FOR OFFICIAL USE ONLY Report No: PAD3260 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$200 MILLION TO THE REPUBLIC OF EL SALVADOR FOR AN EL SALVADOR LOCAL ECONOMIC RESILIENCE PROJECT March 21, 2019 Social, Urban, Rural and Resilience Global Practice Latin America And Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS Currency Unit = US$ FISCAL/CALENDAR YEAR January 1 - December 31 Regional Vice President: Axel Van Trotsenburg Country Director: Yaye Seynabou Sakho Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager: Ming Zhang Task Team Leader(s): Ana I. Aguilera, Zoila Navarro ABBREVIATIONS AND ACRONYMS CERC Contingency Emergency Response Component COMURES Corporation of Municipalities of the Republic of El Salvador (Corporación de Municipalidades de la República de El Salvador) DA Designated Account DGCG General Directorate of Public Accounting (Dirección General de Contabilidad Gubernamental) DRFS Disaster Risk Financing Strategy DRM Disaster Risk Management ESMF Environmental and Social Management Framework FISDL Social Investment Fund for Local Development (Fondo de Inversión Social para el Desarrollo Local de El Salvador) FODES Fund for Municipal Social and Economic Development (Fondo para el Desarrollo Económico y Social de los Municipios) GDP Gross Domestic Product GODEL Local Governance and Economic Development Project IADB Inter-American Development Bank IFRs Interim Financial Reports IPPF Indigenous People Planning Framework ISDEM Salvadoran Institute for Municipal Development (Instituto Salvadoreño de Desarrollo Municipal) JICA Japan International Cooperation Agency LED Local Economic Development LGSP Local Government Strengthening Project MAG Ministry of Agriculture (Ministerio de Agricultura y Ganadería) MARN Ministry of Environment and Natural Resources (Ministerio de Ambiente y Recursos Naturales) MICA Municipal Institutional Capacity Assessment MIGOBDT Ministry of Governance and Territorial Development (Ministerio de Gobernación y Desarrollo Territorial) MoF Minister of Finance (Ministerio de Hacienda) MOPTVDU Ministry of Public Works, Transport, Habitat and Urban Development (Ministerio de Obras Públicas, Transporte, Vivienda y Desarrollo Urbano) OIM International Organization for Migration PDM Municipal Development Plans (Planes de Desarrollo Municipal) PEP Strategic Participatory Plans (Planes Estratégicos Participativos) PIU-FISDL Project Implementing Unit PPP Purchase Power Parity PPSD Project Procurement Strategy for Development PSC Project Steering Committee SAFIM Municipal Financial Management System (Sistema de Administración Financiera Municipal) SCD Systematic Country Diagnostic SETEPLAN Technical and Planning Secretariat of the Presidency (Secretaría Técnica y de Planificación de la Presidencia) STEP Systematic Tracking of Exchanges in Procurement USAID United States Agency for International Development TABLE OF CONTENTS DATASHEET ........................................................................................................................... 2 I. STRATEGIC CONTEXT ...................................................................................................... 7 A. Country Context................................................................................................................................ 7 B. Sectoral and Institutional Context .................................................................................................... 8 C. Relevance to Higher Level Objectives............................................................................................. 10 II. PROJECT DESCRIPTION.................................................................................................. 11 A. Project Development Objective ..................................................................................................... 11 B. Project Components ....................................................................................................................... 12 C. Project Beneficiaries ....................................................................................................................... 19 D. Results Chain .................................................................................................................................. 19 E. Rationale for Bank Involvement and Role of Partners ................................................................... 21 F. Lessons Learned and Reflected in the Project Design .................................................................... 21 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 22 A. Institutional and Implementation Arrangements .......................................................................... 22 B. Results Monitoring and Evaluation Arrangements......................................................................... 23 C. Sustainability................................................................................................................................... 23 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 24 A. Technical, Economic and Financial Analysis ................................................................................... 24 B. Fiduciary.......................................................................................................................................... 27 C. Safeguards ...................................................................................................................................... 28 V. KEY RISKS ..................................................................................................................... 30 VI. RESULTS FRAMEWORK AND MONITORING ................................................................... 32 ANNEX 1: Implementation arrangements and support plan ........................................... 40 ANNEX 2: Typology of pre-identified Subprojects and ineligible activities ...................... 48 ANNEX 3: Methodology for calculation of benefits under Component 1 ........................ 51 Page 1 of 52 DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name El Salvador El Salvador Local Economic Resilience Project Project ID Financing Instrument Environmental Assessment Category Investment Project P169125 B-Partial Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 17-Apr-2019 31-Dec-2024 Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective is to improve institutional performance of municipalities and increase access for citizens to services and resilient infrastructure. Components Component Name Cost (US$, millions) Page 2 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Component 1: Investments in services and in resilient municipal infrastructure to 116.00 support LED Component 2: Competitive fund for high-impact investments on regional economic 54.00 development Component 3: Institutional Strengthening and Capacity Building 10.00 Component 4: Contingent Emergency Response Component 10.00 Component 5: Project management and implementation 9.50 Organizations Borrower: Republic of El Salvador Implementing Agency: Ministry of Finance Fondo de Inversion Social para el Desarrollo Local de El Salvador PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 200.00 Total Financing 200.00 of which IBRD/IDA 200.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 200.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025 Annual 0.00 4.00 16.00 58.00 64.00 50.00 8.00 Cumulative 0.00 4.00 20.00 78.00 142.00 192.00 200.00 Page 3 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Social, Urban, Rural and Resilience Global Practice Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or Yes men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ Substantial 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Substantial 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Moderate 9. Other 10. Overall ⚫ Substantial Page 4 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Schedule 2, Section I.A.1 - Institutional Arrangements: The Borrower, through MoF, shall make the proceeds of the Loan available to the Project Implementing Entity under a subsidiary agreement (“Subsidiary Agreement”) between the Borrower, through MoF, and the Project Implementing Entity. Sections and Description Schedule 2, Section I.A.1(b)(v) - Institutional Arrangements: The Borrower, through MoF, shall cause the Project implementing Entity to not later than three (3) months after the Effective Date, establish, and thereafter operate and maintain, at all times during Project implementation, a dedicated unit for Project execution (“PIU-FISDL”), with structure, functions and responsibilities acceptable to the Bank, as set forth in the Operational Manual, including, inter alia, the responsibility of the PIU-FISDL to implement, monitor and supervise the carrying out of the Project Page 5 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) (including its financial, procurement and safeguards aspects). Sections and Description Schedule 2, Section I.A.3 - Institutional Arrangements: Not later than two (2) months after the Effective Date, the Borrower, through MoF, shall establish, and thereafter operate and maintain, throughout Project implementation, a committee (the “Project Steering Committee”), with representatives, functions and responsibilities acceptable to the Bank and defined in the Operational Manual. Sections and Description Schedule 2, Section I.B.1 - Subprojects: Prior to the carrying out of a Municipal Subproject, the Borrower shall cause the Project Implementing Entity to enter into an agreement with the pertinent Municipality (the Municipal Framework Agreement) under terms and conditions acceptable to the Bank. Sections and Description Schedule 2, Section I.B.4 - Subprojects: Prior to the carrying out of a Regional-Scope Subproject, the Borrower shall cause the Project Implementing Entity to enter into an agreement with the pertinent Participating Eligible Municipality (the Regional-Scope Agreement) under terms and conditions acceptable to the Bank. Sections and Description Schedule 2, Section I.D.1(a) - Safeguards: The Borrower shall cause the Project Implementing Entity to ensure that the Project is carried out with due regard to appropriate health, safety, social, and environmental standards and practices, and in accordance with the Safeguards Instruments. Conditions Type Description Effectiveness Article IV, 4.01(a) - Subsidiary Agreement: That the Subsidiary Agreement has been executed on behalf of the Borrower, through MoF, and the Project implementing Entity, and all conditions precedent to its effectiveness (other than the effectiveness of this Agreement) have been fulfilled. Type Description Effectiveness Article IV, 4.01(b) - Operational Manual: That the Project Implementing Entity has adopted the Operational Manual in a manner satisfactory to the Bank. Type Description Disbursement Schedule2, Section III.B.1(b) - Withdrawal Conditions: Under Category (4), unless and until the Bank is satisfied, and notified the Borrower of its satisfaction, that all of the CER Conditions, as described under Section I.E.2 of Schedule 2 to the Loan Agreement, have been met in respect of said activities. Page 6 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) I. STRATEGIC CONTEXT A. Country Context 1. El Salvador is the smallest country in Central America, one of the most densely populated and vulnerable to climate change and natural disasters in the world. With a population of 6.4 million in 2017, the country is largely urban (65 percent) and ranks in the 83rd percentile worldwide in terms of population density. It had a per capita Gross Domestic Product (GDP) of almost US$4,000 in 2017 in current terms (US$8,000 based on purchasing power parity, PPP). The country has very high exposure and vulnerability to natural hazards, including earthquakes and volcanic eruptions. It is also highly vulnerable to climate change impacts, including increased occurrences of floods, droughts, and tropical storms. Over 95 percent of the population lives in areas considered at risk from two or more hazards (Parker 2006)1. 2. In terms of economic development, low growth stands out as the dominant feature. Economic growth has been lackluster, with the annual GDP growth exceeding 3 percent only twice since 2000 and averaging just 2.3 percent in the last five years. Over the medium-term, GDP growth is expected to remain around 2.5 percent, given persistent structural weaknesses. Private consumption, bolstered by remittances (which amount to US$5.1 billion, 17.98 percent of GDP), is expected to continue to support growth. 3. High levels of crime and violence, low investment, poor educational attainment, and lack of economic opportunities, prevent the country from growing at a faster pace (El Salvador 2015 Systematic Country Diagnostic). While gang-related violence has substantially dropped in recent years2, El Salvador continues to have one of the highest homicides rate in the world: 60.07 homicides per 100,000 inhabitants in 2017, more than double Mexico’s rate. Limited opportunities for quality education and jobs lead thousands to join the “maras” (gangs) or migrate to other countries3. At the same time, high dependency on remittances hinders incentives to work. Due to lack of economic opportunities, an estimated 2 million Salvadorian migrants live in the United States (US Census Bureau’s American Community Survey, 2011), with growing concerns for an upward trend as the recent migrant caravans4 become more frequent. The primary triggers of migration continue to be lack of economic opportunities, high rates of crime and violence, and family reintegration (International Organization for Migration-OIM Survey 2017, self-reported data). Despite progress in poverty reduction, at 46 percent poverty5 remains higher than the average for Latin America and declining slower than in most countries in the region. 4. Lack of economic opportunities disproportionally affects women at the formal labor force and in leadership positions. Despite the country’s recent legislative efforts, gender inequalities are still large. In the 2018 World Economic Forum’s Global Gender Gap Report, El Salvador ranks 87 out of 149 countries. There are two key areas in the country where gender inequalities can be mostly observed: (i) inequality in political participation and decision making: while women represent 53 percent of the country’s population and 40.7 percent of the 1 Parker, Ronald Steven. 2006. Hazards of nature, risks to development: an IEG evaluation of World Bank assistance for natural disasters (English). Washington, DC: World Bank. 2 U.S. Department of State Diplomatic Security. 2008. El Salvador 2018 Crime & Safety Report. 3 While maras offer relatively attractive economic returns due to their role in drug trafficking and illegal activities, the chances of getting killed are very high. Migration offers a safer alternative, but the path is uncertain and often dangerous, especially for the poorest. 4 New form of collective terrestrial migration that originated in March 2018. 5 The poverty line in El Salvador is $5.50 a day (2011 PPP) (World Bank Poverty & Equity Data Portal 2019). Page 7 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) workforce, only 11 percent of Mayors (28), 31 percent of Congress Representatives (26), and an estimated 33 percent of municipal staff in decision-making positions are women6; and (ii) inequality in economic opportunities 72 percent of working women are in the informal sector, while 67.4 percent of occupied men work in informality. In terms of salary gaps, the average monthly salary of women in El Salvador was US$271 which corresponds to 83 percent of men average salary in 2016. 5. In the past five years, the government has vowed efforts to make El Salvador more “productive, educated, and safe” by promoting inclusive growth and resilience. The 2014-2019 National Development Plan supports four priority pillars: (i) stimulating productive employment through sustained economic growth; (ii) bolstering education with inclusion and social equity; (iii) strengthening citizen security, through an ambitious program of objectives and actions; and (iv) moving towards an environmentally sustainable economy, resilient to the effects of climate change. B. Sectoral and Institutional Context 6. Municipalities are integral actors for service delivery, local development, and disaster risk management. El Salvador is a unitary state comprised of the Presidency and 262 municipalities. Municipalities are the only elected subnational government, while the 14 departments or governorates (Departamentos) function as administrative subdivisions. Municipalities have the mandate to improve service delivery (public transportation, solid waste collection and management, local or secondary roads, public spaces, housing and urban regeneration), nurture local economic development, manage and mitigate disasters, and providing better engagement with citizens to enhance local accountability. 7. Despite progress in recent years, municipal governments face challenges in delivering basic services and managing disaster risks effectively. One in four households in the country does not have access to safe drinking water. Over 75 percent of municipalities have inadequate infrastructure to manage disasters appropriately, although institutional capacity is relatively higher (United Nations Development Program’s Disaster Risk Management Index 2018). Challenges to deliver basic services and address vulnerabilities to disasters are exacerbated by climate change impacts. 8. Institutional capacity varies greatly across municipalities. Out of the 262 municipalities, only seven are considered high capacity (or Type-1 using the 2007 Typology of Municipalities)7. These seven municipalities are those with the largest population, highest rate of urbanization and economic activity, and the lowest level of poverty. In contrast, 74 percent of municipalities are rated Type 4 or 5, and have small populations, high levels of poverty, weak economic activity, and low capacity. Territorial imbalances are also evidenced by the disparate municipal capacities to generate their own revenues. In 2015, Type-1 municipalities reported US$130.5 million in own-generated revenues while Type-5 registered US$14.4 million. 6 Preliminary estimates based on the early results of the Municipal Institutional Capacity Assessment (MICA) baseline survey (February and March 2019). Overall, an estimated 32.82 percent of municipal staff in decision-making positions are women, and the gender gaps vary by area of expertise. The largest gender gap for women in decision-making positions is in Basic Service Provision (27 percent women), followed by Governance, Transparency and Citizen Engagement (28.71 percent), Human Resources and Planning (29.63 percent), and Municipal Finance and Public Investment (44.35 percent). 7 Due to the lack of an updated Census (last one was carried out in 2007), the municipal typology prepared by the German Technical Cooperation Agency (GTZ) in 2007 continues to be an important tool for local development planning and analysis. Based on this methodology the 262 municipalities are grouped into five types, with type 1 being the highest capacity and type 5 the lowest. Page 8 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 9. Municipalities face several challenges related to their investment capacity and fiscal sustainability . Most municipalities: (i) are highly dependent on central government transfers; (ii) are highly indebted and have relatively weak financial management systems; and (iii) have limited capacity to raise own-source revenue. The main source of municipal revenues is the National Fund for Economic and Social Development (FODES). Set up in 1988, the FODES transfers a percentage (currently 8 percent) of the central government’s current revenues to municipalities (US$344 million in 2017). The FODES functions to some extent as an equalization grant8, and on average represents 51.4 percent of municipal revenue. In line with the slow economic growth at the national level, municipal revenues grew annually at 3.3 percent between 2010 and 20179. Following the 2011 Municipal Debt Refinancing Law10, municipal debt grew by 155 percent from US$206 million in 2010 to US$525 million in 201811. The lack of property taxes substantially limits municipalities’ ability to collect own-source revenue and exacerbates their dependence on the national government. On average, estimated own-source revenue is between 9 and 11 percent of municipal income. 10. Economic development also requires investments at the municipal, as well as regional or supra-municipal scale. Investing in local development has the potential to contribute to business development and job creation. With an enabling regulatory mandate and a wide institutional network of deconcentrated agencies12 to support LED, municipalities can play a key role in improving the services and basic infrastructure that support the creation of more and better jobs. While San Salvador (population 2.2. million), San Miguel, and Santa Ana (250,000 residents each) have the scale for local economic development, most municipalities have small populations (average population size of about 25,000), which may not provide the basis for achieving economies of scale. Recent literature13,14, 15 highlights that fragmentation of resources at the municipal level may not lead to significant impacts in terms of permanent jobs and economic opportunities created. Strategic Local Economic Development (LED) investments must be made at the supra-municipal scale to achieve the economies of scale needed to make these investments economically sustainable and impactful. Earlier experiences show that there is both a high demand for and a proven track record in LED investments at the supra-municipal level (El Salvador Local Government Strengthening Project Implementation Completion and Results Report (P110826); FUSADES 2018; and consultations with Mayors on January 30, 2019). 11. The government’s strategy for local development aims at strengthening coordination between the national and local governments, promoting citizen and results centered development, and fostering inter-municipal cooperation. This translated into four national priority areas: (i) increase in investments to promote economic 8 Transfers to each municipality are determined according to a formula based on four parameters (weighted): population (50 percent), equal share (25 percent), poverty levels (20 percent) and land area (5 percent). 9 Alfaro, Laura and Chauvin, Jasmina, Foreign Direct Investment, Finance, and Economic Development (September 21, 2016). 10 Decreto N 502. Ley de creación del fideicomiso de reestructuración de deudas de las municipalidades (FIDEMUNI). November 2010. 11 BANDESAL (October, 2018). Presentación stock de deuda municipal, restructuración FIDEMUNI. 12 At the municipal level, local businesses can go to their local municipal office for local economic development (EMPRE or UDEL). At the regional level, the Support and Development Centers to Small and Medium Enterprises (CDEMYPES) and the Local Economic Development Agencies (ADELs) support businesses and local producers through public-private partnerships or through deconcentrated agencies of the Ministry of Economy (e.g. CDMYPES). Some Mancomunidades or Associations of provide substantial support for promoting local economic development in their regions (e.g. Asociacion de Municipios Los Nonualcos). 13 FUSADES 2018. Desarrollo económico regional y especializaciones productivas en el Salvador . 14 Maria, Augustin; Acero, Jose Luis; Aguilera, Ana Silvia; Garcia Lozano, Marisa. 2017. Central America urbanization review: making cities work for Central America (English). Directions in development; countries and regions. Washington, D.C.: World Bank Group. 15 Calvo-Gonzalez, Oscar; Lopez, J. Humberto. 2015. El Salvador - Systematic country diagnostic: building on strengths for a new generation (English). Washington, D.C.: World Bank Group. Page 9 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) opportunities (the 2014-2019 National Development Plan prioritizes policy interventions that improve livelihoods and promote job creation at the municipal level, with an emphasis on vulnerable populations including young women, single mothers, and female heads of households); (ii) promoting territorial development (the government created the Technical and Planning Secretariat of the Presidency (SETEPLAN) Directorate for Territorial Development and the National System of Coordination for Territorial Development); (iii) achieving healthier municipal financial management (through the implementation of the Municipal Financial Management System (SAFIM) and efforts to tackle the growing municipal debt levels); and (iv) mainstreaming resilience as a national priority (through the preparation of a sound national risk and climate change strategy, the Ministry of Finance’s (MoF) Disaster Risk Financing Strategy (DRFS), the creation of the Ministry of Public Works (MOPTVDU) Direction of Adaptation to Climate Change and Strategic Risk Management (DACGER), and other national commitments under the United Nations Framework Convention on Climate Change (UNFCCC)). 12. Given the country’s high exposure to natural disasters16, the GoES is aware that any local investment that do not integrate disaster risk management may not be sustainable in the long term. At the national level, the Ministry of Environment and Natural Resources (MARN) developed a national strategy and issued a report on risks and vulnerabilities to climate change. The report includes probabilistic models of risk scenarios for earthquakes, floods, and tsunamis. The Ministry of Finance’s DRFS identifies, prioritizes and comprehensively integrates guidelines aiming to reduce the potential impact of disaster risks on public finances. The GoES is also exploring complementary financial instruments to the Disaster Mitigation Protection Fund (FOPROMID), and the contingent line of credit for disaster risks granted by JICA (2018), which are the main financial instruments implemented for emergency response. 13. To advance a sustainable and resilient local economic development agenda and unlock the cities’ potential to contribute to national economic growth, this Project aims to: (i) Address pressures to fiscal sustainability by improving public financial management at the municipal level; (ii) Support municipalities to create an enabling environment for LED through investment and institutional strengthening activities; (iii) Enhance the technical capacity of municipalities to adequately manage, operate, and maintain basic infrastructure and services; (iv) Deepen the capacity of municipalities to manage disaster risks, reduce climate change vulnerability, and ensure that all new infrastructure financed under the Project is resilient; and (v) Promote social accountability as a key principle for municipal management to achieve further allocative efficiency and improve transparency. C. Relevance to Higher Level Objectives 14. The Project is aligned with the World Bank Group’s Country Partnership Framework (CPF) FY16-FY19 for El Salvador, and the challenges highlighted in the 2015 Systematic Country Diagnostic (SCD). The Project supports two key objectives of the CPF, including Objective 1: Build Capacity to Create Safer Communities for Economic Development, and Objective 5: Promote the Efficiency of Public Spending. The Project will directly support the CPF’s strategic objective of reinforcing the foundations of inclusive growth by encouraging local governments to 16 El Salvador ranks second in the world in terms of its economic risk to natural disasters, and municipal governments are the most affected. It is also the second country with the highest risk of fatalities (Dilley, 2005). The country is exposed to multiple hazards: floods, earthquakes, hurricanes, landslides, and volcanic eruptions in selected communities (El Salvador 2017 Disaster Risk Profile). Page 10 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) develop and implement strategies that support economic activity and resilience at the territorial scale. The Project’s institutional strengthening activities aim to complement efforts at the national level to promote inclusive growth, fiscal sustainability and resilience. 15. The 2015 SCD prioritizes three key policy areas to promote sustainable development in El Salvador : (i) increase economic opportunities and competitiveness; (ii) strengthen the fiscal position to safeguard fiscal sustainability; and (iii) improve the resilience of the country to natural disasters. The Project aims at advancing these priority areas through financing multi-purpose and resilient local infrastructure to promote economic and productive activities, while strengthening local and national capacities for economic development, financial management, resilience, and citizen engagement. This Project is also aligned with the WBG Climate Change Action Plan and 2021-2025 climate targets. 16. In addition to its emphasis on climate resilience, the Project is aligned with the Twin Goals and the Corporate Priorities of Gender and Citizen Engagement. By providing needed investments to build and improve supporting infrastructure, this project will contribute to creating temporary and longer-term economic opportunities. The project favors high poverty areas and aims to reduce territorial imbalances, through formula- based allocation under Component 1 and by having at least one project benefitting each region in the country under Component 2. Capacity building and training activities under Component 3 will target female municipal staff to empower more women to take on decision-making positions in city governments. Component 5 will support the creation of an open platform in which citizens can interact and engage with authorities on all aspects related to the prioritization, implementation, maintenance and operation of the financed subprojects. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 17. The Project Development Objective is to improve institutional performance of municipalities and increase access for citizens to services and resilient infrastructure. 18. Institutional performance will focus on four areas: (i) enhanced fiduciary systems and greater transparency in managing debt, income, and public expenses; (ii) improved service delivery systems; (iii) improved municipal government capacity to design and manage infrastructure assets in a resilient manner; and (iv) enhanced accountability and oversight mechanisms. Improved municipal performance in these areas will positively impact services for the population. It will also improve the efficiency of public spending and the sustainability of public investments at the local level. 19. The term “resilient” refers to the ability of infrastructure and services to reduce the magnitude of impacts and/or the duration of disruptive events such as disasters or shocks. The effectiveness of resilient infrastructure or services depends on their ability to anticipate, absorb, adapt to, and/or rapidly recover (retain their basic Page 11 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) function and structural capacity) from a potentially disruptive event (NIAC 2010)17. PDO Level Indicators (a) Outcome 1. Improved institutional performance of municipalities: • Municipalities that register sub-national debt, income and expenses in accordance with MoF standards. • Municipalities that meet the minimum conditions established in Component 1 (see Annex 3). (b) Outcome 2. Increased access to resilient municipal infrastructure and services: • People (female and male) provided with increased access to services and resilient infrastructure. • Financed subprojects complying with the Social Investment Fund for Local Development (FISDL) Disaster Risk Management and environmental standards18. B. Project Components 20. Overview. The proposed Project will finance the provision of resilient municipal infrastructure investments for promoting local economic development (Component 1). It will also promote economic development investments at the regional scale through inter-municipal cooperation (via participating eligible municipalities19) through a competitive fund (Component 2). In addition, the Project will also support local and national efforts to strengthen institutional capacity mainly related with the four areas of Component 1, including efforts to improve municipal public finances, and strengthen institutional capacities on disaster risk management and climate resilience (Component 3). A Contingency Emergency Response Component (Component 4) will allow the government to allocate funds for disaster response and recovery in the event of disasters. Component 5 will finance project management tasks. Component 1: Investments in services and in resilient municipal infrastructure to support LED (US$116 million) 21. This component will finance resilient municipal infrastructure, including the preparation of technical designs, as needed, in municipalities that meet certain minimum conditions and incremental goals . The focus will be on investments identified as having positive impact on generating economic opportunities at the municipal level. Eligible subprojects will mainstream disaster risk management approaches in the technical designs, as well as operations and maintenance plans. Pre-identified examples of eligible investments are local markets that can also be used as collection centers in the event of disasters; construction or rehabilitation of secondary roads; community centers that can be used as shelters during disasters; linear and floodable parks; recreational centers, community daycares; local fairs; and disaster-resilient tourist infrastructure. Some municipalities may also prioritize investments on basic services and infrastructure, such as small bridges and local electrification networks. 17 National Infrastructure Advisory Council (NIAC 2010) 18 FISDL through its environmental unit identifies the level of risk and the socio-environmental impact of sub- projects. The methodology includes the criteria of the new Environmental Impact Assessment System, MARN's efforts to improve and streamline procedures and the request of a safety and emergency plan, and guidelines for managing disasters. 19 “Participating Eligible Municipality” means a group formed by Municipalities organized in associations or a ny other form of incorporation with a legal personality, duly established in the Borrower’s territory in accordance with the applicable laws, and/or an indi vidual Municipality, which, upon meeting the criteria set forth in the Operational Manual, is eligible to receive support for the carrying out of a Regional-Scope Subproject. Page 12 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) For a detailed list of the pre-identified typology of subprojects, see Annex 2. All infrastructure subprojects will incorporate low carbon and climate resilient technical designs, thereby helping the country improve resilience to climate change and to mitigate its impacts, as ecosystem – based adaptation projects. 22. Allocation of project funds to beneficiary municipalities under this component will be conditional on municipalities meeting minimum conditions and incremental goals. All municipalities are eligible to benefit from Component 1 funds, provided they fulfill the minimum conditions20. These minimum conditions and incremental goals will be focused on four areas of institutional performance: (i) enhanced fiduciary systems and greater transparency in managing debt, income, and public expenses; (ii) improved service delivery systems; (iii) improved municipal government capacity to design and manage infrastructure assets in a resilient manner; and (iv) enhanced accountability and oversight mechanisms. Minimum conditions are related to registering basic information and clarifying municipal roles and responsibilities. Incremental goals relate to the implementation of priority policy actions, by area of institutional performance. In 2017, SAFIM reported that 65 percent of municipalities fulfill requirements aligned with the financial management minimum conditions. For a full list of minimum conditions and incremental goals, see Annex 3. 23. Minimum conditions and goals will be tailored to municipal institutional capacity . Municipalities are classified into three groups, using a combined methodology that considers their level of institutional capacity (using the 2007 GIZ methodology) and MoF’s fiscal risk incidence index. Group 1 municipalities (19) are those with relatively high capacity, larger population size (35 percent of total population), and higher fiscal risk incidence index. Group 2 municipalities (117, totaling 48 percent of total population) have intermediate capacities and fiscal risks. Group 3 municipalities (126) have lower capacities, low fiscal risk incidence levels, and account for 17 percent of the total population. Minimum conditions and incremental goals will be tailored to each group. Technical assistance activities in Component 3 are fully aligned to support achievement of these goals. If needed, these conditions and goals will be adjusted, based on the results of the Global Facility for Disaster Reduction and Recovery (GFDRR)-financed 2019 Municipal Institutional Capacity Assessment (MICA) baseline survey; survey results are expected by end of March 2019. 24. Financing under this Component will be formula based. Component 1 funds will be distributed as follows: 10 percent in Year 1; and 30 percent in Years 2, 3 and 4, respectively. In Year 1, all municipalities that fulfill all the minimum conditions will be benefited by Component 1. In Years 2, 3, and 4, municipalities can receive up to 30 percent of their formula allocation: (i) up to 10 percent on achievement of the minimum conditions; and (ii) an additional 20 percent upon achievement of the annual incremental goals. If municipalities meet the minimum conditions, a weighted index will be calculated as follows: binary achievement of goals (weighted 60 percent), plus municipal population21 (weighted 40 percent). This index is then multiplied by the corresponding yearly amount described above. Funds from municipalities that did not meet the goals will be distributed among the municipalities that met 100 percent of the minimum conditions and annual goals, in direct proportionality to the allocation formula. 25. Investments will be aligned with the municipal regional investment plans . Municipalities must choose investments aligned with (or prioritized in) their local or regional development plans. Such plans may include the 92 existing Strategic Participatory Plans (PEPs) and 174 Disaster Risk Management Plans (whose preparation was 20 It is important to mention that, even if funds are allocated to the beneficiary municipalities, there will not be any actual transfer of funds to the municipalities, as financial management tasks will be carried out by FISDL. 21 Using official Census estimates. Page 13 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) financed under the Local Government Strengthening Project (LGSP), the Eastern Region Master Plan (financed by the Japan International Cooperation Agency, JICA), the Western Region Master Plan (currently being prepared with Inter-American Development Bank (IADB) funding), existing municipal development plans (PDMs), or similar planning instruments available at the local or regional level. Where such plans do not exist for a given municipality, the Project will finance the preparation of local or regional development plans under Component 3. 26. Technical designs and pre-investment studies. This component will also support the preparation of technical designs, feasibility and other studies needed to carry out infrastructure works. Component 2: Competitive fund for high-impact investments on regional economic development (US$54 million) 27. This Component will support the government’s territorial development strategy by financing strategic investments for local economic development at a multi-municipal scale on a competitive basis for an estimated amount between US$2 million and US$ 15 million each. Municipalities or groups of municipalities, either formally associated in the form of Mancomunidades (associations of municipalities), or through a separate legal association following the local legislation can participate, by submitting project proposals (perfiles tecnicos) that meet the eligibility criteria. Awarded proposals will then receive support to finance the preparation or update of technical studies, as well as implementation of civil works. Examples of projects financed under this Component may include logistics improvements in nearby municipalities, markets, supportive infrastructure along tourist corridors (roads, bus stops, lookouts, and basic services), and artisan fairs (see Annex 2). This Component is closely linked to the technical assistance provided to municipalities under Component 3. 28. Competition rules. Funds available under this Component will be allocated on a competitive basis up to three times during the life of the Project. The participation criteria for each of the three competitions will be published through a call for proposals, which will be publicly advertised. The schedule of call for proposals, evaluations, and selections will be made available to the public in each round. Eligible municipalities or groups of municipalities may be selected as beneficiaries. In the second and third rounds, municipalities that have not been awarded in the previous round will be prioritized, provided that the proposals meet the selection criteria. To ensure regional balance, each of the four regions in the country must benefit from at least one subproject over the life of the Project. Existing subproject proposals of multi-municipal scope identified by municipalities and Mancomunidades that have some level of technical readiness (but have not been funded so far) may be eligible to compete if they meet the submission criteria. 29. Selection criteria. Selection criteria include, among others: (i) subprojects with high potential to create job opportunities, especially for women, youth at risk22, migrant returnees and minorities; (ii) subprojects with high potential to increase local competitiveness and productivity; (iii) subprojects that are submitted by two or more municipalities; (iv) co-financed subprojects; (v) subprojects aligned to national and regional development plans; and (vi) subprojects that demonstrate climate change adaptation or mitigation benefits. Subprojects that trigger large scale resettlement and/or irreversible negative environmental impacts will not be eligible. The relative weight of the selection criteria will be specified in the Operational Manual and will be agreed with the World Bank. Eligible subprojects must comply with World Bank’s requirements on environmental and social management, including safeguards. Eligible subprojects must submit a complete technical profile, financial viability studies, 22When identifying youth-at-risk, the project will make every effort to ensure that proven methodologies, such as the ‘situational analysis’ and the ‘socio-ecological model’ for risk identification and mitigation is used, including the use of community-level micro-data instead of national or provincial statistics replicate/mimic at local levels. Page 14 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) sustainability, and operations and maintenance plans. 30. Selection process and institutional arrangements. The FISDL will prepare a technical evaluation report for the proposals received in each round, applying the criteria and scoring principles specified in the Operational Manual. The process for preparing this technical evaluation report will build on FISDL’s experience, existing capacity, and lessons learned in implementing past competitive funds. Based on FISDL’s technical evaluation report, the final selection of proposals will be made by the Project Steering Committee, comprised of MoF, SETEPLAN, FISDL, Corporation of Municipalities of the Republic of El Salvador (COMURES) and Salvadoran Institute for Municipal Development (ISDEM). Other key stakeholders, such as the Ministry of Economy, Ministry of Environment and Natural Resources (MARN), MOPTVDU, or others, may be invited to participate in the selection process, as needed. Agreements with beneficiary municipalities (single or grouped) will be signed after selection of awarded proposals. 31. Technical designs and pre-investment studies. This Component will also support the preparation of technical designs, feasibility and other studies needed to carry out infrastructure works that are competitively selected and financed under this Component. Technical assistance under Component 3 will be provided in Years 1 and 2 to ensure that enough volume of subproject proposals is received. These activities will be managed by FISDL, working with the various municipalities. During Year 1, there will be emphasis on ensuring access to these funds for municipalities or Mancomunidades in regions that do not already have a set of viable subprojects prepared. This will ensure that in rounds 2 and 3, the regions that did not submit proposals in previous rounds will be able to participate. 32. Gender-informed technical designs. Infrastructure investments will incorporate gender aspects to complement government efforts to reduce inequalities between women and men. Women and men have different needs, priorities and usage for infrastructure and systems. The process of planning and approving policies, plans, and strategies on urban development often engages men predominantly due to social and gender norms that restricts women’s participation in decision making. Women participants may also be less confident or influential in these settings and hence, their specific needs and interests may not be taken into consideration as effectively23. The project will address gender gaps in community-level decision-making to ensure that urban infrastructure investments respond to the specific needs and priorities of women, as well as men. Component 3: Institutional Strengthening and Capacity Building (US$10 million) 33. This Component will finance institutional strengthening activities at two levels: (i) support to municipal governments to help them achieve the minimum conditions and goals, as well as technical support to Mancomunides; and (ii) support to government agencies at the national level, including: (a) technical assistance to MoF for the implementation of SAFIM and the adaptation of a revised regulatory framework for managing municipal investments, (b) technical assistance/support to selected government entities for the creation of a national registry of municipal investments through the development of an interoperable platform accessible to various national and local agencies; and (c) creation of a pilot municipal innovation behavioral lab for fostering innovation in the public sector. Sub-Component 3.1. Strengthening institutional capacity of municipal governments (US$7.2 million) 23 World Bank (2010): Making Urban Development Work for Women and Men: Tools for Task Teams. Washington DC Page 15 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 34. Activity 3.1.1. Strengthening institutional capacity of municipal governments. This set of activities will support technical assistance, capacity building, equipment, workshops and training to all municipalities in the country, as well as the operationalization of the 174 DRM Plans that were prepared under the LGSP. The focus will be to build capacity in areas related to the achievements of goals in Component 1 such as: (i) municipal finances and own-source revenue collection and transparency; (ii) planning and managing municipal investments; (iii) building capacities to integrate local economic development into municipal management; (iv) disaster risk management; (v) workshops to provide information about the DRM and social and environmental management approach in the elaboration of subprojects; (vi) climate resilient planning and investments24; (vii) participatory planning; and (viii) strategic planning. In addition, Activity 3.1.1 envisions the preparation of a communication strategy to strengthen municipal awareness and compliance in the use of SAFIM. Trainings that are required by the Municipal Career Law will be strengthened. Curricula design and dissemination strategy will be adapted to the needs of female municipal staff to bridge existing gender gaps and advance in having a larger representation of women in decision-making positions at the local level. Since pre-identified challenges to female participation are related to lack of awareness (based on consultations), a dissemination strategy will include advertising training offerings at the Mayors Regional Councils (CDA) and social media. Other areas supported may include financial management (accounting, financial reporting, and internal controls), and environmental and social management, as identified during project implementation. Building on the lessons documented in the LGSP Implementation Completion and Results Report, activities will be executed centrally by FISDL, with technical leadership from several responsible agencies such as the MoF, SETEPLAN, and ISDEM). The capacity building and technical assistance program will start with activities identified under the LGSP Final Evaluation and the recently published municipal action plans financed by The United States Agency for International Development’s (USAID) Municipal Governance Project (available only for 11 municipalities). Prioritized areas may be further revised during implementation, based on continuous consultations with municipalities, MoF, SETEPLAN, ISDEM, academia and other relevant stakeholders. This Sub-Component will support the achievement of the minimum conditions and goals related to municipal investment capacity, disaster risk management and climate resilience, and citizen engagement. 35. Activity 3.1.2. Strengthening of Municipal Associations or Mancomunidades. This set of activities seeks to support technical assistance and institutional strengthening programs that will benefit Municipal Associations. It will finance consulting services for legal, technical and administrative support to Municipal Associations, promoting and disseminating the municipal association system in the country, creating and supporting new Municipal Associations, and strengthening capacities in territorial management. Sub-Component 3.2. Support the National Government entities (US$2.8 million) 36. Activity 3.2.1. Support to the Ministry of Finance for the implementation of SAFIM and the adaptation of revised regulatory framework for managing municipal investments. This set of activities will support (i) adaptation of national guidelines and criteria for prioritizing and registering infrastructure investments at the municipal level (linked to incremental goals under Component 1)25; (ii) carrying out of consultations with local authorities and civil society; (iii) publication and dissemination of the framework for managing municipal investments; (iv) provision of training and the carrying out of capacity building activities for municipal staff to maximize compliance with the achievement of minimum conditions and incremental goals related to municipal 24 For example, tax recovery plans, foreign direct investment plans, and plans for improving own-source revenue collection. 25 This activity will start in the fourth month of Project implementation as currently reflected in the procurement strategy and plan. The World Bank will provide technical assistance support to the MoF before effectiveness to define scope of work under this activity. Page 16 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) financial management; (v) acquisition of equipment and training materials; (vi) carrying out of minor refurbishment works and the purchase of equipment for an improved training center; and (vii) revision of learning curricula for municipalities. 37. Activity 3.2.2. Creation of the National Registry of Municipal Investments. This set of activities will support the development of an interoperable platform accessible to various national and local agencies. This platform will harmonize and integrate diverse lists of municipal investments in a single registry to help inform policy making. This platform will strengthen and be integrated with the National Information System for Territorial Management (SNIT)26 and Minister of Finance’s registries. 38. Activity 3.2.3. Creation of a pilot Municipal Innovation Lab. This set of activities will support the creation of a pilot behavioral lab for fostering innovation in the public sector. The lab will be formed by a group of experts from the public and private sectors, as well as academia and think tanks. It will support selected municipalities by providing dedicated support for solving some of the most pressing challenges that municipalities in El Salvador face. This innovation lab will initially focus on pre-identified challenges related to municipal finance and own- source revenue collection and local economic development. It will carry out experiments using behavioral sciences in their design. Results and lessons learned from these experiments will inform the decision to extend or suspend this pilot. The lab will be initially led by the MoF to support 2-3 pilots at the municipal level. Component 4: Contingent Emergency Response Component (US$10 million) 39. The Contingent Emergency Response Component (CERC) will provide immediate response to an eligible emergency, as needed and is intended to strengthen the country’s fiscal resilience and immediate response capacity, safeguarding against higher levels of disaster vulnerability, including those driven by climate change. This component is designed to enable rapid access to funds for response and recovery purposes under streamlined procedures for procuring goods, works, and services. 40. The allocation of US$10 million to CERC avoids the potential reallocation of funds from other Project Components. However, in case of need, additional uncommitted funds from the other Components may be reallocated to CERC, while unutilized CERC funds can vice versa be reallocated to the other Components27. It also speeds up the activation and enhances the readiness of the instrument by facilitating the identification of its possible use and scope in the most likely scenarios of activation. 41. The CERC can be activated in response to natural events that have caused, or are likely to cause, a major adverse economic or social impact. The CERC may be activated on a State of Emergency (ex-post) or for an imminent event (ex-ante). Eligible events include earthquakes, volcanic eruptions, droughts, excessive rainfall and related landslides, tropical depressions and storms, which do not include manmade or health emergencies. Triggers for CERC are a Declaration of a State of Emergency via Executive Decree (by the President) or Legislative Decree (by Congress)28 (ex-post mechanism) or an Orange Alert29 where imminent events are likely to cause major 26 Currently under development, the SNIT centralizes geospatial data and information, such as risk and hazard maps. 27 If activated, the Project must be restructured within three months to update the PDO and indicators, the component activities, and, if needed, the disbursement category allocations, and safeguard policies triggered. 28 In accordance with Art. 24 of the Civil Protection Law (Ley de Protección Civil, Prevención y Mitigación de Desastres ), Legislative Decree N° 777, 2005. 29 In accordance with Art. 58 of the General Regulation of the Civil Protection Law (Reglamento General de la Ley de Protección Civil, Prevención y Mitigación de Desastres). Page 17 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) adverse effects with a probability of more than 75 percent (ex-ante mechanism). An activation protocol to guide the implementation of CERC will include a government request submitted by the MoF to the Bank, attaching rapid impact and needs assessments, as well as an emergency action plan (including the designation of implementing agencies and evidence of meeting the trigger conditions). Detailed arrangements for CERC, including fiduciary and safeguard requirements, with a positive and negative list of procurable items reviewed by the Bank’s environmental and social safeguards team will be established in a CERC-specific Operations Manual. 42. CERC implementation arrangements will be aligned with the country’s institutional and legal framework. CERC Implementing Agencies will be designated based on the type of event and their respective experiences and capacities (e.g. MAG for droughts, MOPTVDU for infrastructure rehabilitation after earthquakes, floods, and landslides). Depending on the type and scale of the event, one, or all three agencies might implement CERC activities. The MoF will coordinate the CERC and liaise with the Bank. The MoF will request CERC activation through the activation protocol, which includes the designation of implementing agencies. The assessed implementing agencies are the Ministry of Agriculture (MAG), Ministry of Public Works (MOPTVDU) and Ministry of Governance and Territorial Development (MIGOBDT) via the national DRM agency “Dirección General de Protección Civil, Prevención y Mitigación de Desastres”. Depending on the type and scale of the event, one or more agencies may implement CERC activities. The CERC implementing agency(ies) will be designated based on the type of event that triggers the CERC (e.g., MAG for droughts, MOPTVDU for infrastructure rehabilitation after earthquakes, floods/landslides, and MIGOBDT for managing shelters, depots and cross support). The activation protocol is considered a pilot to harmonize emergency procedures, which has been identified as an institutional need among the three CERC implementing agencies. Component 5: Project management and implementation (US$9.5 million) Subcomponent 5.1. Creation of a Project Implementation Unit (PIU) and strengthening activities to FISDL (US$ 4 million). 43. This sub-component will finance the costs related to the establishment and staffing of a Project Implementation Unit within FISDL (PIU-FISDL) including, inter alia, incremental operating costs, project audits, monitoring and evaluation, impact evaluations and communication strategy. It will also support activities to continue strengthening FISDL’s capacity for safeguards. The PIU-FISDL will include the following units: (i) project coordination; (ii) communications; (iii) legal; (iv) technical (including specialists in social safeguards, environmental safeguards, local economic development and infrastructure); (v) administration and finance (including specialists in accounting, procurement and treasury); and (vi) monitoring and evaluation (M&E). The PIU-FISDL will comprise seasoned fiduciary staff with experience in projects financed by the World Bank or other international development partners. Their roles and responsibilities are detailed in the Project’s Operational Manual. Subcomponent 5.2. Verification of minimum conditions and goals under Component 1 (US$2.5 million). 44. This sub-component will finance activities and processes associated with Component 1 assessments, including an independent verification of the results of the evaluations made by national agencies. The PIU-FISDL will report to the World Bank on the achievement of goals by the municipalities under Component 1. The first period of verification of minimum conditions will start at least four months after the effectiveness of the Project. From the second year onwards, incremental goals will be verified at the end of each fiscal year, unless modified by the MoF following a due process acceptable to the World Bank, as established in the Project’s Operational Page 18 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Manual. In the case of goals related to municipal finance, the General Directorate of Public Accounting (DGCG) will be responsible for the verification of compliance and will report results to FISDL. In addition, a consulting firm will be hired to conduct an independent annual assessment of the goal verification process at least four times during project implementation. The selection of the firm and the assessment methodology must have the Bank’s no objection. Goals may be revised every three years or six months ahead of the municipal elections, whichever comes earlier. Sub-component 5.3. Creation of a citizen engagement platform (US$0.5 million). 45. This sub-component will finance the development and implementation of a digital platform in which citizens can access the status of activities funded under Components 1 and 2 and provide feedback. This platform will be piloted in FISDL with the objective to scale it up nationwide. C. Project Beneficiaries 46. Project beneficiaries are the residents of the 262 municipalities in El Salvador, who will have increased access to resilient infrastructure and services supporting local economic development. Total direct beneficiaries are estimated to be 4.5 million. Municipal and national public-sector staff will also benefit from training and capacity building activities of the Project. D. Results Chain Problem statement: • Jobs and economic opportunities are limited at the local level, leading to unemployment, violence and migration, especially of the youth. • Poor institutional performance hinders local governments’ capacity to deliver basic infrastructure and services to the population. • The country’s low resilience to disasters adversely affects the sustainability of investments and livelihoods. Critical assumptions: • Commitment of municipalities to the Project development goals and chosen subprojects, as well as their future maintenance and sustainability. • Commitment by the national government to continuously support municipalities through technical assistance programs and capacity building. • Commitment of national and local governments to incorporate and mainstream resilience and citizen engagement in subprojects. • Commitment of communities to engage in the Project and maintain assets. Page 19 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Figure 1. Results Chain LONG-TERM ACTIVITIES OUTPUTS OUTCOMES OUTCOMES Km. of roads built or rehabilitated Increase access to No. of people provided with new or Increased number of municipal infrastructure improved electricity service people with access to and services infrastructure and Percentage of subprojects including services. women’s needs in project design Increased access to Percentage of financed subprojects resilient infrastructure functioning and delivering services to Improved compliance and services communities after completion. with FISDL’s resilience standards Percentage of subprojects complying with FISDL’s DRM standards. Beneficiaries of job-focused Support regional interventions economic development Sq. meters of productive infrastructure built or rehabilitated No. of subprojects with disaster contingency plans. No. of municipalities using citizen Improved institutional engagement platform. Increased number of performance of municipalities that Increased citizen satisfaction rate with municipalities register debt, income at least one municipal sub-project and expenses to MoF provided Institutional strengthening No. of municipal staff (female and Increased municipal male) trained performance as measured by No. of municipalities using the new municipalities public investment guidelines published meeting minimum by the MoF. conditions Increased training rating among municipal staff No. of municipalities adequately registering debt and income in SAFIM No. of municipalities that submit Annual Financial Statements on time to the Office of the Auditor General Page 20 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) E. Rationale for Bank Involvement and Role of Partners 47. The World Bank is well placed to support the country because of the experience built with the implementation of the LGSP (P118026). This Project builds upon the results, lessons, systems and capacity built under the LGSP. Implemented between 2011 and 2017, the US$80 million LGSP supported the strengthening of technical and administrative capacity at the municipal level, as well as the formulation of policies for decentralization at the national level15. This operation introduces three shifts in focus from LGSP: (i) a sectoral shift from basic infrastructure and services to local economic development and resilience; (ii) a behavioral shift linking municipal fund allocation to performance goals; and (iii) an institutional shift through the inclusion of a competitive fund for transformative economic or productive projects at the inter-municipal scale. 48. The World Bank will bring global experience to strengthen project implementation. Related experiences include Bolivia’s Urban Infrastructure Project (P083979, closed), Haiti Municipal Development and Urban Resilience Project (P155201), Bangladesh Urban Resilience Project (P149493), Tanzania Urban Local Government Strengthening Program (P118152), and the Moldova Second Competitiveness Enhancement Project (P144103). In addition to this operational and policy engagement, the Bank has been actively building its body of knowledge: (i) on urbanization and territorial development in Central America, through the Central America Urbanization Review (P152713); (ii) on Local Economic Development through the Competitive Cities Knowledge Base (P148372), a multi-sectoral initiative involving the Trade & Competitiveness Global Practice, and the Social, Urban, Rural and Resilience Global Practice. 49. The World Bank has worked closely with development partners who have been actively supporting the country’s local development agenda. Projects and initiatives financed by international partners have assisted the government to promote and advance the decentralization process and its municipal development efforts. Coordination activities have been carried out during the project preparation to avoid duplication of effort and ensure synergies among projects. The project will complement ongoing projects and initiatives financed by USAID, the IADB and JICA. In particular, while a co-parallel or co-financing is not envisioned, this Project will ensure coordination and complementarity with the USAID’s ongoing operation (in 2016, USAID approved a US$36 million to support municipal governance and infrastructure). F. Lessons Learned and Reflected in the Project Design 50. The Project draws from the experience of the previous LGSP, whose operational lessons, results and proven systems have been fully incorporated in the Project design. Lessons include: • The need to consider a centralized scheme to avoid implementation delays, promote efficiency in the use of funds and minimize the risks associated with the limited execution capacities at the local level. • The need to use alternative mechanisms to FODES for the allocation of funds for municipal infrastructure investments to benefit disadvantaged municipalities and promote their economic growth. In addition, and despite potential operational complexities, the Project will condition the funds under Component 1 on Page 21 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) municipalities meeting certain minimum conditions or eligibility criteria, thus stimulating municipal measures towards strengthening municipal finances, administrative management and DRM. • The need to continue strengthening FISDL’s capacity for safeguards oversight. • The creation of an inter-institutional committee, which has proven to be an effective mechanism not only to facilitate overall project coordination but also to guarantee institutional ownership of the different agencies involved in project implementation. • A thorough analysis of the institutional capacity of project participating agencies to overcome any limitations that could undermine project implementation in a timely manner. • The importance of combining infrastructure investments with capacity building activities at the local level, in order to significantly improve municipal management and enhance service delivery. Capacity building proved to be more important in LGSP than the availability of financial resources for supporting municipalities. • Importance of community-driven approach to prioritize local investments. The Project will build on, and strengthen, existing community engagement mechanisms such as the Citizen Control Committees to ensure ownership and to monitor project implementation. It will also apply, experiences from other countries (such as the Bolivia Urban Infrastructure Project, P083979) to improve transparency and promote citizen engagement mechanisms through digital platforms. • Greater involvement of COMURES as a key political actor will benefit local ownership of future efforts to strengthen local governments. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 51. Implementation arrangements have been designed to streamline project execution. The Project proposes a centralized implementation mechanism for Components 1, 2, 3 and 5 to promote efficiencies in the use of funds and avoid delays that would arise if a decentralized arrangement is adopted in an environment of weak execution capacities at the local level. Component 4 (CERC) will be implemented in line with the provisions of the Civil Protection Law and under the coordination of MoF. Depending on the type and scale of the triggering event and the implementation priorities established in case of activation by the National Commission for Civil Protection, CERC will be implemented by one or more of the following implementing agencies: (i) MIGOBDT; (ii) MOPTVDU; or (iii) MAG. Implementation arrangements for Component 4 will be detailed in a specific Operational Manual. 52. The Project will be implemented by FISDL while the MoF will be responsible for overall project coordination. The MoF will enter into a Subsidiary Agreement with FISDL to establish, operate and maintain an internal Project Implementation Unit (PIU-FISDL) for Components 1, 2, 3 and 5. The PIU-FISDL will report directly to the President of FISDL and will be responsible for the Project’s technical, fiduciary and safeguard aspects. The existing technical units of FISDL, reinforced by staff hired by the PIU-FISDL, will be the government’s technical counterparts to the World Bank for fiduciary aspects, risk management, and social and environmental safeguards. FISDL will initiate the hiring of key PIU staff immediately after the Project has been declared effective. The PIU is expected to be fully staffed within the first three months of project implementation. The objectives, structure and responsibilities of the PIU-FISDL will be outlined in the Project’s Operational Manual (POM). A full draft of the POM is being finalized and its adoption is an effectiveness condition. Fiduciary assessments verified that FISDL has the needed capacity to implement this Project. Page 22 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 53. A Project Steering Committee (PSC) will be established to oversee project planning, and execution, and to facilitate effective coordination of Components 1, 2, 3 and 5. The MoF will be responsible for establishing, chairing, and maintaining the PSC throughout project execution. The PSC will be comprised of representatives from MoF, SETEPLAN, FISDL, ISDEM and COMURES. Other government and private agencies will be invited to join as needed depending on the issues to be addressed at each session of the Committee. The PSC will meet at least every quarter to resolve strategic issues affecting the Project execution, provide policy guidance, and review project implementation progress and results indicators. It will be responsible for the final selection of projects to be financed under Component 2. The roles and responsibilities of the PSC are detailed in the POM. B. Results Monitoring and Evaluation Arrangements 54. A project monitoring and evaluation system will be established by the PIU-FISDL to assess progress on indicators set in the Project’s results framework. The PIU-FISDL will collect data on activities and outputs based on inputs from FISDL’s municipal advisors (asesores municipales) working directly with municipalities, in accordance with the format outlined in the POM. Among FISDL’s strengths are: (i) strong presence in the territory; (ii) ability to work with local communities, including operational capacity in areas with high rates of crime and violence; and (iii) expertise from previous projects implemented with multilateral organizations. The Project builds on FISDL’s organizational structure for project implementation, including the regional coordinators, municipal advisors, and list of registered contractors. Data will be disaggregated by municipality for all indicators. 55. An annual assessment will be the main tool to assess progress towards the PDO. The annual assessment will be carried out in line with the procedures established in the POM and will be complemented by an independent firm to ensure objectivity. The POM will provide clear definitions for each indicator as well as a comprehensive guidance on the scoring. Adjustments to the performance indicators and scoring methodology will be made throughout implementation in line with agreed procedures and particularly at the mid-term review to address any possible shortcomings or changes in conditions. The results framework will be reviewed and updated if necessary during the mid-term review, depending on the emerging trends regarding the infrastructure and services supported by the project. 56. Baseline for municipal institutional capacity assessment (MICA). Primary data on baseline indicators for measuring institutional capacity at the municipal level will be collected on a random sample of 60 municipalities. The survey instrument builds on good international practices and has been jointly designed by government officials and the World Bank. The sample of 60 municipalities is based on probability proportional to size (p.p.s. sampling), using total population as a measure of size. The sample is stratified based on capacity levels: (i) low capacity; (ii) medium capacity; and (iii) high capacity. Field data collection took place in February 2019 with technical assistance support from the World Bank financed through the Global Facility for Disaster Reduction and Recovery (GFDRR). Pilot data collection in 2-3 municipalities will start in early February 2019 to test and adjust the survey instrument and field protocols. A competitively selected local firm specializing in survey management will be responsible for data collection. This study will serve as a baseline for updating the typology of municipalities and informing project design, implementation, and evaluation C. Sustainability 57. Three kinds of sustainability have been assessed: (i) sustainability of assets built with project funds; (ii) fiscal sustainability of activities supported by the Project in the medium and long term; and (iii) institutional Page 23 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) sustainability and governance. The key elements of the sustainability plan are: • Sustainability of assets: The design of Components 1, 2 and 3 incorporates climate and disaster risk considerations into the criteria for selecting subprojects and activities. All infrastructure subprojects will include an Operation and Maintenance Plan and associated budget allocated, in accordance to local investment guidelines and World Bank norms. • Fiscal sustainability: The MoF already allocates resources in their annual budget to fund the General Directorate of Public Accounting (DGCG) activities to support municipalities in the implementation of SAFIM. MoF has expressed strong ownership of the municipal development agenda and plans to complement current efforts with incremental resources to maintain their capacity building programs and issue a formal accreditation to municipal staff trained. • Institutional sustainability is ensured through the incentive mechanism which rewards improved municipal government management. The MoF has expressed strong interest in requesting additional financing after year 3 of Project implementation, based on the findings of the mid-term review of the Project. Mainstreaming citizen-engagement approaches builds community cohesion and ownership to maintain and preserve local investments. Municipal ownership and sustainability of the improved institutional capacities would be ensured by the national government’s sustained efforts to build performance-based systems with local authorities. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis 58. Technical Analysis. Investments expected to be proposed under Components 1 and 2 are not likely to be technically complex. FISDL has extensive experience in managing and implementing infrastructure investments at the municipal level and has proven track record of implementing the types of subprojects envisioned in this Project. Building on the results and lessons learned from the LGSP, FISDL will be responsible for validating technical designs of subprojects and providing technical support to municipalities for preparing technical designs. FISDL will also be responsible for ensuring compliance with fiduciary aspects, risk management and social and environmental safeguards, in a manner acceptable to the World Bank. The World Bank will review the designs of the more complex subprojects and will confirm that they meet the required technical standards as established in the POM. 59. Climate Resilience. It is expected that the Project will have positive environmental impacts. Components 1 and 2 will prevent and/or mitigate disaster risks and benefit from climate adaptation activities, mainly with municipal infrastructure to mitigate the impact of floods, and landslides. All subprojects will be developed following the FISDL’s technical, social and environmental standards, in a manner acceptable to the World Bank. Component 3 includes capacity building and training activities to address disaster risk management and climate change adaptation at the municipal level. The Project will use a Code of Environmental Good Practice. Given that civil works are small scale, no major indirect and irreversible negative impacts are expected. Page 24 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 60. Economic and Financial Analysis. The Project is expected to have positive effects in terms of increased economic activity, employment and income, through the improvement of institutional performance and investments at the municipal and inter-municipal levels. The economic analysis was carried out for the three main groups of infrastructure investments likely to be carried out under Components 1 and 2: (i) road infrastructure; (ii) small water infrastructure networks30; and (iii) electrification. Given that the distribution of subprojects along sectors is not yet known, the analysis applied a distribution along the following lines, based on the earlier World Bank projects in El Salvador: (i) roads – 70 percent; (ii) municipal markets – 10 percent; (iii) electricity and street lighting – 5 percent; and (iv) other categories 15 percent. 61. A literature review demonstrates that access to basic services and improvement of connective infrastructure have positive effects on the economy. Trade facilitation infrastructure can reduce transaction costs, making businesses more profitable 31 32 33 34. Another type of infrastructure improvement that can stimulate growth and reduce poverty is the provision of electricity to households 35 36 37. Moreover, access to water services can have positive impacts on reducing child mortality and other health indicators38 39, and it is positively associated with an increase on activity in the tourism sector. 40 62. The parameters for the cost-benefit analysis included: (i) a discount rate of 6 percent; (ii) a 10-year horizon for benefits from the project investments; (iii) project benefits generated starting from Year 4 of the project; (iv) an execution rate of costs as follows: Year 1 – 10 percent, Year 2 – 20 percent, Year 3 – 30 percent, Year 4 – 25 percent, and Year 5 – 15 percent; (v) costs of victimization of non-lethal crimes in El Salvador are 0.19 percent of GDP41; (vi) an increase in GDP of 0.4 percent as a consequence of the reduction in transportation costs42; and (vii) costs of US$200 million. Results of the cost-benefit analysis are shown in the table below. 30 Investments with use or potential contamination of international waterways are not eligible. 31 Giordano, P., Guzman, J., & Watanuki, M. (2011). Evaluating the Economic Impacts of Transport Costs in Latin America. 32 Gertler, P. J., Gonzalez-Navarro, M., Gracner, T., & Rothenberg, A. D. (2014). The Role of Road Quality Investments on Economic Activity and Welfare: Evidence from Indonesia’s Highways. Working Paper. 33 Gonzalez-Navarro, M., & Quintana-Domeque, C. (2016). Paving Streets for the Poor: Experimental Analysis of Infrastructure Effects . Review of Economics and Statistics, 98(2), 254-267. 34 Gibbons, S., Lyytikäinen, T., Overman, H., & Sanchis-Guarner, R. (2017). New Road Infrastructure: The Effects on Firms . SERC Discussion Paper 214. 35 Khandker, S. R., Barnes, D. F., & Samad, H. A. (2012). The Welfare Impacts of Rural Electrification in Bangladesh. The Energy Journal, 33(1), 187-206. 36 Aguirre, J. (2017). The Impact of Rural Electrification on Education: A Case Study from Peru . The Lahore Journal of Economics, 22(1), 91- 108. 37 Dasso, R., & Fernandez, F. (2015). The effects of electrification on employment in rural Peru. IZA Journal of Labor & Development, 4(1). 38 Gamper-Rabindran S., S. Khan, and C. Timmins. (2010). The impact of piped water provision on infant mortality in Brazil: A quantile panel data approach. Journal of Development Economics 92(2): 188-200. 39 Galiani, S., Gertler, P., & Schargrodsky, E. (2005). Water for Life: The Impact of the Privatization of Water Services on Child Mortality . Journal of Political Economy, 113(1), 83-120. 40 Christie, Iain; Fernandes, Eneida; Messerli, Hannah; Twining-Ward, Louise. 2013. Tourism in Africa : harnessing tourism for growth and improved livelihoods (English). Washington DC ; World Bank. 41 Jaitman, L., Caprirolo, D., Granguillhome Ochoa, R., Keefer, P., Leggett, T., Lewis, J. A., … Torre, I. (2 017). The Costs of Crime and Violence: New Evidence and Insights in Latin America and the Caribbean. BID 42 Giordano, P., Guzman, J., & Watanuki, M. (2011). Evaluating the Economic Impacts of Transport Costs in Latin America . Page 25 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Table 1. Economic analysis summary NET PRESENT VALUE (NPV) US$ 289,567,064 INTERNAL RATE OF RETURN (IRR) 38 percent INVESTMENT RECOVERY PERIOD 10 years BENEFIT-COST RATIO 2.64 63. Sensitivity analysis. A sensitivity analysis was carried out using the assumptions outlined in Table 1. The results of the sensitivity analysis are summarized in Table 2 and confirm that project investments are economically justified even under the conservative scenario. Table 2. Underlying assumptions used in the sensitivity analysis Variable Scenario Base Conservative Favorable Crime reduction (Welsh y Farrigton 2009) 1 percent 0.5 percent 2 percent Growth in GDP (Giordano et al. 2011) 0.4 percent 0.2 percent 0.5 percent Table 3. Cost-benefit analysis results under different scenarios Benefits Net Present Value Cost-Benefit Social Costs (US$) (US$) (US$) Ratio IRR Scenario 1- Base 176,879,410 466,446,474 289,567,064 2.64 38% Scenario 2- Conservative 176,879,410 233,223,237 56,343,827 1.32 14% Scenario 3- Favorable 176,879,410 584,711,952 407,832,543 3.31 48% 64. Rationale for public sector provision. Due to market failures, non-rival public goods such as roads and municipal infrastructure are commonly underprovided. In the absence of specific market failures, competitive markets deliver the efficient amount of all goods and services. However, the existence of market failures such as public goods, externalities and spillovers provide a condition for public sector intervention. This Project will finance the provision of basic municipal infrastructure that is currently underprovided to improve living conditions and contributed to ending extreme poverty in El Salvador. Resilient infrastructure investments also have large positive externalities and spillovers43, that are not captured by investors but will benefit society. For example, transportation infrastructure may have a positive impact on the extent of the market and the ability of producers to exploit economies of scale and specialization. Those investments also allow greater dissemination of knowledge 43 Externalities occur when producers or consumers do not bear the full costs and benefits of an activity. Page 26 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) and technology.44 Therefore, the public sector has a role to implement policies and investments that promote positive externalities. Finally, investments under Components 1 and 2 will have many beneficiaries, therefore these public investments will potentially shape choices about where people live and work, influences the nature and location of private investment, and affects quality of life. 65. Value added of World Bank’s support. This Project will build on the lessons and systems built under the LGSP. Implemented between 2011 and 2017, the US$80 million project supported the strengthening of technical and administrative performance at the municipal level, as well as the formulation of policies for decentralization at the national level45. The World Bank Group can bring global experiences to strengthen project implementation. In addition, the World Bank is mobilizing a strong community of development partners (NGOs and private sector) such as USAID, JICA, and Totem Brooklyn, who are already working on municipal governance and local resilience initiatives in El Salvador. B. Fiduciary (i) Financial Management 66. Financial Management Assessment (FMA) and Mitigation Measures. A financial management assessment of FISDL concluded that overall FISDL has in place adequate controls and systems. The following measures will be implemented to ensure the satisfactory performance of financial management functions for project implementations purposes: (i) hiring qualified Financial Management (FM) staff for the PIU-FISDL; (ii) inclusion of internal controls and procedures in the FM section of the POM to ensure adequate contract management and monitoring mechanisms over project funds; and (iii) training in FM and disbursement procedures for FM staff. Basic arrangements to ensure proper control, recording, and reporting are detailed in Annex 1. The PIU-FISDL will produce unaudited semiannual financial statements, as well as annual audited financial statement (under ToRs and by an external audit firm, both acceptable to the Bank). 67. FM assessments of the three implementing entities identified for Component 4 (CERC) - MIGOBDT, MOPTVDU and MAG have been completed. Funds for this component will flow through a Designated Account under MoF control. A limited FM Assessment was carried out to evaluate MoF’s capacity to handle disbursement operations under CERC. The CERC Operational Manual includes a specific section detailing the basic FM arrangements for CERC, including institutional strengthening measures considered in the implementation and support plan. Procurement 68. Procurement will be carried out in accordance with the World Bank’s “Procurement Regulations for IPF Borrowers” (Procurement Regulations) dated July 2016, revised in November 2017 and August 2018, and the provisions stipulated in the procurement plan and the POM. 44 Krugman (1991, 1996), Borland and Yang (1992), Krugman and Venables (1995), Kelly (1997), Porter (1998), Gallup, Sachs and Mellinger (1999), Limao and Venables (1999). 45 Existing planning and policy instruments include standardized methodological guidelines, System of Monitoring and Technical Assistance (SIMAT), Information System of Municipal Management (SIGMuni), among others. The LGSP also supported the preparation of 92 Local Participatory Plans (PEPs), 149 Municipal Fiscal Plans, and 174 Municipal Disaster Risk Management Plans (PGRD), as well as the facilitation of 294 Citizen Consultations, 575 Citizen Control Committees. Page 27 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 69. Procurement arrangements. The procurement capacity assessment of FISDL noted that while FISDL has previously implemented World Bank procurement activities, it has limited exposure to the new procurement framework. A series of mitigation measures will be implemented to ensure satisfactory performance of procurement functions, including: (i) hiring qualified procurement staff for the PIU-FISDL; (ii) including a procurement section in the Project’s Operational Manual, including detailing roles and responsibilities; and (iii) including standard Bank procurement documents in contracts, including the Bank’s standard fraud and anti- corruption clauses. 70. CERC Component. The three implementing entities identified to implement CERC have previously carried out procurement under emergency situations; however, none of them have experience with Bank procurement regulations. The CERC Operational Manual will include a specific section detailing the procurement arrangements for the component, including procurement advisory services as needed, that could be provided by FISDL procurement staff. 71. Project Procurement Strategy for Development (PPSD) Summary. A PPSD was prepared to define the applicable procurement arrangements, appropriate selection methods, including market approach, and the types of review to be conducted by the World Bank. It is anticipated that most project activities will be carried out through request for quotations, request for bids and/or request for proposals, mostly in the national market. In case of international market approach, the Project will use the Bank’s standard bidding documents. The complete PPSD will be available before negotiations and the procurement plan will be based on the PPSD. 72. Procurement Plan. A procurement plan for the first 18 months of implementation was developed and agreed at negotiations. The Systematic Tracking of Exchanges in Procurement (STEP) system will be used to plan, track, and monitor the procurement activities and to issue non-objection for any prior review activities. C. Safeguards (i) Environmental Safeguards 73. The Project has been assigned an Environmental Category B based on the anticipated environmental impact of its activities. The Project triggers the following environment safeguards: OP 4.01 Environmental Assessment; OP 4.04 Natural Habitats; OP. 4.09 Pest Management; and OP 4.11 Physical Cultural Resources. The precise locations and the nature of the subprojects under Components 1 and 2 will only be known during implementation. Since the site-specific investments will be defined during implementation, during project preparation it was not feasible to assess the potential impacts and risks of the subprojects. Accordingly, the World Bank required the Borrower to prepare an Environmental and Social Management Framework (ESMF) to prevent and mitigate the potential environmental and social impacts of subprojects. The ESMF will guide the inclusion of elements like a Grievance Redress Mechanism (GRM), gender considerations, potential labor influx, community and occupational health and safety, and potential labor issues, among others, at the level of the subprojects. The ESMF also includes a provision to screen and exclude from funding any subprojects likely to cause irreversible or significant adverse environmental or social impacts that are sensitive, diverse, or unprecedented (Category A). Likewise, the World Bank will assess the environmental and social aspects, and provide its non-objection, to the subprojects considered for funding under Components 1 and 2, before they are declared eligible for funding under this Project. The ESMF also includes a section describing the safeguard requirements aspects of the CERC (Component 4), establishing that its activities will need to comply with the same environmental and social requirements of non- Page 28 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) CERC activities. The ESMF also establishes that the subprojects will need to consider the Environmental, Health and Safety Guidelines, general and specific. OP 4.04 Natural Habitats, OP 4.09 Pest Management and OP 4.11 Physical Cultural Resources are triggered on a precautionary basis. The ESMF includes appropriate measures for mitigating the impact of pesticides, outlines chance-find procedures and procedures to screen-out locations that may negatively impact conversion or degradation of critical natural habitats. Depending on the size and type of the works, goods, and services to be financed under the CERC, the CERC implementation agencies may require preparing additional environmental impact assessments related to pest management, natural habitats or physical cultural resources. If needed, the CERC implementing agencies will follow precautionary measures established in the ESMF and prepare any additional impact assessments based on the ESMF. 74. The Borrower’s Environmental and Social Management Framework (ESMF) was prepared with a Stakeholder Engagement Plan (SEP), in consultation with stakeholders, to identify, manage and mitigate potential adverse impacts. The Project includes financial support for staffing of the PIU-FISDL and improvement of environmental and social management in FISDL. Consultations with the key actors, including indigenous organizations as informed by the stakeholder analysis, took place in late January 2019. The ESMF, satisfactory to the World Bank, was disclosed on February 19, 2019 on the MoF website and on the World Bank’s website on February 27, 2019.46 (ii) Social Safeguards 75. The World Bank social safeguard policies triggered by the Project include Indigenous Peoples (OP/BP 4.10) and Involuntary Resettlement (OP/BP 4.12). Given the national scope of the Project and its implementation in all 262 municipalities, the Project triggers Indigenous Peoples (OP/BP 4.10). Also, given that subprojects involving infrastructure works, particularly under Components 1 and 2, may involve small-scale involuntary resettlement, economic displacement, easements and/or restriction in access, the Project triggers Involuntary Resettlement (OP/BP 4.12). As the locations of the subprojects and their activities will only be defined during implementation, an Indigenous People Planning Framework (IPPF) and Resettlement Policy Framework (RPF) were prepared, following a consultative process, in accordance with the requirements of OP/BP 4.10 and OP/BP 4.12. Consultations with the Ministry of Culture and Indigenous People representatives were held on January 25, 2019. The consultations led by the Ministry of Finance helped to inform the preparation of the IPPF and to ensure that the principles outlined under OP/BP 4.10 are considered during project preparation and implementation. Safeguards instruments were disclosed on February 19, 2019 on the MoF website47 and on the World Bank’s website on February 27, 2019. These frameworks will guide the screening and assessment of potential adverse social impacts of subprojects, and the preparation of site/activity-specific Indigenous Peoples Plans and/or Resettlement Plans, as needed, during Project implementation. (iii) Grievance Redress Mechanisms 76. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address 46 http://www7.mh.gob.sv/pmh/es/Documentos_Ministerio_de_Hacienda.html#nxt:nxtDMH00000001 47 Ibid. Page 29 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non- compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress- service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 77. Citizen engagement. The citizen-engagement platform supported under Component 5 will be harmonized and complementary to the GRS, building on regional experience. The citizen-engagement platform will be piloted and transferred to FISDL for adoption nation-wide. In addition, the Project will carry out satisfaction survey to measure citizen satisfaction rates with at least one subproject financed in each municipality. V. KEY RISKS 78. The overall risk rating of the project is assessed as substantial, driven by political and governance; macroeconomic; technical design; institutional capacity for implementation and sustainability; fiduciary; and environment and social. 79. Political and Governance. Political polarization has been a feature of the Salvadoran political environment for many years. The lack of political consensus has at times hindered the approval of key reforms. The Bank held consultations with national and local actors from all political parties during project preparation, to promote overall support and ownership of the project. The Project has received strong support from mayors and local leaders across the political spectrum. 80. Macroeconomic. The country’s fiscal situation has deteriorated in the recent years mostly due to low economic performance and lack of a comprehensive fiscal reform. The combination of weak growth and high debt stock poses important challenges to debt dynamics – particularly in a politically polarized context. The Bank will continue to provide technical assistance to the government to support improved fiscal performance and a sustained path of debt reduction. 81. Technical Design of the Project. The primary risk with the technical design is the complexity of the operation. Project design incorporates a new mechanism of fund allocation among municipalities. In addition, some of the proposed targets (particularly those related to municipal fiscal and debt management) can be perceived by the municipalities as a threat to their autonomy, although performance-based transfers are well documented in the country’s regulatory framework. Despite the proposed centralized implementation arrangements, this risk can result in implementation delays. In addition, intergovernmental relationship can be challenging, given the number of actors and different sectors involved (e.g., local economic development, basic services, roads, urban development, disaster risk management). To mitigate this risk, a Project Steering Committee is being created to oversee project execution and facilitate effective coordination across actors and sectors. Technical support to the achievements of project goals will be provided under Component 3, and a communication strategy to socialize project design will be implemented under Component 5. Effective participation in the identification of the works may also contribute to increased ownership. Technical designs will follow the recommendations included in the Page 30 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Good Practice Note on Gender Based Violence (GBV) and GBV Risk Screening Tool being applied to projects with civil works, that includes mitigation measures to prevent Bank-financed projects from exacerbating GBV risks in project areas (e.g. prioritize local labor, ensure adequate code of conduct, strengthen GRM, among others). 82. Institutional Capacity for Implementation and Sustainability. Despite FISDL’s experience with the earlier Bank financed project and established institutional capacity, the Project will involve a higher volume of transactions and a larger number of stakeholders. In addition, having three Implementing Agencies for CERC poses some complexities in terms of interinstitutional coordination. Execution of civil works in areas of high crime rates adds to the complexities of the project. These risks will be mitigated by strengthening FISDL’s capacity for technical, safeguards, and fiduciary oversight. The Project will build upon FISDL’s existing protocols and processes for implementing local infrastructure projects in challenging social contexts and work closely with social development specialists throughout implementation to ensure sustainability and community ownership. For Component 4, the coordinating role of the MoF and the protocols and simulations with CERC Implementing Agencies will help mitigate potential implementation delays. The Bank will also provide on-going implementation support to FISDL and the three CERC implementing agencies, as well as support the early initiation of preparatory activities (e.g. preparation of ToRs, harmonization of registries) to expedite implementation upon effectiveness. Non-reimbursable technical assistance resources will be available to carry out simulations (at least once a year) to ensure adequate implementation capacity and preparedness to respond in an emergency. 83. Fiduciary. The fiduciary risk rating takes into account the following key risk factors: (i) complex project design; (ii) limited capacity of FIDSL to implement a project of this size and complexity; (iii) the fact that MAG, MOPTVDU and MIGOBDT, which will be responsible for implementing Component 4, have no previous experience with Bank fiduciary policies and procedures; (iv) CERC implementation requires strong internal processes and procedures to maintain accurate and reliable financial records that are currently not standard (harmonization of this procedures will be a contribution of this Project); and (v) the presence of several implementing agencies requiring the consolidation of financial information. Mitigation measures to ensure the satisfactory performance of fiduciary functions include: (i) qualified fiduciary staff in the PIU; (ii) periodic training in FM, procurement and disbursement for fiduciary staff; (iii) use of the POM; (iv) auditor’s management letters to be produced on a semester basis to monitor internal control; and (v) hiring of external auditors during first five months of the project. 84. Environmental and Social. The Project triggers a number of Bank safeguard policies and will be implemented in 262 municipalities, many of which have weak capacities for safeguards implementation. In addition, subprojects will need to be screened during implementation and detailed safeguard documents may need to be prepared in selected cases based on the ESMF and RPF. The Bank will provide focused implementation support on safeguard aspects during implementation, including training, reviews and clearance of technical design and supervision documents, site visits to assess compliance and resolve issues, and reviews of safeguard implementation reports and follow-up. Building upon the results and lessons learned in the LGSP, the Project will strengthen FISDL’s capacity for safeguards oversight as part of the activities financed under Component 5. . Page 31 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) VI. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: El Salvador El Salvador Local Economic Resilience Project Project Development Objectives(s) The Project Development Objective is to improve institutional performance of municipalities and increase access for citizens to services and resilient infrastructure. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline End Target Outcome 1. Improved institutional performance of municipalities Municipalities that register sub-national debt, income and 0.00 85.00 expenses in accordance with MoF standards (Percentage) Municipalities that meet minimum conditions established in 0.00 100.00 Annex 1 (Percentage) Outcome 2. Improved access to resilient municipal infrastructure and services People provided with increased access to services and resilient 0.00 4,500,000.00 infrastructure (Number) Female provided with increased access to services and 0.00 2,250,000.00 resilient infraestructure (Number) Financed subprojects complying with FISDL's DRM and 0.00 95.00 environmenal standards (Percentage) Page 32 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target Component 1. Investments in services and in resilient municipal infrastructure to support LED Roads improved or rehabilitated (Kilometers) 0.00 165.00 People provided with new or improved electricity service (CRI, Number) 0.00 10,000.00 Female provided with new or improved electricity service 0.00 5,000.00 (Number) Number person-days employment created under subprojects 0.00 1,509,120.00 (Number) Percentage of subprojects designs complying with the Infrastructure and Gender guidelines as established in the Ops 0.00 95.00 Manual (Percentage) Grievances registered related to delivery of project benefits that 0.00 100.00 are actually addressed (Percentage) Component 2. Competitive fund for high-impact investments on regional economic development Roads improved or rehabilited (Kilometers) 0.00 95.00 Beneficiaries of job-focused interventions (CRI, Number) 0.00 13,000.00 Beneficiaries of job-focused interventions - Female (CRI, 0.00 7,150.00 Number) Sq. meters of productive infrastructure built or rehabilitated (Square Meter(m2)) 0.00 27,507.00 Percentage of subprojects designs complying with the Infrastructure and Gender guidelines as established in the Ops 0.00 65.00 Manual (Percentage) Grievances registered related to delivery of project benefits that 0.00 100.00 Page 33 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target are actually addressed (Percentage) Component 3. Institutional Strengthening and Capacity Building Number of municipal staff trained (Number) 0.00 500.00 Number of female municipal staff trained (Number) 0.00 275.00 Average training satisfaction rating among municipal staff 0.00 75.00 trained (Percentage) Percentage of female municipal staff who report that the training received was valuable and will help them advance in 0.00 75.00 their jobs. (Percentage) Percentage of municipalities submitting Annual Financial Statements on time to the Office of the Auditor General and in 0.00 85.00 compliance with the repongrds (Percentage) Percentage of contingency plans including at least one chapter 0.00 60.00 addressing women's needs (Percentage) Number of municipalities using the citizen engagement platform 0.00 70.00 (Number) Average citizen satisfaction rate with at least one subproject provided under components 1 or 2 (Percentage) 0.00 85.00 IO Table SPACE UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Municipalities that register sub-national MOF standards include the Annual Annual Data collected as part MoF and verification by debt, income and expenses in accordance type of information and the assessment of the annual independent Page 34 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) with MoF standards frequency of registration. using MoF assessment under assessment The assessment is included and SAFIM Component 1 in the annual assessment data under Component 1. Data collected as part Minimum conditions as PIU-FISDL and of the annual Municipalities that meet minimum defined under component 1 Annual MoF, SAFIM independent assessment under conditions established in Annex 1 and as described in the assessment Component 1 Operational Manual. Starting in year 2, direct beneficiaries are Census counted in a radius of Improved resilient municipal estimates 500m (Component 1) infrastructure defined as and People provided with increased access to Semi-annual and 2Km radius PIU-FISDL increased access to disaster- construction services and resilient infrastructure (Component 2) of resilient roads, public space, progress respective local markets or fairs. reports interventions based on Census data. Starting in year 2, direct beneficiaries are Census counted in a radius of estimates 500m (Component 1) Female provided with increased and Semi-annual and 2km radius PIU - FISDL access to services and resilient construction (Component 2) of infraestructure progress respective reports interventions based on Census data. Financed subprojects complying with “Subprojects functioning Annual FISDL According to PIU-FISDL and FISDL's DRM and environmenal standards and delivering services to (starting Year verification of independent Page 35 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) communities” defined as 3) completed subprojects assessment projects that are fully in technical audit operational, that have been reports properly handed over to the municipality (in accordance with the operations manual) and that are maintained. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Technical audit reports Km of roads improved or Annual FISDL FISDL Roads improved or rehabilitated of subprojects rehabilitated Semi- Technical audit of People provided with new or improved FISDL FISDL annual subprojects electricity service Semi- Female provided with new or FISDL FISDL annual improved electricity service Technical audit reports of subprojects Person-days defined as Baseline assumptions number of days worked on Semi- are 12 temporary jobs Number person-days employment FISDL FISDL construction and delivery of annual created per civil work x created under subprojects subprojects, per FISDL 262 civil works per 4 standards. years of project implementation x 6 months of execution of Page 36 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) each work (average) Subprojects that have Percentage of subprojects designs documented taking into Technical audit reports complying with the Infrastructure and account women's needs in Annual FISDL FISDL of subprojects Gender guidelines as established in the their technical designs, Ops Manual protocols or procedures for operation Grievances registered FISDL´s records, Grievances registered related to delivery Semi- related to delivery of project FISDL technical audits and FISDL of project benefits that are actually annual benefits that are actually site visit reports addressed addressed Technical audits of Km of roads improved or Annual FISDL subprojects FISDL Roads improved or rehabilited rehabilitated Semi- FISDL, Census Technical audits FISDL Beneficiaries of job-focused interventions annual data Beneficiaries of job-focused interventions - Female Productive infrastructure Semi- Technical audit reports Sq. meters of productive infrastructure defined as markets, FISDL FISDL annual of subprojects built or rehabilitated business parks, touristic and agroindustry infrastructure Subprojects that have Percentage of subprojects designs documented taking into Semi- Technical audit of complying with the Infrastructure and account women's needs in FISDL FISDL annual subprojects Gender guidelines as established in the technical designs, protocols, Ops Manual and procedures for operation Page 37 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Grievances registered FISDL´s records, Grievances registered related to delivery Semi- related to delivery of project FISDL technical audits, and FISDL of project benefits that are actually annual benefits that are actually site visit reports addressed addressed ISEM's attendance and Number of municipal staff Annual ISDEM graduating ISDEM Number of municipal staff trained trained administrative records ISDEM's attendance Number of female municipal staff Annual ISDEM and graduating ISDEM Number of women trained trained administrative records Semi- Satisfaction Average training satisfaction rating among Training satisfaction based Satisfaction surveys Independent firm annual surveys municipal staff trained on results of survey. Percentage of female municipal staff who report that the training received was valuable and will help them advance in their Percentage of female municipal staff jobs.Training satisfaction Satisfactory who report that the training received based on results of survey. Annual Satisfactory surveys Independent firm surveys was valuable and will help them The training will meet the advance in their jobs. particular needs that women have (as specified in the PAD) to more frequently get decision-making positions and thereby close the gender gap. Percentage of municipalities submitting Percentage of municipalities Annual MoF Financial statements – MoF Annual Financial Statements on time to submitting Annual Financial verification undertaken Page 38 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) the Office of the Auditor General and in Statements on time to the by MoF compliance with the repongrds Office of the Auditor General and in compliance with the reporting standards Percentage of contingency plans including Technical audits of Annual FISDL FISDL at least one chapter addressing women's subprojects needs Defined as the number of municipalities applying the citizen engagement Number of municipalities using the citizen Annual FISDL Independent audit PIU-FISDL platform in the budget, engagement platform planning and implementation of their subprojects Average citizen satisfaction Annually, Independent Average citizen satisfaction rate with at Independent rate with at least one starting in perception PIU-FISDL least one subproject provided under perception survey subproject provided under year 3 survey components 1 or 2 components 1 or 2 ME IO Table SPACE Page 39 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) ANNEX 1: Implementation arrangements and support plan COUNTRY: El Salvador El Salvador Local Economic Resilience Project I. Project Institutional and Implementation Arrangements 1. The Project will be implemented by FISDL while the MoF will be responsible for overall coordination. Through a Subsidiary Agreement with the MoF, FISDL will be the implementing agency of the Project (for Components 1, 2, 3 and 5) and will be assigned the responsibility for establishing and maintaining an internal and dedicated Project Implementing Unit (PIU-FISDL) for the execution of Components 1, 2, 3 and 5. FISDL will be responsible for: (i) coordinating project implementation activities with municipalities, Mancomunidades, and other key stakeholders; (ii) ensuring compliance with Banks’s fiduciary, procurement and safeguard policies; (iii) reporting as well as monitoring and evaluation at the central level (e.g. baseline, financial audits, and progress reports); and (iv) executing and supervising activities and proceeds at the central level. FISDL will have the complete fiduciary role including signing of all contracts, contract management, technical supervision and delivery payments48. Framework agreements under Component 1 will be signed with all the municipalities for subprojects implementation. 2. The PIU-FISDL will be comprised of the following units: (i) project coordination; (ii) communications; (iii) legal; (iv) technical (including specialists in social safeguards, environmental safeguards, local economic development and infrastructure); (v) administration and finance (including specialists in accounting, procurement and treasury); and (vi) Monitoring and Evaluation (M&E). It will be comprised by seasoned fiduciary staff with experience in projects financed by the Bank or other international development partners. The PIU-FISDL would have technical, fiduciary and safeguard specialists assigned from within the FISDL and consultants hired to strengthen existing capacities. The PIU-FISDL coordinator will respond directly to the President of FISDL. The roles and responsibilities of key PIU positions will be detailed in the Operational Manual. 3. The MoF will establish and maintain a Project Steering Committee (PSC) throughout implementation. The PSC will oversee planning, execution and facilitation project coordination of Components 1,2,3 and 5. It will provide strategic guidance and facilitate proactive actions for the resolution of any operational or administrative bottleneck. The MoF will chair the PSC. Key institutions represented in the PSC include MoF, SETEPLAN, FISDL, ISDEM and COMURES. They will provide advice in their areas of competence: SETEPLAN in relation to national and territorial planning; ISDEM and COMURES in relation to municipal institutional strengthening; and FISDL on technical aspects. Other actors will be invited to join as needed depending on the issues to be addressed at each session of the Committee. Figure 2 outlines the PSC’s main roles and responsibilities. Further details will be established in the POM. 4. Verification of the achievement of minimum conditions and incremental goals under Component 1. The PIU-FISDL will report to the PSC the achievement of minimum conditions and incremental goals under 48PIU-FISDL will have the procurement responsibilities for the Project, except for the CERC component where they will only serve as an advisor to ensure Bank’s procurement regulations are followed by the other implementing agencies. Page 40 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Component 1. The implementation schedule of Component 1, including the verification of goals depends on the Legislative Assembly Project approval date. In the first year of implementation, verification of the minimum conditions will be carried out starting in the fourth month of implementation, and the verification period and disbursement must be adjusted to the government’s fiscal year. From the second period onwards, goals will be verified at the end of each fiscal year, unless modified by the PSC following a due process acceptable to the Bank. Goals reported through SAFIM will be verified by the General Directorate of Public Accounting (DGCG) of the MoF, who will report results to the PIU-FISDL. In addition, a consulting firm will be hired to conduct an independent annual assessment of the goal verification process during project implementation. The selection of the firm and assessment methodology must have the Bank’s no objection. Goals may be revised every three years or six months ahead of the municipal elections, whichever comes earlier. Figure 2. Project Steering Committee Roles and Responsibilities Composition Roles Responsibilities Chaired by the MoF. • High level inter-institutional • Ensure compliance Loan Agreement. Includes representatives coordination body created to • Solve strategic issues affecting from: SETEPLAN, FISDL, provide strategic guidance and project execution. ISDEM, and COMURES. facilitate project implementation • Review implementation progress Depending on the needs, in line with Loan Agreement, and result indicators. other public sector Operational Manual, PAD and • Propose implementation agencies and/or private Bank’s policies. improvements for the compliance of sector representatives the project objectives. can be invited to join. • Propose policy Page 41 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) alternatives/corrective actions to solve bottlenecks. • Approve annual plans for project execution. • Approve modifications to the Project’s Operational Manual. • Approve selected project proposals that compete in Component 2, based on the established selection criteria reported by FISDL. Financial Management 5. Financial management tasks will be handled by the PIU-FISDL, supported by FISDL’s institutional administrative structure as needed. The PIU-FISDL will be responsible for carrying out FM tasks for Components 1, 2, 3, and 5. It will be staffed at a minimum with a well-seasoned Financial Specialist, an accountant and treasury analyst. PIU-FISDL’s FM tasks include: (i) budget formulation and monitoring; (ii) cash flow management (including processing payments and submitting loan withdrawal applications to the Bank); (iii) maintenance of accounting records, including the maintenance of an inventory of fixed assets for the project; (iv) administration of underlying information systems; (v) preparation of in-year and year-end financial reports; and (vi) arranging for the execution of the external audit. 6. The PIU-FISDL will be responsible for preparing and monitoring the annual operating plan and budget. The budget will be integrated into the FISDL annual budget and monitored through the National Financial Management System (SAFI) and FISDL’s internal systems. Budget’s formulation and execution will follow local requirements. 7. Project accounting will be managed through the Integrated Information System . The integrated system includes budgeting, treasury, and accounting modules. It will be adapted to extract data from the accounting system; in addition, supplementary records will be maintained in EXCEL to prepare project financial statements. Project accounting will be on accrual basis, in accordance with the government’s accounting policies; however financial statements required by the Bank will be prepared on a cash basis. 8. FISDL has adequate internal control and procedures. Its operations are guided by: (i) the Financial Management Law (Ley AFI); (ii) the annual Law of the General Budget of the State; (iii)MoF regulations and manuals; (iv) FISDL’s manual of financial procedures and practices; and (v) the Project’s Operational Manual. The Project’s Operational Manual will include: (a) roles and responsibilities of the PIU-FISDL’s FM staff; (b) internal controls for the project; (c) content and formats of the interim Financial Reports (IFRs), annual financial reports; and (d) auditing arrangements. 9. FISDL’s designated account (DA) will be opened at the Central Bank of El Salvador in United States Dollars. The following disbursement methods may be used to withdraw funds from the loan (i) reimbursement, (ii) advance, and (iii) direct payment. Under the advance method and to facilitate implementation, the PIU-FISDL will have access to a DA which will be opened in the Central Reserve Bank to be used exclusively for deposits and withdrawals of loan proceeds for eligible expenditures. As needed, Page 42 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) the PIU-FISDL will withdraw funds from the DA and transfer to the Project’s operational account maintained by FISDL in a commercial bank acceptable to the Bank, for the payment of accrued expenditures. Funds deposited into the DA as advances, will follow Bank’s disbursement policies and procedures as described in the Disbursement and Financial Information Letter (DFIL) and Disbursement Guidelines. The flow of funds is illustrated in the following figure: Figure 3. Flow of Funds World Bank Loan Account Advance Reimbursement s Designated Account (Central Bank) Direct Payments FISDL’s account Operating Account (Commercial Bank) Suppliers, Contractors and Consultants 10. The PIU-FISDL will prepare and submit semi-annual IFRs within the 45 days after the end of the semester. The IFRs will contain at least: (i) a statement of sources and uses of funds (with expenditures classified by category) and cash balance; (ii) a statement of budget execution per component and sub- component; and (iii) a reconciliation of the Designated Account. The PIU-FISDL will be responsible for consolidating the financial information including transactions under Component 4. 11. The PIU will prepare the project financial statements on an annual basis. The proposed Project’s annual financial statements will be audited by a private firm under the terms and conditions acceptable to the Bank and will cover all project components (including CERC, when it is activated). The auditors will conduct semi-annual interim reviews and the results of the review will be communicated to FISDL in a management letter within 90 days after the review. The Project’s annual audit reports will be submitted to the Bank not later than six months after the end of each audited period. Audit costs will be financed by the Project. Audited financial statements will be disclosed on FISDL’s website and the WB will make them available to the public in accordance with the Bank Policy on Access to Information. Page 43 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) 12. FISDL should retain all records (contracts, orders, invoices, bills, receipts and other documents) evidencing expenditures under their respective parts of the proposed Project until at least the later of: (i) one year after the Bank has accepted the audited financial statements covering the period during which the last withdrawal from the loan account was made; and (ii) two years after the closing date. FISDL will provide access to the Bank for examination of such records. Procurement 13. Procurement will be carried out in accordance with the Procurement Regulations. Procurement under the project will be carried out in accordance with ‘World Bank Procurement Regulations for IPF Borrowers’ dated July 2016 and revised in November 2017 and August 2018 (‘Procurement Regulations’), and the provisions stipulated in the procurement plan and the Project’s Operational Manual. All procurement methods and procedures are required to be consistent with the World Bank’s Core Procurement Principles and ensure that the World Bank’s Anti-Corruption Guidelines and Sanctions Framework and contractual remedies set out in its Legal Agreement are adhered to. 14. A simplified Project Procurement Strategy (PPSD) was completed as part of project preparation. The World Bank’s standard procurement documents will be used for all contracts that are subject to international competitive procurement. As defined in the PPSD, international market is expected to be used specially in consulting services, in which there is limited market within El Salvador. When approaching the national market, in accordance with paragraph 5.3 of the Procurement Regulations, a simplified bidding document will be agreed within the OM, including national procurement arrangements for publication and enforcement of including Bank’s standard fraud and anti-corruption clauses. FISDL will use the existing COMPRASAL (national procurement system) for publication purposes at national level. 15. Procurement capability assessment. An assessment of FISDL, conducted for the preparation of the project and PPSD identified the following procurement risks: (i) FISDL has previously implemented WB’s funds; however, they have limited exposure to the new WB’s procurement framework; ( ii) the requirement to obtain approval within FISDL is long and could cause delays in procurement processing, including contract management; and (iii) FISDL’s president signs all contracts, regardless of their amount. 16. A series of mitigation measures will be implemented to ensure the satisfactory performance of procurement functions, including: (i) hiring qualified procurement staff for the PIU-FISDL to manage procurement activities including a procurement coordinator, two procurement specialists and an assistant under TORs agreed with the Bank, with relevant experience in donor-funded procurement, particularly in WB or IADB rules and procedures; (ii) the POM will include a procurement section, including roles and responsibilities, and especially flow-charts with specific time-frames; (iii) the POM will also include non- Bank standard procurement documents, including Bank’s standard fraud and anti-corruption clauses and (iv) possible delegation of authority to Project’s coordinator to sign contracts and approvals within contract management. Procurement staff will be invited to participate in Bank’s training programs on procurement regulations. 17. CERC component. Procurement assessments of the three implementing entities identified for Component 4 , MIGOBDT, MOPTVDU, and MAG, have been completed. All of them have previously carried Page 44 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) out procurement under emergency situations; however, none of them have experience with Bank procurement regulations. The CERC manual will include a specific section detailing the procurement arrangements for the component, including the procurement of advisory services, that as needed, could be provided by FIDLS’s procurement staff. Training sessions, technical assistance and CERC simulations will also be available to staff in these institutions starting from year 1, to ensure smooth implementation if an emergency event triggers the CERC. 18. The Bank’s STEP system will be used to prepare, clear, and update the procurement plans and carry out procurement transactions for the Project. The text part, along with the procurement plan tables in STEP, constitute the procurement plan for the project. II. Project Implementation Strategy and Support Plan 19. An implementation strategy has been defined to support project implementation. The strategy was developed based on the project’s nature and its risk profile, thus focusing on priority activities to overcome the main risks outlined in the risk section such as institutional capacity for implementation, environmental and social safeguards, fiduciary aspects and political and governance. 20. Formal supervision missions and field visits will be conducted at least two times per year throughout the project’s lifespan. In addition, the core team is expected to have regular contact with project counterparts through call/video conferences. 21. Financial Management Supervision. Project supervision will review the implementation of FM arrangements and performance, identify corrective actions as necessary, and monitor fiduciary risks. Supervision missions will take place on a semi-annual basis and include: (i) desk review of project IFRs and audit reports, following-up on any issues raised by auditors, as appropriate; (ii) participation in project supervisions at least twice a year, to look into the operation of the control systems and arrangements described in this assessment; and (iii) updating the FM rating in the Financial Management Implementation Support and Supervision Report (FMISSR), as needed. In addition, during the first year of execution, the Project will be closely monitored (quarterly) with the aim of ensuring that the FM arrangements are working as intended and to make changes if needed. 22. Procurement. During procurement post reviews or project supervision, the procurement team will review the implementation of agreed arrangements and performance metrics, identify corrective actions if necessary, and monitor fiduciary risks. During the first year of implementation, the Project will be closely monitored, particularly on prior review activities defined in the procurement plan, with the aim of ensuring that the procurement arrangements are working as intended and the procurement regulations are adhered to. Procurement post reviews are expected to take place on an annual basis. 23. Social safeguards. To strengthen implementation and oversight capacity, there will be a significant need for capacity building measures, in addition to the support expected to be provided by FISDL. These measures include the hiring of at least one social specialist and one environmental specialist within the PIU, in addition to the specialists from FISDL. These specialists will help implement the safeguard instruments prepared for this project, including the Environmental and Social Management Framework (ESMF), which will guide the preparation of Environmental and Social Management Plans (ESMPs) and Page 45 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) other related safeguard management measures; the Indigenous Peoples Planning Framework (IPPF); and the Resettlement Policy Framework (RPF). It will be also important to strengthen the environmental and social management system (ESMS) to screen and track the environmental and social management aspects of the subprojects. As part of the stakeholder engagement process, the project will also conduct local consultation activities in the area of influence of each of the subprojects to be covered by this operation. Since the Project will be implemented at a national scale, the specific measures to avoid or minimized potentially adverse impacts will be defined in the context of each of the subprojects, based on the provisions of the safeguard frameworks. Table 4. Implementation support Time Focus Skills Needed First 12 months Project starting up and TTL/Co-TTL establishment of PIU-FISDL DRM Specialist Local Economic Development Specialist Social Specialist Procurement Specialist FM Specialist Safeguard Specialist Communication Specialist PFM Specialist Infrastructure Specialist Set up system for verification of TTL/Co-TTL minimum conditions and goals FM Specialist for Component 1 PFM Specialist DRM Specialist Local Economic Development Specialist Social Specialist Infrastructure Specialist Publish competition rules and TTL/Co-TTL schedule for Component 2 Procurement Specialist FM Specialist Safeguard Specialist Local Economic Development Specialist Social Specialist DRM Specialist Infrastructure Specialist CERC simulations, training and TTL/Co-TTL technical assistance DRM Specialist Procurement Specialist FM Specialist Page 46 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Safeguard Specialist DRM Specialist Fiduciary and Safeguard Procurement Specialist Training FM Specialist Safeguard Specialist Years 2-3 Verification of minimum TTL/Co-TTL conditions for Component 1 Procurement Specialist FM Specialist Procurement of civil works Safeguard Specialist (component 1) DRM Specialist Local Economic Development Rolling out of competitive funds and Infrastructure Specialists for high impact regional Social Specialist investments Procurement of civil works (component 2) Mid-Term Review Mid-Term Review (assessment TTL/Co-TTL; Technical of project implementation Supervision/Engineer, DRM, FM, towards achievement of PDO) Procurement and Safeguards Specialist; Monitoring and Evaluation; Local Economic Development, Social and Infrastructure Specialists Years 4-5 Continued support to TTL/Co-TTL implementation of works and Technical Supervision/Engineer capacity building, project Procurement Specialist closure FM Specialist Safeguard Specialist DRM Specialist Local Economic Development, Social and Infrastructure Specialists Page 47 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) ANNEX 2: Typology of pre-identified Subprojects and ineligible activities Typology of subprojects Sub-typology of projects 1. Civil works49 (construction, • Local commercialization centers – municipal and farmers adaptation, expansion, markets, shopping centers or plazas, food centers, etc. Some of upgrading or equipment) this infrastructure could be used as storage centers in the event of disasters • Multi-purpose school infrastructure, community centers to be used as shelters in the event of disasters • Infrastructure for the provision of municipal touristic services50, e.g. infrastructure to support archaeological sites and historic centers • Livestock and plant commercialization centers • Incubators startup to create sustainable entrepreneurial support infrastructure • Infrastructure for the installation of agro-industrial park • Recreational courts and public spaces • Processing, packaging or storage centers for fishery, agricultural or livestock products • Craft docks, boarding docks, and piers • Community daycares • Bus and micro-bus stations • Secondary road infrastructure and bridges • Small water and sanitation systems • Small electrification networks • Linear parks51 • Solar panels, solar arrays, alternative energy power sources • Restoration and rehabilitation of ecosystems, installation of artificial reefs, and grey infrastructure (hybrid solutions) 2. Public services for • Creation of innovation centers promoting local • Local and regional competitiveness programs economic development • Employment and labor coordination offices • Sectoral technical assistance and business intelligence programs for locally-produced services and products 49 According to the official definition of the MoF: “construction” refers to the development of a new building or infrastructure that allows the provision of a good or the materialization of a service. “Adaptation” refers to repurposing existing infrastr ucture to provide new services, different from the ones for which it was originally built. “Expansion” refers to civil works aimed a t increasing the built capacity of a certain infrastructure to respond to increasing demand. “Upgrading” refers to the modifica tion of existing infrastructure to improve service standards. “Equipment” refers to the acquisition and installation of furniture, appliances, tools, and provisioning aimed at improving the conditions of facilities where public services are provided. 50 Tourist information centers, touristic lookouts, rest stops, boarding and disembarking for tourism, tourist transport parking, or ecotourist sites. 51 Linear parks are urban natural public spaces, usually located in river basins or other geographic features located within cities, intended for connection, conservation of ecosystem biodiversity, decontamination of micro-basins and citizen recreation, outdoors and in contact with nature. Page 48 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) • Fairs, local productive festivals, and marketing • Strengthening support centers to Small and Medium Enterprises (SMEs) or CEDEMYPES • Business development programs • Support to value chains and supply-chain development • Support to youth entrepreneurship programs • Job training programs, internship and job-skills matching programs • Family and artisan production programs (e.g. jams, sausages, etc.) • Management of protected areas (reduction of land-based stressors, measures to reduce physical or pressures damage to ecosystems) • Management programs to mitigate the major threats to protected areas, to reduce climate risks and provide other ecosystem services • Alternative and sustainable livelihood programs explicitly designed to strengthen protected areas or marine managed areas that reduce climate risks and provide other ecosystem services • Improved tourism services and micro-regional touristic routes. • Promotion support programs for aquaculture and fish farms (e.g. shrimps, langoustines, etc.) • Rehabilitation and equipment of public spaces for product commercialization (e.g. road stores, mobile facilities for local fairs, etc.) 3. Investments on • Administrative simplification programs (e.g. for opening and improving municipal doing business) administrative • Design and implementation of Apps for citizen engagement on processes for promoting municipal services (e.g. Boston 311, Active Salta, La Paz Barrio local economic Digital) development • Design and implementation of online platforms for paying municipal services • Design and implementation of digital participatory platforms for the prioritization and supervision of public works, registration of events, repairs, etc. The following activities are ineligible for financing under this Project: • Land acquisition expenditures. • Subprojects where the land tenure has not been clearly established or where land tenure is contested by local communities, organizations or individuals who claim rights over the proposed areas. • Subprojects that could be classified as Category A under Bank policy OP 4.01 (likely to have significant Page 49 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) adverse environmental impacts that are sensitive or unprecedented). These impacts may affect an area broader than the sites or facilities subject to physical works or which have a moderate or high environmental impact, according to the national legislation (PIAMA52). At the Bank’s discretion, this exclusion may also extend to potential associated facilities, which are not part of the project but that are essential for their operation. • Subprojects that involve the risk of significant involuntary resettlement policy OP 4.12. Resettlement will be considered as significant if a subproject: (i) involves the involuntary resettlement of more than 200 families; (ii) involves the resettlement of indigenous peoples or other socially vulnerable groups; or (iii) affect significantly the source of livelihoods of the affected population. • Subprojects with the potential to involve child or forced labour, whether as part of its own activities or as part of their supply chain. • Subprojects involving waste management. • Final intermediation activities that would involve the assignment of financial resources for subprojects. • Subprojects involving nature reserves, and protected areas. • Mangrove, reef and coral reefs and cliffs alteration. • Affectation of wetlands areas, crater lake drainage, lahars. • Subprojects in sites with declarations of environmental emergency status, unless the MARN has permission and the Bank's no objection. • Subprojects with potential effects on cultural heritage, except if the documented permission of the Ministry of Culture is available. • Subprojects that involve the use of toxic agrochemicals. • Subprojects with use of potential contamination of international waterways. • Subprojects involving the construction or rehabilitation of dams, or other investments which rely on the services of existing dams for water systems or irrigation. 52 Proyectos de Impacto Ambiental Moderado o Alto (PIAMA), Categorización de Actividades, Obras o Proyectos, MARN 2017 Page 50 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) ANNEX 3: Methodology for calculation of benefits under Component 1 Component 1 is developed using a results-based approach. Funds are available to municipalities that fulfill institutional performance goals related to: (i) enhanced fiduciary systems and greater transparency in managing debt, income, and public expenses; (ii) improved service delivery systems; (iii) improved municipal government capacity to design and manage infrastructure assets in a resilient manner; and (iv) enhanced accountability and oversight mechanisms. 1. The total amount of Component 1 is distributed in four years (Bi). Total funds under Component 1 will be distributed as follows: 10 percent in year 1; 30 percent in years 2, 3 and 4. In year 1, all municipalities have the possibility of benefiting with 10 percent of their total Component-1 allocation, provided they fulfill all the minimum conditions. In years 2, 3, and 4, municipalities can receive up to 30 percent of their formula allocation: (a) up to 10 percent upon achievement of the minimum conditions, and (b) an additional 20 percent upon achievement of the annual incremental goals. 2. Maximum benefit per year, per municipality (MBMi) is calculated based on a weighted index formula that considers two parameters: the (i) binary achievement of goals (takes the value of zero or 1 - weighted 60 percent); and (ii) the population of each municipality (weighted 40 percent); multiplied by the yearly distributed amount. This result is standardized53. (MBMi)= WIM *Bi Where: i = Years Bi = total amount to be distributed among municipalities in Year “i” WIM = weighted index (WIM) = achievement of goalsj* 60 percent + municipal populationj*40 percent 3. Achievement of goals. In Year 1, municipalities must fulfill all minimum conditions to access to benefits. In years 2, 3 and 4, municipalities must fulfill all minimum conditions to access to 10 percent of the maximum amount per year. To access to the maximum amount, municipalities must fulfill the minimum conditions plus the incremental goals. 4. Example. Assuming Component 1 total amount of US$ 118 million; starting disbursements in 2020; and a municipality that fulfilled minimum conditions plus incremental goals. 53Standardized: Aligns distributions to allow the comparison of corresponding normalized values for different datasets in a way that eliminates the effects of gross influences. Page 51 of 52 The World Bank El Salvador Local Economic Resilience Project (P169125) Minimum conditions and incremental goals under Component 1 Minimum conditions1 and incremental goals Verifiable2 Responsible of Validation I. Public Finance Management • Own revenues reporting and management 1.1: Submit annually to the MoF the annual revenue statement, as registered in SAFIM, no Digital form DGCGE later than ten days after the end of the last fiscal year 3. 1.2: Publish on the municipality’s front desk and/or website (i) the various payment forms FISDL and Direct and templates for paying municipal fees, duties, and taxes; (ii) the current municipal tax independent observation legislation; and (iii) schedule of due dates to the public4. firm 1.3: Register an own-income growth rate greater than or equal to the average of the last Digital form DGCGE three fiscal periods, as registered in SAFIM. Direct 1.4: Enable at least one additional form of payment to the public, different from cash. FISDL observation • Debt level reporting and management 2.1: Submit annually to the MoF the annual municipal debt statement based on information Digital form DGCGE registered monthly in SAFIM, no later the tenth day after the closure of last fiscal year 5. 2.2: Publish on the municipality’s front desk and/or website (i) the level of municipal debt Direct to date; (ii) Municipal Code Law, (iii) Municipal Debt Law, and (iv) Municipal Council FISDL observation agreements approving any municipal debt issued in the current fiscal year 6. 2.3: Report the indicator “service debt / own income”, showing that is less than or equal to Digital form DGCGE the average of the last three periods, reported in SAFIM. II. Public Investment 1: Submit to FISDL and MoF the name and contact information of the official in charge of Digital form DGCGE the formulation and monitoring of municipal public investment projects7. 2: Prepare at least one technical design for an investment project that considers a local Digital form FISDL economic and/or resilience approach. 3: Include in the municipal annual budget at least one investment project that considers a Digital form FISDL local economic and/or resilience approach. 4: Implement at least one investment project that considers a local economic and/or a Digital form FISDL local resilience approach. III. Disaster Risk Management 1: Submit annually to FISDL and MoF the name and contact information of the official in Digital form FISDL charge of disaster risk management8. 2: Comply with social and environmental standards stablished by the PIU - FISDL in Digital form FISDL projects financed under Component 1. 3: Prepare or update a disaster risk management plan (Multi-hazard) Digital form FISDL 4: Include in the municipal annual budget at least one investment project that considers a Digital form FISDL disaster risk management approach. IV. Citizen engagement 1: Carry out at least one public session of the Municipal Council 9 in which the municipal Municipal FISDL annual budget is discussed. Council Act Townhall 2. Carry out at least one Townhall Meeting9 for budget discussion. FISDL Meeting Act Note: 1/Minimum conditions are required from Year 1 onwards; while incremental goals will be assigned since the second year and according to their capacities. 2/ Digital form verifiable will be provided by FISDL. 3/ Based on Form N° 1.1 "Sworn Statement of Municipal Income" and in accordance to article N° 111 of Ley AFI (Decree N° 516). 4/Detailed in Annex N° 1 "Sworn Statement of Municipal Income". 5/ Based on Form N° 2.1 “Sworn Statement of Municipal Debt" and in accordance to article N° 111 of Ley AFI (Decree N° 516). 6/ Detailed in Annex N° 2 "Sworn Statement of Municipal Debt". 7/ Detailed in Form N° 3 "Sworn Statement of the Official in Charge of Public Investment Projects". 8/Detailed in Form N° 4 "Sworn Statement of the Official in charge of the Municipal Disaster Risk Management". 9/ The name of the mechanism is subject to change based on the results of the baseline survey, and according to title IX of the Municipal Code. Minimum conditions are highlighted in gray and white letters (I: 1.1, 1.2, 2.1, 2.2, and II.1, III.1, and IV.1) Incremental goals are not highlighted Page 52 of 52