Document of The World Bank Report No: 78082-LK INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PAPER ON A PROPOSED PROJECT RESTRUCTURING AND ADDITIONAL FINANCING IN THE AMOUNT OF US$20.3 MILLION GRANT FROM THE AUSTRALIAN DEPARTMENT OF FOREIGN AFFAIRS AND TRADE (DFAT) TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT (NELSIP) (MAY 10, 2013) April 11, 2014 Sustainable Development Department Rural Development and Livelihoods Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 1, 2014) Currency Unit = Sri Lankan Rupee (Rs) Rs 132 = US$1 US$ 1.53 = SDR 1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ACLG Assistant Commissioner of Local GNDs Gram Niladhari Divisions Government GoSL Government of Sri Lanka ADB Asian Development Bank GPN General Procurement Notice AF Asia Foundation GTZ German Technical Cooperation APRC All Party Representatives Conference IC Individual Consultants CAS Country Assistance Strategy ICB International Competitive Bidding CBC Community-Based Contracting IDA International Development CBO Community Based Organization Association CDD Community Driven Development IEC Information Education and CEA Central Environmental Authority Communication CFAA Country Financial Accountability IFAD International Fund for Agricultural Assessment Development CLG Commissioner of Local Governments IMF International Monetary Fund CQ Consultants’ Qualifications IOM International Organization for CWSSP Community Water Supply & Sanitation Migration DA Designated Account IPDP Indigenous Peoples Development Plan DC Direct Contracting ISDS Integrated Safeguards Data Sheet DFAT Department of Foreign Affairs & Trade IUFR Interim Unaudited Financial Reports DPS Designated Procurement Specialist JICA Japan International Cooperation DSD Divisional Secretary Division Agency EIA Environmental Impact Assessment EMP Environment Management Plan LA Local Authority ENREP Emergency Northern Recovery Project LADP Local Authority Development Plan ESAMF Environmental and Social Assessment LAPIM Local Authority Project Implementation Management Framework Manual ESMF Environmental and Social Management LGIIP Local Government Infrastructure Framework Improvement Project FAO Food and Agriculture Organization LKR Sri Lankan Rupees FBS Fixed Budget Selection FM Financial Management MC Municipal Council FMIS Financial Management Information MDTU Management Development and Systems Training Unit FMR Financial Management Report M&E Monitoring and Evaluation FR Financial Reports ML&E Monitoring, Learning and Evaluation GA Government Agent ii MNB Ministry of Nation Building UC Urban Council (Short name for the Ministry of Nation UNDB United Nations Development Building and Estate Business Infrastructure UNDP United Nations Development Development) Program MoFP Ministry of Finance and Planning UNHCR United Nations High Commissioner MOU Memorandum of Understanding For Refugees MTR Mid Term Review UNICEF United Nations Children’s Fund NCB National Competitive Bidding UNOPS United Nations Office for Project NEA National Environment Act Services NELSIP North East Local Services Improvement USAID US Agency for International Project Development NGO Non-Governmental Organization VDP Village Development Plan NIRP National Involuntary Resettlement Plan WA Withdrawal Application NPA National Procurement Agency WFP World Food Program NPC Northern Provincial Council NPSC National Project Steering Committee OM Operation Manual OP/BP Operational Policy/Bank Policy PAD Project Appraisal Document PC Provincial Council PCN Project Concept Note PDO Project Development Objective PIC Project Implementation Cell PM Praja Mandalaya PPCC Provincial Planning and Coordination Committee PS Pradeshiya Sabha PTF Presidential Task Force QBS Quality-Based Selection QCBS Quality and Cost Based Selection RAP Reawakening Project (popular name For Community Livelihoods in Conflict Affected Areas Project) RFP Request For Proposal SBD Standard Bidding Document SEC State Engineering Corporation SLILG Sri Lanka Institute of Local Government SWAP Sector Wide Approach SSS Single-Source Selection Vice President: Philippe H Le Houerou Country Director: Francoise Clottes Sector Director: Jack Henry Stein Sector Manager: Shobha Shetty Task Team Leader: Seenithamby Manoharan iii SRI LANKA SRI LANKA: NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT (NELSIP) P118870 CONTENTS Page Project Paper Data Sheet v Project Paper I. Introduction 1 II. Background and Rationale for Additional Financing 1 III. Proposed Changes 2 IV. Appraisal Summary 4 Annexes 1. Revised Results Framework and Monitoring Indicators 8 2. Operational Risk Assessment Framework 14 3. Allocation of Proceeds 18 4. List of New LAs in Adjoining Provinces 20 iv SRI LANKA NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT ADDITIONAL FINANCING DATA SHEET Basic Information - Additional Financing (AF) Country Director: Francoise Clottes Sectors: Roads and highways (60%); Sector Manager/Director: Shobha Subnational government administration (20%); Shetty/John H. Stein Water supply (10%); Irrigation and drainage Team Leader: Seenithamby Manoharan (10%) Project ID: P150140 Themes: Rural services and infrastructure Implementation Effectiveness Date: May 5, (25%); Participation and civic engagement 2014 (25%); Conflict prevention and post-conflict Lending Instrument: Investment Project reconstruction (25%); Decentralization Financing (25%)Environmental category: B – Partial Additional Financing Type: Scale-up Assessment Expected Closing Date: December 31, 2015 Joint IFC: No Joint Level: Basic Information - Original Project Project ID: P113036 Environmental category: B- Partial Assessment Project Name: North East Local Services Expected Closing Date: December 31, Improvement Project 2015 Lending Instrument: Sector Investment Joint IFC: No Lending (SIL) Joint Level: AF Project Financing Data [ ] Loan [ ] Credit [X ] Grant [ ] Guarantee [ ] Other: Proposed terms: AF Financing Plan (US$m) Source Total Amount (US $m) Total Project Cost: 20.30 Cofinancing (Australian Department of 20.30 Foreign Affairs and Trade – DFAT) Beneficiary Borrower: Total Bank Financing: IDA New Recommitted Client Information v Recipient: Ministry of Finance and Planning, Democratic Socialist Republic of Sri Lanka Responsible Agency: Ministry of Economic Development 464/A, T.B. Jaya Mawatha, Colombo 10 Contact Person: Mr. Monty Balasooriya, Project Coordinator Telephone No.: 077-9371267 Fax No.: 011-238-2066 Email: balasooriyamonty@yahoo.com AF Estimated Disbursements (Bank FY/US$m) FY 2010 2011 2012 2013 2014 2015 Annual 10 10.3 Cumulative 10 20.3 Project Development Objective and Description vi Original Project Development Objective (PDO) is to support local authorities in the Northern and Eastern Province to deliver services and local infrastructure in a responsive and accountable manner. Revised Project Development Objective is to support local authorities in the Northern Province, the Eastern Province and Adjoining Provinces to deliver services and local infrastructure in a responsive and accountable manner. The project components and implementation arrangements remain unchanged. Component 1: Infrastructure Service Delivery: The objective of this component is to improve the quantity and quality of public goods delivered and maintained by Local Authorities (LAs). These may include rural roads, drains, culverts and bridges, public buildings, markets and fairs, waste disposal, rural water supply, parks, recreation facilities and libraries, nursery schools, playgrounds and dispensaries. Component 2: Institutionalizing Accountabilities: This component aims at ensuring that LAs undertake public expenditures and deliver local services in a transparent and accountable manner. It will strengthen upward and downward accountability systems at the LAs and will support: (a) transparent and independent annual financial audits of LAs to ensure their financial accountability; (b) social and technical audits of public expenditures undertaken by LAs to ensure effective use of funds in line with citizen expectations; and (c) systems and processes to bring greater transparency in LA affairs and strengthen citizen voice in planning, budgeting and monitoring. This component will also support an Information Education & Communication (IEC) campaign aimed at disseminating project related information to different stakeholders at all levels. Component 3: Building Capacities: This component aims at strengthening the service delivery systems and capacities of the LAs to deliver their mandated services as well as strengthening the monitoring capacities of the provincial and national level institutions. It will support (a) improving the efficiency of current systems and procedures relating to planning, budgeting, financial management, revenue management and procurement at the LA level, (b) improving the efficiency, timeliness and follow up of the internal and external audits of LAs, (c) training elected representatives and staff of LAs on financial management, procurement and project management, (d) providing effective hand holding support to LAs on day to day basis, and (e) developing a long term capacity building strategy for LAs. It will also support the strengthening of the capacities of the national and provincial level institutions that play a critical role in the support and oversight of local government functions. Component 4: Assessments and Evaluation: This component will finance: (i) activities pertaining to establishing a comprehensive monitoring system, including baseline assessment, repeater surveys of social assessments, social accountability assessment, and capacity assessments; (ii) evaluating technical and social audits and preparation of citizens score cards; and (iii) other needed analysis as and when they are needed. Component 5: Project Management: This component will support the key agencies at the central, provincial and local levels that are involved in the day to day management of the project to procure necessary consultant, equipment and operational support for the smooth implementation of the project. Safeguard and Exception to Policies vii Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) [X]Yes [ ] No Natural Habitats (OP/BP 4.04) [X]Yes [ ] No Forests (OP/BP 4.36) [ ]Yes [X] No Pest Management (OP 4.09) [ ]Yes [X] No Physical Cultural Resources (OP/BP 4.11) [X]Yes [ ] No Indigenous Peoples (OP/BP 4.10) [ X ]Yes [ ] No Involuntary Resettlement (OP/BP 4.12) [ X ]Yes [ ] No Safety of Dams (OP/BP 4.37) [ ]Yes [X ] No Projects on International Waterways (OP/BP 7.50) [ ]Yes [X] No Projects in Disputed Areas (OP/BP 7.60) [ ]Yes [X] No Does the project require any waivers of Bank policies? [ ]Yes [X] No Have these been endorsed or approved by Bank management? [ ]Yes [ ] No Conditions and Legal Covenants: Financing Agreement Reference Description of Date Due Condition/Covenant DFAT Grant Agreement Completion of financial Disbursement Condition management assessment of LAs in adjoining provinces viii SRI LANKA: NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT (NELSIP) PROJECT PAPER I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide Additional Financing and a Level-1 restructuring of the Sri Lanka North East Local Services Improvement Project (NELSIP) (P113036)(Cr 4728 LK). 2. The proposed changes include: (i) revising the Project Development Objective (PDO) to reflect the expansion in the Project Area; (ii) changes related to the revisions of the results framework; and (iii) revise financial allocations among the project components. The proposed Additional Financing in the amount of US$ 20.3 million would help finance the costs associated with expanding the project area to war affected adjoining districts of Anuradhapura, Polonnaruwa, Puttalam and Moneragala. . II. Background and Rationale for Additional Financing in the amount of US$ 20.3 million 3. The original objective of the Project is to support local authorities in the Northern and Eastern Provinces to deliver services and local infrastructure in a responsive and accountable manner. NELSIP has been designed to cover a five-year period (2010-2015), and has a total original budget of US$ 86 million, of which the IDA contribution amounted to US$ 50 million and Government of Sri Lanka (GOSL) and beneficiary contributions amounted to US$ 34 million & US$ 2 million respectively. 4. The Credit was approved on May 13, 2010 and it became effective on December 15, 2010. The Credit will close on December 31, 2015. The total cumulative disbursement to-date is 82.7%. Achievements of the project to date are quite substantial in terms of expected outputs under each of the project components. The latest ISR ratings of the project are Moderately Satisfactory (in terms of implementation progress) and Satisfactory (in terms of progress towards achievement of the PDO). 5. While NELSIP has hitherto been focusing on strengthening local infrastructure service delivery in the North and East Provinces to help them address the service delivery deficits caused by the prolonged civil war, it needs to be recognized that there are LAs who are at the fringe of the NELSIP Project area but nevertheless bore a significant brunt of the spillover effects of the conflict. Districts like Moneragala, Polonnaruwa, Anuradhapura and Puttalam in the adjoining provinces were affected during the conflict which resulted in a severe strain on their already thin stretched infrastructure and service delivery systems. Hence the Government of Sri Lanka is desirous of extending the scope of NELSIP to selected LAs in the adjoining provinces that were significantly impacted during the conflict. 6. To support the GoSL in addressing these critical priorities, Australian Department of Foreign Affairs and Trade (DFAT) is partnering with the GoSL and the World Bank to expand the scope of the current NELSIP project by providing additional grant of US$ 20.30 million thereby increasing the total resource outlay of the project to US$ 106.30 million. DFAT contribution will help to strengthen 1 the programmatic approach followed in NELSIP and will supplement the existing contributions made by the GoSL and International Development Association (IDA) and will enable GoSL to increase the resources available for meeting the backlogs of capital investments to a considerable extent as well as to enhance the institutional strengthening initiatives of NELSIP to introduce a performance based framework for local government support. 7. Building upon the existing initiatives for strengthening institutional systems and processes of LAs in the North and East, the Project also intends to introduce an incentive based framework for local governance by piloting a Performance based grant that will reward superior institutional performance by LAs on three broad areas viz (1) LA Management (2) Good Governance and (3) Service Delivery. The additional financing provided by DFAT will be commingled with the existing resources of NELSIP. Also the existing design of the NELSIP work program will continue unchanged and only those additional activities that will complement and enhance the impact of the current NELSIP design and work program are included. No formal project changes are required in respect of the performance grant and this could be accommodated within the project operating manual without changing the legal agreement. 8. The implementation arrangements for the NELSIP Project will continue as it is under the existing project with minor modifications made to incorporate the role of DFAT in Project supervision and management. Fine tuning the subproject approval processes at district level in the Northern Province and any other Province to facilitate participation of elected public representatives from the newly constituted Provincial Council could be effected by conducting district level coordinating committee meetings as and when required and this arrangement will not need any changes in the LAPIM. Strengthening the monitoring mechanism of the Ministry of Economic Development (MED) is assured through introducing MED in redefining the recipient in the FA. 9. Following the MTR, in November 2013, both parties agreed to (i) fine tune the subproject clearing mechanism at district level in the Northern Province or adjoining Provinces to facilitate participation of all district level legislators and administrative authorities as a result of the new Provincial Council; (ii) strengthen the monitoring aspects of the Ministry of Economic Development; (iii) use DFAT grant to co-finance the IDA Credit of the Project; (iv) expand the project area to war affected adjoining districts of Anuradhapura, Polonnaruwa, Puttalam and Moneragala; and (v) revise financial allocations among the project components. III. Proposed Changes Revised Project Development Objective 10. The PDO is revised to include provinces adjoining Northern and Eastern Provinces in the project area. The revised PDO is to support Local Authorities in the Northern Province, the Eastern Province and the Adjoining Provinces to deliver services and local infrastructure in a responsive and accountable manner. 11. The Project components will remain unchanged. The revised amounts of the components with Additional Financing from DFAT are (a) Component A: Infrastructure Service Delivery (original amount is US$ 76.00 million and the revised amount is US$ 89.80 million); (b) Component B: Institutionalizing Accountabilities (original amount is US$ 2.00 million and the revised amount is 2 US$ 1.00 million); (c) Component C: Building Capacities (original amount is US$ 4.00 million and revised amount is US$ 12.00 million); (d) Component D: Assessment & Evaluation (original amount is US$ 1.00 million and the revised amount is US$ 1.00 million); and (e) Component E: Project Management (original amount is US$ 3.00 million and the revised amount is US$ 2.50 million). The savings in Component B and E are due to extensive use of existing government staff at national, provincial, district and local levels. Component C is increased considerably as a result of the subsequent request of the GOSL to reconstruct local authority office buildings that were damaged during the war. This reconstruction is taking place at the original locations and therefore does not trigger any safeguard issue outside the agreed Environmental Safeguard Management Framework (ESMF). All the above building works will be completed before December 31, 2014. Financing Plan (Component Wise) Project Costs (US$ Million) Component GOSL Beneficiary Prior to After Total Funding Contribution Contribution Restructuring Restructuring After Restructuring (Proposed) GOSL Beneficiary IDA IDA DFAT IDA + DFAT+ GOSL+BEN Component A: 33.00 2.00 41.00 36.50 18.30 89.80 Infrastructure Service Delivery Component B: Institutionalizi 0.00 0.00 2.00 0.50 0.50 1.00 ng Accountabiliti es Component C: Building 0.00 0.00 4.00 11.50 0.50 12.00 Capacities Component D: 0.00 0.00 1.00 0.50 0.50 1.00 Assessments and Evaluations Component E: Project 1.00 0.00 2.00 1.00 0.50 2.50 Management TOTAL 34.00 2.00 50.00 50.00 20.30 106.30 Financing Plan (Total) Source Local Foreign Total Beneficiary 02.00 00.00 02.00 Borrower/Recipient 34.00 00.00 34.00 IDA 50.00 00.00 50.00 DFAT 20.30 00.00 20.30 TOTAL 106.30 00.00 106.30 Project Financing 12. The total project financing including grants released, implementing the balance work and the expansion of NELSIP activities into proposed new 22 LAs in the adjoining four districts is US$ 106.30. This will be allocated to each of the major project component as follows; (a) Component A: Infrastructure Service Delivery - US$ 89.80 million (b) Component B : Institutionalizing 3 accountabilities- US$ 1.00 million (c) Component C: Building Capacities-US$ 12.00 million (d) Component D: Assessment & Evaluation – US$ 1.00 million and Component E: Project Management – US$ 2.50 million. Other Changes 13. Approval is sought to effect the following amendments to include: Education and communication campaign will include “Disseminating Project related information to stakeholders and strengthening demand-side approaches to local governance”. Replace “Recipient” with “Recipient, through MED”. Replace the existing paragraph in the Financing Agreement on “Review by the World bank of Procurement Decisions” with “The Procurement Plan shall set forth those contracts which shall be subject to the Association’s Prior Review. All other contracts shall be subject to Post Review by the Association”. Financing Plan for the Project and the table specifying the categories of Expenditures in Section IV A.2 shall be revised to read as in Annex 3, while “Percentage of Expenditures to be Financed (including taxes)”, remain unchanged. “Project Output Indicators” of Annex 1 to Schedule 2 shall be modified as shown in Annex 1. IV. Appraisal Summary 14. Economic Analysis: The project has already demonstrated significant economic and social benefits in the form of greater efficiency and effectiveness in delivering basic social services as well as improved local governance by strengthening local planning processes and accountability. Because the LAs have discretion in the selection of public investments to be financed by capital grant funds, it is not possible to determine ex ante the precise composition of investments to be made. The project also provides capacity support on basic revenue mobilization and administration through training that emphasizes alternate sources of local revenues, rules and procedures for better collection and administration of local revenues. 15. Technical: The initial assessment of the LAs in the adjoining provinces has been completed by MED and an action plan has been drawn to commence capacity building activities in LAs that have not qualified to receive project grants. Adequate staff is available in the LAs and Local Government Departments to execute the project activities in the adjoining Provinces. A plan to release the first tranche in full has been prepared by MED and the subprojects are also identified. Revision of Local Authority Project Implementation Manual (LAPIM) will be completed by April 15, 2014. A plan for second tranche will be prepared in April 30, 2014. No formal project changes are required in respect of the performance grant and this could be accommodated within the project operating manual without changing the legal agreement. Fine tuning the subproject approval processes at district level in the Northern Province and any other Province to facilitate participation of elected public representatives from the newly constituted Provincial Council could be effected by conducting district level coordinating committee meetings as and when required and this arrangement will not need any changes in the LAPIM. Strengthening the monitoring mechanism of the Ministry of 4 Economic Development (MED) is assured through introducing MED in redefining the recipient in the FA. 16. Financial Management: The additional financing provided by DFAT will be commingled with the existing resources of NELSIP. Hence, the sources of funds are indistinguishable to the Government of Sri Lanka and it is proposed that a common designated USD account and common local bank accounts be used for all NELSIP funds. It is also proposed that a single set of accounting records are maintained and a set of interim financial reports consolidating all sources of funds including DFAT funds are prepared. A common audit report will be prepared for covering all NELSIP activities. New agencies, such as 22 new LAs and Provincial Finance Departments which have not been assessed under the original project and expected to be supported with the additional financing, will be subjected to a detailed Financial Management assessment. A disbursement condition will be placed on the sub-grants to be disbursed to the 22 new LAs in the adjoining provinces until successful Financial Management assessment is completed. There are no overdue audit reports for the exiting project or any other project that is being implemented by MED. 17. Procurement: Procurement under the Grant would be carried out in accordance with the applicable guideline for NELSIP i.e. World Bank’s "Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 6 2011”; and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011", and the provisions stipulated in the Legal Agreement. The overall procurement risk is rated Substantial, based on an assessment of capacities of the PMU for NELSIP and LAs who will implement this grant. Staff of Project Management Unit (PMU) and LAs has gained knowledge on procurement during the implementation of the NELSIP. Annual procurement progress reports will be provided to the Bank, which will include status updates, procurement audit reports, and an analysis of agreed procurement indicators. The Operational Manual used by NELSIP will be applicable to this grant as well. Procurement plans will be prepared based on the implementation plans, and reviewed by and agreed with the Commissioners Local Government (CLGs). Specific activities in the procurement plans will be earmarked for IDA financing under the Grant. The LAPIM will provide thresholds and guiding principles on methods and timing for each contract to be financed by the Grant, which will be agreed between the Recipient and the Bank. Procurement Plans will be updated at least annually or as required to reflect the actual implementation needs and improvements in institutional capacity. The Bank will carry out post review of procurement actions annually on a sample basis. Applicable Prior Review Thresholds are shown in the Table below: Expenditure Contract Value Procurement Contracts/Processes Category (Threshold) Method Subject to Prior Review Works >= US$7,500,000 ICB All contracts. =US$1,000, 000 ICB All contracts. =US$300,000 All competitive methods; All contracts over US$ 0.5 Services (firms) advertise internationally million equivalent