Document of The World Bank Report No: 70534-SV RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF LOCAL GOVERNMENT STRENGTHENING PROJECT LOAN June 1, 2010 TO THE REPUBLIC OF EL SALVADOR December 13, 2012 ABBREVIATIONS AND ACRONYMS COMURES Municipalities Corporation of El Salvador FISDL Social and Local Development Fund ISDEM Salvadoran Institute for Municipal Development OM Operations Manual MOF Ministry of Finance (Ministerio de Hacienda) PAD Project Appraisal Document PDO Project Development Objective SAE Secretariat of the Presidency for Strategic Affairs SSDT Sub-secretariat for Territorial Development UEP Project Execution Unit Regional Vice President: Hasan Tuluy Country Director: Carlos Felipe Jaramillo Sector Manager: Laurent Msellati Task Team Leader: Victoria Stanley 2 EL SALVADOR LOCAL GOVERNMENT STRENGTHENING PROJECT P118026 CONTENTS Page A. SUMMARY ........................................................................................................................... 4 B. PROJECT STATUS .............................................................................................................. 4 C. PROPOSED CHANGES ...................................................................................................... 4 D. ANNEX 1…………………………............................................................................................ 8 3 LOCAL GOVERNMENT STRENGTHENING PROJECT RESTRUCTURING PAPER A. SUMMARY The proposed restructuring impacts the Institutional Arrangement for the Project, the Results Framework and a reallocation among disbursement categories: A. One of the implementing entities – the Salvadoran Institute for Municipal Development (ISDEM) – will no longer be responsible for leading project implementation of Component 2, and this responsibility will be transferred to the main project coordinating entity, the Secretariat of the Presidency for Strategic Affairs (SAE). ISDEM is not able to continue in this key implementation role and the government of El Salvador has requested this transfer of responsibilities to ensure smooth project implementation. B. The Project Coordination Unit (UEP) and its reporting, monitoring, financial management, and auditing responsibilities, originally assigned to ISDEM, will be transferred to the Ministry of Finance. C. Now that the Project has been under implementation for two years it is more clear what is monitorable and how, and some modifications/clarifications are being made to the intermediate outcome indicators and targets in the results framework. D. Some minor reallocations among disbursement categories. B. PROJECT STATUS The Project is rated Satisfactory for both Implementation Progress and Development Outcome progress. The Project has disbursed 56% of the Loan. All 262 Municipalities have received their first transfer for investments and for disaster risk management activities. 499 investment proposals have been submitted for review by municipalities and 251 have been approved. Of these, 55 sub-projects have been completed. Capacity building activities under Component 2 have begun with preparation of municipal strategic plans and training for municipal staff on many topics (planning, risk management). The preliminary study for the decentralization strategy under Component 3 is being procured. Safeguards compliance is rated satisfactory and all social and environmental safeguards are being applied as appropriate and supervised by the Bank team. Procurement and Financial Management are also rated satisfactory and there are no overdue audits. C. PROPOSED CHANGES There are no changes to the Project Development Objective (PDO), components, safeguards or activities. The main changes are a revision of some intermediate outcome indicators, changes to the implementation arrangements, and a reallocation of proceeds. 4 Performance Indicators There are no changes to the PDO indicators. Now that the Project has been under implementation for 18 months some modifications/clarifications are being made to the intermediate outcome indicators and targets (see Annex 1) to better demonstrate progress towards the development objective. Two indicators have been added under Components 2 and 4 (one each) to better track progress on local governments’ implementation of public finance consolidation plans and ISDEM’s training of local government employees. Two indicators were dropped under Component 3 as they do not adequately track the progress of the component and are beyond the control of the Project. Institutional arrangements The changes in institutional arrangements relate to ISDEM. ISDEM is responsible for the implementation of Sub-components 2.1, 2.2, 2.3, 2.4 and 2.6, Component 3 and sub- component 4.2. A Project Executing Unit (UEP) was created within ISDEM to manage Project resources for these Components and sub-components and to carry out project reporting, monitoring and auditing. ISDEM is currently not able to continue with these implementation responsibilities and the government of El Salvador has requested a transfer of responsibilities to ensure smooth project implementation. ISDEM will no longer be responsible for maintaining the UEP. The UEP will move to the Ministry of Finance (MOF). All reporting, monitoring, financial management and auditing responsibilities of the UEP will remain, however now under the mandate of the MOF. ISDEM will no longer handle any funds. The responsibility for managing funds associated with these Components (Sub-components 2.1, 2.2, 2.3, 2.4 and 2.6, Components 3 and 4) will be transferred, along with the UEP, to MOF. All ISDEM responsibilities for the strategic direction and implementation of Component 3 (Decentralization Strategy Support) and Component 4 (Project Management) will move to SAE. SAE will also be responsible for the strategic direction and implementation of Component 2, with technical support from ISDEM. SAE will be supported for all Components by the UEP, under MOF, for procurement, FM, and disbursement. Financial Management and Procurement reviews of MOF and the UEP were done in November 2012 to assess if the resulting changes in financial management and procurement responsibilities would affect the fiduciary risk of the project. Financial Management Assessment: Under the proposed move, the UEP would retain its independence and would be responsible for the entire fiduciary life cycle starting from the contracting of services and/or goods until the payment of contracted services and/or goods. As the UEP would retain its actual staff, such a move would have minimal impact on its fiduciary capacity and would not increase the FM risk assessed for the Project. The UEP will remain responsible for: (i) budget formulation and monitoring; (ii) cash flow management (including payments to contractors and consultants, and submitting loan withdrawal applications to the Bank); (iii) maintenance of accounting records; (iv) preparation of in-year and year-end financial reports, (v) administration of underlying information systems; and (vi) arranging for execution of annual project financial audits. 5 Procurement Assessment: Under the proposed move, the UEP would retain its independence and would be responsible for the entire procurement life cycle starting from the contracting of goods, works, non-consulting services and/or consulting services until the respective payment. As the UEP would retain its actual staff, such a move would have minimal impact on its procurement capacity and would not increase the Procurement risk assessed for the Project. Reallocations among Disbursement Categories Reallocations from Category (1) to Category (2): after applying the formulas agreed in the Project Appraisal Document (PAD) and Operations Manual (OM) to establish the amounts to be transferred to each municipality for the pre-investment, there is a balance of US$31,313 that will not be needed. The Interagency Committee for the Project has agreed that this balance should be reallocated to Category (2) to further support the strengthening of ISDEM (sub-component B.6). Category (2) to Category (5): The first restructuring of the Project reallocated US$1,701,200 from Category (5) to Category (2) by mistake. These funds are for FISDL but should remain in Category (5). The present restructuring will correct this mistake. In addition, the Government has requested the possibility to finance some staff salaries for FISDL from the loan under Operating Costs (Category 5). A detailed plan for these salary costs has been prepared and will be approved by the Bank on an annual basis. Category of Expenditure Allocation % of Financing Current Revised Current Revised Current Revise (1) Subproject (1) Subproject 52,750,000 52,718,687 100 100 Grants under Grants under Part Part A of the Project A of the Project (2) Goods, Non- (2) Goods, Non- 8,614,700 6,944,813 100 100 Consultant Consultant Services, Services, consultants’ consultants’ services, services, Operating Costs, Operating Costs, and Training and under Part B of Training under the Part B of the Project Project 3) Technical 3) Technical 15,185,400 15,185,400 100 100 Assistance Assistance Subproject Subproject Grants Grants under under Part Part B of the Project B of the Project (4) Goods, Non- (4) Goods, Non- 699,200 699,200 100 100 6 Consultant Consultant Services, Services, consultants’ consultants’ services, services, Operating Costs, Operating Costs, and Training and Training under Part C of under Part C of the the Project Project (5) Goods, Non- (5) Goods, Non- 2,083,500 3,784,700 100 100 Consultant Consultant services, services, consultants’ consultants’ services, services, Operating Costs, Operating Costs, and Training Training, and under Part D of Salaries the Project under Part D of the Project (6) Front-end (6) Front-end Fee 200,000 200,000 Fee (7) Unallocated (7) Unallocated 467,200 467,200 TOTAL TOTAL 80,000,000 80,000,000 AMOUNT AMOUNT Other Changes Under Component2, ISDEM will continue to strengthen its training capacity, but will not establish regional offices of its municipal training center (loan agreement, Schedule 1, Part B.2). ISDEM has decided that establishing partnerships with other training institutions/universities in the country will be more efficient and cost effective. Also under Component 2 the capacity building and institutional strengthening activities include not just ISDEM, but also COMURES (Municipalities Corporation of El Salvador) and the Ministry of Finance (MH). These institutions were always to be included as part of the institutional strengthening under Component 2 and this will be corrected in the loan agreement, Schedule 1, Part B.6. There will also be a change to the definition of Operating Costs (Appendix, Section I. Definitions, no. 23). The staff of the UEP, FISDL, ISDEM and others make frequent trips to the municipalities for training sessions, review and discussion meetings, and supervision of the sub-projects. These meetings incur costs that some municipalities are not able to cover – for facilities, materials, etc. Often it is necessary for the Project to finance these costs (facilities and materials costs) and they should be included under Operating Costs. 7 ANNEX 1: Results Framework and Monitoring EL SALVADOR: LOCAL GOVERNMENT STRENGTHENING PROJECT Project Development Objective (PDO): The Project development objective is to improve the administrative, financial and technical processes, systems and capacity of local governments to deliver basic services, as prioritized by local communities, in the medium and long-term. Revised Project Development Objective: no change D=Dropped Cumulative Target Values** C=Continue Core PDO Level Results N= New Unit of Data Source/ Responsibility for Baseline Frequency Indicators* R=Revised Measure YR 1 YR 2 YR 3 YR4 Methodology Data Collection All locally defined and prioritized Municipal C % 0% 100% 100% 100% 100% Mid-term and M&E system FISDL (with UEP) Subproject investments of 262 final Municipalities, which are financed by the Project, are implemented in accordance with fiduciary and safeguards policies as well as national standards. Municipalities receiving additional TA progress by at C % 0% 0% 30% 50% 85% Mid-term and evaluation UEP/ISDEM least one capacity category on final areas for which they received TA. Local governments are regularly requesting Municipal C % 0% 0% 20% 40% 90% Mid-term and M&E system UEP/ISDEM administration and planning final support from ISDEM, and ISDEM has been budgeted sufficient resources to respond and has a system to prioritize and meet requests in a timely manner in a timely manner. 8 INTERMEDIATE RESULTS Intermediate Result (Component One): Investments for improved basic services have been implemented by Local Governments. Revised Intermediate Result (Component One): Local governments plan and implement investments in a technically sound and participatory way. [One sub-indicator below has been revised.] 80% of investments, as defined in the local government Quarterly M&E system FISDL (with UEP contracts, satisfactorily C % 0% n/a 80% 80% 80% and ISDEM) completed according to technical specifications. 80% of facilities built /rehabilitated effectively are C % 0% n/a n/a n/a 80% Mid-term and Final Evaluation FISDL, UEP, used at end of project. ISDEM 80% of Citizen Control Committees provide supervision to construction and C % 0% n/a 30% 55% 80% Quarterly M&E system UEP/ISDEM functioning of Project financed investments. 80% of local governments have plans for the maintenance R % 0% n/a 80% 80% 80% Quarterly M&E system UEP/ISDEM Intermediate Result (Component Two): Local governments’ development plans and institutional strengthening action plans to be supported by the Project, have been implemented. Revised Intermediate Result (Component Two): [one new sub-indicator added; other three are revised] 80% of 160 local governments have implemented a public N % 0% n/a 25% 50% 80% Quarterly M&E system UEP/ISDEM finances consolidation plan 80% of 262 local governments have implemented a risk R % 0% n/a 25% 50% 80% Quarterly M&E system UEP/ISDEM management plan 114 5-year Municipal development plans produced R No. 0 0 20 50 114 Quarterly M&E system UEP/ISDEM and implemented with ample civil society engagement. 47 local governments have implemented and are using the R No. 0 0 0 20 47 Quarterly M&E system UEP/ISDEM official public finances management system (SAFI) developed by the ministry of finance 9 Intermediate Result (Component Three): Institutional structure within SAE/SSDT, MH, and COMURES for analyzing and designing decentralization policies established. Revised Intermediate Result (Component Three): [one sub-indicator revised; two dropped] A decentralization strategy has R Y/N No No No No Yes Midterm and Final M&E System SAE/UEP been established MH has established and staffed D a fiscal decentralization unit. SAE/SSDT and COMURES D have staff dedicated to researching, analyzing and preparing decentralization policy papers. Intermediate Result (Component Four): The institutional structure within the ISDEM for supporting local governments’ institutional strengthening needs established and functioning. Revised Intermediate Result (Component Four): [one sub-indicator revised; one new] ISDEM capacity development centre’s new strategy and R Y/N No No No Yes Quarterly M&E system UEP/ISDEM curriculum have been produced and are being used The courses and sessions offered by ISDEM’s capacity N No 0 0 25 50 150 Quarterly M&E system UEP/ISDEM development centre reach 150 local government employees. ISDEM has set up and maintains data base to monitor C Y/N No No No Yes Quarterly M&E system UEP/ISDEM local governments’ development (current level of management capacity). 10