DOCUMENT OF THE WORLD BANK FOR OFFICIAL USE ONLY Report no: 83961-ET INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT SDR 245.6 MILLION (US$380 MILLION EQUIVALENT) TO THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR THE SECOND URBAN LOCAL GOVERNMENT DEVELOPMENT PROGRAM April 9, 2014 Urban Development and Services 1 (AFTU1) Country Department 3, AFCE3 Africa 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 March 12, 2014) Currency Unit = Ethiopian Birr (ETB) ETB 19.34 = US$1 US$ = SDR 0.64624531 Government Fiscal Year July 8 – July 7 ABBREVIATIONS AND ACRONYMS AMP Asset Management Plan APA Annual performance assessment BoFED Bureau of Finance and Economic Development BUD Bureau of Urban Development CIP Capital investment plan CPS Country Partnership Strategy DLIs Disbursement linked indicators DLRs Disbursement linked results DRS Developing regional state ECPI Ethiopian Cities Prosperity Initiative ECSU Ethiopian Civil Service University ERR Economic rate of return ESMP Environment and Social Management Plan ESMS Environmental and social management system ESSA Environment and Social Systems Assessment ESW Economic and Social Work FEACC Federal Ethics and Anti-Corruption Commission GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (German Society for International Cooperation) GTP Growth and Transformation Plan IBEX Integrated Budget and Expenditure IDA International Development Association IFMIS Integrated financial management information system IPA Independent procurement audit MDGs Millennium Development Goals M&E Monitoring and evaluation MoFED Ministry of Finance and Economic Development MSE Micro and small enterprises MUDHCo Ministry of Urban Development, Housing, and Construction NPV Net present value OFAG Office of Federal Auditor General OFED Office of Finance and Economic Development (at local government level) ii O&M Operations and maintenance ORAG Office of Regional Auditor General PAP Program Action Plan PDO Program Development Objective PEFA Public Expenditure and Financial Accounting PFM Public Financial Management PforR Program for Results PPA Participatory Performance Agreement PTC Program Technical Committee PSCAP Public Sector Capacity Building Program Support Project REACC Regional Ethics and Anti-Corruption Commission REP Revenue enhancement plan REPA Regional environmental protection agency RPPAs Regional Public Procurement Agencies SNNP Southern Nations, Nationalities, and Peoples Region UGCBB Urban Governance Capacity Building Bureau ULG Urban Local Government ULGDP Urban Local Government Development program ULGDP II Second Urban Local Government Development Program ULGSP Tanzania Urban Local Government Strengthening Program (of Tanzania) Vice President: Makhtar Diop Country Director: Guang Zhe Chen Sector Director Jamal Saghir Sector Manager: R. Mukami Kariuki Task Team Leader: Abebaw Alemayehu Co-Task Team Leader: Onur Ozlu iii ETHIOPIA Second Urban Local Government Development Program Table of Contents Page I. STRATEGIC CONTEXT ................................................................................................ 1 A. Country Context .......................................................................................................... 1 B. Sectoral and Institutional Context ............................................................................... 2 C. Relationship to the Country Partnership Strategy and Rationale for Use of Instrument .................................................................................................................... 5 II. PROGRAM DESCRIPTION........................................................................................... 7 A. Program Scope ............................................................................................................ 7 B. Program Development Objectives............................................................................. 14 C. Program Key Results and Disbursement Linked Indicators ..................................... 14 D. Key Capacity Building and Systems Strengthening Activities ................................. 17 III. PROGRAM IMPLEMENTATION .............................................................................. 18 A. Institutional and Implementation Arrangements ....................................................... 18 B. Results Monitoring and Evaluation ........................................................................... 21 C. Disbursement Arrangements and Verification Protocols .......................................... 23 IV. ASSESSMENT SUMMARY .......................................................................................... 24 A. Technical (including program economic evaluation) ................................................ 24 B. Fiduciary.................................................................................................................... 29 C. Environmental and Social Effects ............................................................................. 34 D. Integrated Risk Assessment Summary ...................................................................... 37 E. Program Action Plan ................................................................................................. 38 TABLES Table 1: Urbanization rates of selected African countries (1960–2012) ................................... 3 Table 2: Level of access to urban services and infrastructure in the 19 largest ULGs ............. 4 Table 3: Program financing ..................................................................................................... 11 Table 4: Main capacity building activities in phases 1 and 2 .................................................. 18 Table 5: Data generation and collection .................................................................................. 22 Table 6: Program expenditure framework (US$ million) ....................................................... 27 Table 7: Cost of cobblestone roads compared with asphalt roads, selected cities .................. 28 Table 8: Summary of the economic analysis of investments in cobblestone roads ................ 28 Table 9: Integrated Risk Assessment Summary ...................................................................... 37 iv BOXES Box 1: Tanzania Urban Local Government Strengthening PforR: Lessons learned during the first year of implementation .......................................................................................................... 16 ANNEXES Annex 1: Detailed Program Description ................................................................................... 39 Annex 2: Results Framework Matrix ........................................................................................ 60 Annex 3: Disbursement Linked Indicators, Disbursement Arrangements, and Verification Protocols .................................................................................................................... 63 Annex 4: Summary of Technical Assessment .......................................................................... 80 Annex 5: Summary Fiduciary Systems Assessment ............................................................... 103 Annex 6: Summary Environmental and Social Systems Assessment ..................................... 127 Annex 7: Integrated Risk Assessment..................................................................................... 131 Annex 8: Program Action Plan ............................................................................................... 134 Annex 9: Implementation Support Plan .................................................................................. 139 Annex 10: Program Minimum Conditions and Performance Measures ................................... 141 v PAD DATA SHEET . FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA SECOND URBAN LOCAL GOVERNMENT DEVELOPMENT PROGRAM . PROGRAM APPRAISAL DOCUMENT . AFRICA AFTU1 . Basic Information Date: April 9, 2014 Sectors: Sub-national government administration Country Director: Guang Zhe Chen Themes: Access to urban services and housing (50%); Municipal finance (50%) Sector Manager/Director: R. Mukami Kariuki / Jamal Saghir Program ID: P133592 Team Leader(s): Abebaw Alemayehu Program Implementation Period: Start Date: May 2, 2014 End Date: December 31, 2019 Expected Financing Effectiveness Date: July 7, 2014 Expected Financing Closing Date: December 31, 2019 . Program Financing Data [ ] Loan [ ] Grant [ ] Other [X] Credit For Loans/Credits/Others (US$M): Total Program Cost: 556.55 Total Bank Financing: 380.00 Total government Financing Gap : 0 financing : 176.55 . Financing Source Amount BORROWER/RECIPIENT 176.55 IBRD/IDA 380.00 Total 556.55 . Borrower: Federal Democratic Republic of Ethiopia vi Responsible Agency: Ministry of Urban Development, Housing, and Construction Contact: Yehya Aman Title: Director, Urban Governance and Capacity Building Bureau Telephone No.: +251 (1) 0115540635 Email: uggcbb@gmail.com . Expected IDA Disbursements (in USD Million) Fiscal Year 2015 2016 2017 2018 2019 2020 Annual 60.74 78.81 80.81 78.81 80.81 0 Cumulative 60.74 139.56 220.37 299.19 380.00 380.00 . Program Development Objective(s) To assist the recipient in enhancing the institutional performance of participating urban local governments in developing and sustaining urban infrastructure and services. Compliance Policy Does the program depart from the CAS in content or in other significant Yes [ ] No [X] respects? . Does the program require any waivers of Bank policies applicable to Program- Yes [ ] No [X] for-Results operations? Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the program meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Overall Risk Rating: Substantial Legal Covenants Name Recurrent Due Date Frequency Financial audits Yes Six months after the end Annually Financing Agreement Reference Schedule 2, of the fiscal year. Section III.B Description of Covenant The Recipient shall have the Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six (6) months after the end of such period. Name Recurrent Due Date Frequency Program Participation Agreement No July 7, 2014 Once Financing Agreement Reference Schedule 2, Section I.C.3 Description of Covenant The Recipient shall ensure that no ULG is eligible to participate in the Program until the Recipient through vii MUDHCo has entered into a tripartite Program Participation Agreement (“PPA”), acceptable to the Association, with each Program ULG and the Region where the Program ULG is located therein. Name Recurrent Due Date Frequency Program Operations Manual Yes Continuous Continuous Financing Agreement Reference Schedule 2, Section I.C.2 Description of Covenant The Recipient shall carry out the Program in accordance with the Program Operations Manual; and shall not amend, abrogate or suspend, or permit to be amended, abrogated or suspended, any provision of the Program Operations Manual, without the prior written agreement of the Association. Name Recurrent Due Date Frequency Action Plan Yes Continuous Continuous Financing Agreement Reference Schedule 2, Section I.C.5 Description of Covenant The Recipient shall carry out the Action Plan in accordance with the schedule set out in the said Action Plan in a manner satisfactory to the Association. Name Recurrent Due Date Frequency Annual Performance Assessment Yes January 31 Annually Financing Agreement Reference Schedule 2, Section III.C Description of Covenant 1. Carry out or cause to be carried out, in accordance with the Program Operations Manual, an assessment covering an EFY to determine: (a) whether the Program ULG has met the DLRs for said EFY; (b) the disbursement amount for the Program ULG for said EFY based on the calculation formula/performance score system as stipulated in the Additional Instructions and the Program Operations Manual; 2. Furnish said assessment, by not later than January 31 each year (for the first assessment, not later than June 30 2014 (EFY2006), to the Association for its review; and 3. For purposes of carrying out each such assessment, engage independent consultants, not later than September 30 of each year, with terms of reference, qualifications, and experience satisfactory to the Association. Name Recurrent Due Date Frequency Value for money audit Yes Starting in September Annually Financing Agreement Reference Schedule 2, 2015, six months after the Section III.D end of the EFY to which the audit relates Description of Covenant The Recipient shall carry out under terms of reference satisfactory to the Association, a value for money audit of the Program activities implemented by the Program ULGs in the preceding EFY and furnish said audit, as a part of the Annual Performance Assessment, to the Association not later than six months after the end of the EFY to which the audit relates; and (2) ensure that the findings of the audit are taken into account in the Annual Performance Assessment for the EFY to which the audit relates. Name Recurrent Due Date Frequency Annual procurement audit Six months after the end Annually, Yes Financing Agreement Reference Schedule 2, of the EFY to which the beginning viii Section III.E audit relates in September 2016 Description of Covenant the Recipient shall: (1) carry out under terms of reference satisfactory to the Association, an annual procurement audit and furnish said audit, along with a satisfactory management response as to how the audit issues have been resolved, to the Association not later than six months after the end of the EFY to which the audit relates; and (2) ensure that the findings of the audit are taken into account in the Annual Performance Assessment for the EFY to which the audit relates. . Team Composition Bank Staff Name Title Specialization Unit UPI Abebaw Alemayehu Task Team Leader, Senior Urban and Local AFTU1 165448 Urban Specialist government Development Onur Ozlu Co-Task Team Leader, Urban economics, fiscal AFTU1 307273 Senior Urban Economist decentralization Chyi-Yun Huang Urban Specialist Urban Planning AFTU1 412009 Mei Wang Senior Counsel Law and Justice LEGAM 229123 Jose Janeiro Senior Finance Officer Financial Management CTRLA 194575 Abiy Demessie Senior Financial Financial Management AFTME 335917 Management Specialist Wendy Ayres Consultant Economics and M&E AFTU1 21392 Yohannes Fisseha ET Consultant Urban Engineering AFTU1 367725 Dinkneh Tefera E T Consultant Urban specialist AFTU1 384373 Berhanu Legesse Ayane Senior Public Sector Public Sector Specialist AFTP2 281029 Specialist Sanjay Srivastava Lead Environmental Environmental AFTN3 246903 Safeguards Specialist Safeguards Chukwudi Okafor Senior Social Development Social Safeguards AFTCS 251914 Specialist Roland White Lead Urban Specialist Urban development AFTU1 148896 Asferachew Abate Abebe Environmental Specialist Environmental AFTN1 383531 safeguards Tesfaye Ayele Senior Procurement Procurement AFTPE 343168 Specialist Chenjerani Simon B. Chirwa Senior Procurement Procurement AFTPE 323627 Specialist Parminder Brar Lead Financial Management Financial management AFTME 245515 Specialist Wendwosen Feleke Operations Officer Economic analysis AFTU1 258468 Roderick Babijes Program Assistant Program support AFTU1 301864 ix Yodit Teamir Rezene E T Temporary Program support AFCE3 452770 Non Bank Staff Name Title Office Phone City Jesper Steffensen Senior Partner, Dege Consult +45 35 42 04 97 Copenhagen, Denmark David De Groot Consultant Florida, USA Worku Yehulashet Consultant Addis Ababa, Ethiopia Zeru Girmay Consultant Addis Ababa, Ethiopia x I. STRATEGIC CONTEXT A. Country Context 1. Ethiopia is a large and diverse country. It is located in the Horn of Africa and is a land-locked country with an area of 1.1 million square kilometers—about the size of France and Spain combined. Its bio-physical environment includes a variety of diverse ecosystems, with significant differences in climate, soil properties, vegetation types, agricultural potential, biodiversity and water resources. Ethiopia is a country of many nations, nationalities and peoples, with a total population of 91.7 million (2012). 1 Only 17 percent of the population lives in urban centers, the great majority of them in Addis Ababa. At a current annual growth rate of 2.6 percent, Ethiopia’s population is estimated to reach 130 million by 2025, and is projected by the United Nations to be among the world’s top ten most populous nations by 2050. Ethiopia is vulnerable to trade shocks from international food and fuel prices, and to large domestic weather-related shocks as the 2011/12 East Africa drought demonstrated. 2. Ethiopia has experienced strong economic growth over the past decade. Economic growth averaged 10.7 percent per year in 2003/04 to 2011/12 compared to the regional average of 5.4 percent. Growth reflected a mix of factors, including agricultural modernization, the development of new export sectors, strong global commodity demand, and government-led development investments. Private consumption and public investment have driven demand side growth, with the latter assuming an increasingly important role in recent years. On the supply side, growth was driven by an expansion of the services and agricultural sectors, while the role of the industrial sector was relatively modest. More recently annual growth rates have declined slightly, but still remain at high single-digit levels. Growth in the export of goods has also moderated in recent years and a decline was observed in 2012/13 for the first time since 2008/09. There have been bouts of high inflation in recent years and, while inflation is currently much lower, keeping it down remains a major objective for monetary policy. 3. Ethiopia is one of the world's poorest countries, but has made substantial progress on social and human development over the past decade. The country’s per capita income of US$370 is substantially lower than the regional average of US$1,257 and among the ten lowest worldwide. 2 Ethiopia is ranked 173 out of 187 countries in the Human Development Index of the United Nations Development Program. However, high economic growth has helped reduce poverty, in both urban and rural areas. Since 2005, 2.5 million people have been lifted out of poverty, and the share of the population below the poverty line has fallen from 38.7 percent in 2004/05 to 29.6 percent in 2010/11 (using a poverty line of US$1.25 per day). However, because of high population growth the absolute number of poor (about 25 million) has remained unchanged over the past fifteen years. Ethiopia is also among the countries that have made the fastest progress on the Millennium Development Goals (MDGs). It is on track to achieve the MDGs related to gender parity in education, child mortality, HIV/AIDS, and malaria. Good progress has also been achieved in universal primary education, although the MDG target may not be met. The reduction of maternal mortality remains a key challenge. 1 Source: United Nations. According to the Ethiopian Central Statistical Agency, the population is 82.6 million. 2 Gross National Income, World Bank Atlas Method. 1 4. The Government of Ethiopia is currently implementing an ambitious Growth and Transformation Plan (GTP) 2010/11–2014/15, which sets a long-term goal of becoming a middle-income country by 2023, with growth rates of at least 11.2 percent per annum during the plan period. To achieve the GTP goals and objectives, the government has followed a “developmental state” model with a strong role for the government in many aspects of the economy. It has prioritized key sectors such as industry and agriculture, as drivers of sustained economic growth and job creation. The GTP also reaffirms the government’s commitment to human development. Development partners have programs that are broadly aligned with GTP priorities. 5. Ethiopia has a federal, democratic government system, established in the early 1990s, with nine autonomous states (‘regions’) and two chartered cities. 3 Since 2003, the decentralization of governance to the regional and district (woreda) levels has been actively pursued. The Ethiopian People’s Revolutionary Democratic Front has been in power in Ethiopia since 1991. This comprises four regionally-based parties from the four major regions (Amhara, Oromia, Southern Nations, Nationalities and Peoples, and Tigray). The long-serving Prime Minister, Meles Zenawi, (from Tigray) died in August 2012, and was succeeded by Hailemariam Desalegn (from Southern Nations, Nationalities and Peoples) who has pursued largely the same policies. The next national elections are scheduled for 2015. Each regional government can develop its own local government structure and create urban local governments (ULGs). 4 There are about 85 ULGs in Ethiopia, the great majority of which have populations of 20,000 or more. 5 B. Sectoral and Institutional Context 6. In Ethiopia, ULGs are the main providers of urban services. ULGs are managed by city/town administrations and have a long list of institutional mandates and responsibilities, which include both state functions (including education and health, among others) and municipal functions (including infrastructure and other services such as urban transport, urban roads, solid waste management and abattoirs). State functions are delegated from regional governments to ULGs, whereas municipal functions are considered to be the exclusive functions of ULGs. ULGs generally receive transfers in the form of block grants/allocations from regional governments in order to fund state functions. However, municipal functions have historically only been funded from municipal own source revenues, which are meager at best. This fiscal gap is compounded by the rapid urbanization in the country. 7. Ethiopia is urbanizing rapidly. 6 The urban population in 2012 was estimated to be about 15 million. Although only 17 percent of the country is urbanized, Ethiopia’s urban population is growing at about 3.6 percent per year, placing it among the fastest urbanizing 3 The Regions are Afar, Amhara, Benishangul-Gumuz, Gambella, Harari, Oromia, Somali, SNNPR (Southern Nations, Nationalities and Peoples), and Tigray. The chartered cities are Addis Ababa and Dire Dawa. 4 ULGs are managed by city/town administrations and have a long list of mandates and responsibilities which include both the woreda-level functions which are concurrent state functions, as well as city/town affairs of delivering services and providing urban infrastructure. 5 As each regional government in Ethiopia is authorized to issue city proclamations as they see fit, there is no formal common definition of what constitutes a city/town. Therefore, the words “city/town” and “ULGs” are used interchangeably throughout this document. 6 World Bank Group, Country Partnership Strategy for the Federal Republic of Ethiopia, August 29, 2012. 2 countries in Sub-Saharan Africa (see table below). 7 It is estimated that the proportion of the population living in urban areas will rise to 19 percent in 2020 and to 23 percent in 2030. 8. Global experience shows that countries that advance to middle income status typically undergo significant urbanization and industrialization. Ethiopia’s rapidly urbanizing cities and towns are key drivers of its economic growth. If Ethiopia is to reach middle income status, it needs to exploit the opportunities for generating the agglomeration economies associated with urbanization. Urban areas are estimated to now account for over 58 percent of gross domestic product (GDP) and to generate about 80 percent of the GDP growth. In addition, urbanization offers new opportunities to improve education, health, and other public services, as more concentrated populations are easier to reach. Table 1: Urbanization rates of selected African countries (1960–2012) Urban Population (%) Urban growth rate (%) 2012 8 2010–2015 9 Ethiopia 17 3.57 South Africa 62 1.21 Ghana 53 3.50 Sudan 33 2.60 Kenya 24 4.36 Source: United Nations. 2012. World Urbanization Prospects, the 2011 Revision. Department of Economic and Social Affairs, Population Division. 9. However, the urban local government institutional systems and urban infrastructure have not kept pace with the rapid urbanization. For the opportunities presented by rapid urbanization to contribute to economic growth, service delivery needs to be improved significantly and urban infrastructure needs to be created and managed properly. In Ethiopia, these mandates rest with urban local governments. However, a significant institutional and fiscal gap has emerged with respect to the provision of basic urban services and infrastructure development in cities. This Program seeks to reduce this gap. 10. ULGs face several institutional challenges. These pertain to: • Local government planning and budgeting practices, which include the preparation and implementation of linked revenue enhancement, asset management, and capital investment plans to manage capital and recurrent expenditures. • Fiduciary management in terms of capacity and systems, including accounting and internal audit functions. • Recruiting and retaining staff with the necessary skills to fill key local government positions. • Establishing and operating systems for receiving and addressing complaints. 7 The Ethiopian Central Statistics Agency calculates urban growth at 4.1 percent per year. This document uses the figures from the United Nations to allow for comparison across countries. 8 World Bank Development Indicators database. 9 United Nations, Department of Economic and Social Affairs, Population Division database. 3 • Generating adequate own source revenues to meet the extensive set of municipal mandates assigned to urban local governments. • Operating land management systems, especially in developing and maintaining an up-to-date inventory of land and in servicing leased land according to national and regional standards. • Ensuring accountability and transparency, particularly in measuring and making public information on the delivery of local services compared with national and regional standards, and in publicly disseminating annual local government budgets, approved projects, expenditures, audit reports, and results of procurement decisions. 11. These institutional challenges, coupled with rapid urbanization, have resulted in significant gaps in provision of infrastructure and basic urban services. Table 2 below shows the coverage in delivery of urban services and infrastructure in Addis Ababa and 18 other large cities in Ethiopia, as found in a 2013 independent study of urban infrastructure. These large cities are the largest ULGs. Table 2: Level of access to urban services and infrastructure in the 19 largest ULGs Service/Infrastructure Level of service provision/coverage (%) Residents with access to piped water 59.1 Residents with access to sewerage and sanitation services 57.3 Solid waste collected and disposed of 52.0 Liquid waste collected and disposed 1.5 Roads paved roads (surfaced with asphalt or cobblestone) 22.8 Roads with pedestrian walkways 8 Source: SUDCA, 2013, “Evaluation of Municipal Service Delivery of Cities Participating in ULGDP, for EFY 2004,” August 2013, Addis Ababa. 12. The government recognizes the institutional and capacity challenges across Ethiopia’s ULGs. It is also acutely aware of the importance of ULGs for the country’s growth and development. The government issued its first Urban Development Policy Note in 2005. In addition, the second Poverty Reduction Strategy Paper and the Growth and Transformation Plan (GTP) for 2010/11–2014/15 both emphasized the importance of urban development for the country’s economic growth. Most recently, the government has further elaborated the importance of urban governance in its forthcoming Ethiopian Cities Prosperity Initiative: Building Green, Resilient and Well Governed Cities, which lays out its medium and long-term strategy for urban development. Collectively, these documents focus on building the institutional capacity of urban local governments to promote livable urban centers and stimulate overall development. 13. Since 2000, the World Bank and the international development community have been supporting the decentralized service delivery framework and urban policy of the government. The Bank has been supporting the government’s efforts to build institutional capacity across the country’s ULGs to enable them to effectively meet their important responsibilities. This partnership has been ongoing through a series of projects, starting with the 4 Capacity Building for Decentralized Service Delivery project (2003), the Public Sector Capacity Building program (2004), and the Urban Local Government Development Program (ULGDP). 14. The government established the ULGDP (the government program) in 2008. Defined in further detail in this document, the government program’s main thrust is to leverage institutional capacity at the urban local government level to improve service delivery and urban infrastructure. Its overall objective is to support improved institutional performance in the planning, delivery, and sustained provision of urban services and infrastructure by local governments. 15. The government intends to roll out this institutional performance-based fiscal transfer system to 85 ULGs with populations over 20,000 (including Addis Ababa). It also plans to gradually expand the scope of the federal and regional governments in capacity building and program administration. The World Bank has been supporting the first phase of the program (ULGDP) since its initiation in 2008 through a credit of US$300 million. 16. Although the first phase of ULGDP included the country’s capital, Addis Ababa, as one of 19 participating ULGs, the program’s per capita funding for Addis Ababa was not sufficient to serve as an incentive. Funding available to Addis Ababa was a small fraction of annual revenue, and as a result, Addis Ababa has only attained a satisfactory level in the annual performance assessment twice since the inception of the program— each time with relatively low scores. Therefore, the rest of this document will refer to the geographic scope of ULGDP for the performance based fiscal transfers, as 18 ULGs. 17. As phase 1 is nearing completion, the government is now embarking on a second phase of the program, and has requested the World Bank to continue its support. Through the use of the Program for Results (PforR) instrument, this second phase—ULGDP II—will scale up support to 26 new ULGs (for a total of 44 ULGs) across nine regional governments. Phase 2 will maintain the performance-based disbursements modality to ULGs established under phase one. However, the scope and boundaries of the PforR will be identical to the scope and boundaries of the government program. Thus, ULGDP II is supporting ULGs with financing provided partly by the World Bank and partly by government as explained in detail below 10. C. Relationship to the Country Partnership Strategy and Rationale for Use of Instrument 18. The World Bank Group’s Country Partnership Strategy (CPS) for FY13–FY16 builds on the progress achieved by Ethiopia in recent years. It aims to help the government accomplish a structural transformation by assisting with the implementation of the GTP. The CPS framework includes two pillars. Pillar One, “Fostering competitiveness and employment”, aims to support Ethiopia in achieving: (a) a stable macroeconomic environment; (b) increased competitiveness and productivity; (c) increased and improved delivery of infrastructure; and (d) enhanced regional integration. Pillar Two, “Enhancing resilience and reducing vulnerabilities,” aims to support Ethiopia in improving the delivery of social services and developing a 10 Program (with a capital P) refers to the PforR program, while program (with a lowercase p) refers to the government's program. 5 comprehensive approach to social protection and risk management. Good governance and state building form the foundation of the CPS. In line with the GTP, gender and climate change have been included as cross-cutting issues to strengthen their mainstreaming across the portfolio. The programs of IFC and MIGA are well aligned with the CPS framework, contributing mainly to the strategic objectives under Pillar One. 19. ULGDP II’s relationship to the Country Partnership Strategy. The Program is an integral element of the Country Partnership Strategy (CPS), discussed by the Board on September 24, 2012. The proposed ULGDP II directly supports pillar one of the CPS by financing urban infrastructure and services. These are essential to foster Ethiopia’s competitiveness. ULGDP II will also assist in reducing vulnerability by encouraging cities to use labor-intensive construction practices that generate significant numbers of jobs, especially for women, youth, and vulnerable people. The ULGDP II will also directly contribute to the CPS’s objective of supporting good governance by providing resources on the basis of performance in participatory planning, financial management, procurement, execution of infrastructure projects, and sustainable delivery of services. 20. ULGDP II supports the World Bank Group’s twin goals of reducing extreme poverty and boosting shared prosperity in four specific ways: ULGDP II will increase employment opportunities by encouraging a labor-intensive approach to construction of urban infrastructure. Under phase 1 (ULGDP), the construction of cobblestone roads - the largest infrastructure expenditure item under ULGDP - resulted in the creation of large numbers of new jobs for city residents, a substantial proportion of which have been taken up by women, youth, disabled, and previously unemployed people, greatly improving their lives. Many cobblestone workers have now formed themselves into micro and small enterprises (MSEs), which are able to bid on and win contracts for other infrastructure projects. Cobblestone construction and other urban infrastructure assets generally use local materials, creating backward linkages to the local economy and reducing costs. Urban infrastructure and services also improve the quality of urban dwellers' lives by facilitating mobility and trade, reducing flooding and thus damage to residential and businesses structures. It also creates positive health and productivity externalities created through increased access to services such as drainage, water supply, sanitation and transport. 21. ULGDP II also contributes to poverty reduction by improving the institutional and infrastructure performance of Ethiopia's urban areas. As Ethiopia urbanizes, poverty becomes more urban. In 2000, 11 percent of Ethiopia’s poor lived in cities, but this rose to 14 percent in 2010/11. The number of urban poor has stayed almost constant between 2005 and 2010/11 (at 3.2 million), even though urban poverty rates fell by almost ten percentage points (from 35.1 percent to 25.7 percent). This indicates, among other things, that continued focus is needed on the urban poor. Through efforts to leverage well-functioning and productive urban centers, the operation is expected to maintain such focus on the urban poor and increase access to basic services, reduce vulnerability, spur inclusive growth and fuel job creation. 22. Rationale for use of the PforR instrument. Financing for the first phase of the government’s program employed a Specific Investment Loan. In phase 1, most of the resources were dedicated to performance-based grants for ULGs, which improved institutional and implementation performance. When the government requested the Bank’s support for a second 6 phase of ULGDP, the PforR instrument (approved in 2012) became the natural choice. The PforR instrument provides a superior modality because its mechanisms are highly complementary to the program intention and design. It allows the Bank’s support to: (a) focus on improving results, in addition to scaling up the government’s existing program (the ULGDP) without unnecessary duplication; (b) make use of existing federal, regional, and local government systems (including public financial management, social and environmental systems management, and procurement management), while further strengthening and integrating them; and (c) adopt a direct, incentive-driven approach to achieve the development objectives. II. PROGRAM DESCRIPTION A. Program Scope Existing Government Program–the ULGDP 23. The ULGDP aims to address institutional and fiscal gaps at the urban local government level by supporting improved institutional performance in the planning, delivery, and sustained provision of urban services and infrastructure by local governments. It aims to fulfill this objective by providing grants to urban local governments based on their performance across a range of areas including fiduciary management, management of environmental and social systems, revenue generation, budgeting practices, execution of planned operations and maintenance, governance, transparency and participation, among others. The Program funds are disbursed on the basis of performance of the participating local governments and are earmarked for investment in urban infrastructure and services. As mentioned earlier, the government program involves a phased approach— to be rolled out to all 85 ULGs in the country over time— gradually expanding the scope and evolving the roles of federal and regional governments in capacity building and program administration. 24. Phase 1 of the program focused on addressing the capacity and infrastructure deficits of 37 ULGs in total. However, the focus was on 19 participating ULGs (including Addis Ababa)—which received both capacity building and performance-based grants for infrastructure and service delivery. The remaining 18 ULGs only received capacity building grants with a view to preparing them to receive performance grants in phase 2. Phase 1 had a total budget envelope of US$416 million (US$300 million IDA, including an additional financing of US$150 million, and US$116 million government), with the following three main elements: • Performance based grants to 19 ULGs (including Addis Ababa) for urban infrastructure investments (US$403 million). • Capacity building grants (US$7.5 million):  To 37 ULGs (including those (18) receiving only capacity building grants and those (19) receiving both capacity building and performance grants).  To the Ministry of Urban Development, Housing, and Construction (MUDHCo) to strengthen its capacity to support the cities. 7 • Implementation support (US$5.5 million).11 25. All ULGDP funds were allocated according to a simple population-based formula. With the exception of Addis Ababa (which will be excluded from the following description due to its significant difference with other cities), to date, an average of US$16 per capita per year has been disbursed to the 18 smaller ULGs using IDA funds. This amount is calculated by dividing the total funding disbursed over the life of the program (six years) to participating ULGs by the population in their respective local governments. These funds are then complemented by 20 percent matching funding from the ULGs and 20 percent from the regional governments. 26. Disbursement of the allocations was made after local governments undergo an annual performance assessment. The actual amount disbursed to each local government is determined by the performance of that local government as measured in the annual performance assessment. Local governments cannot access the ULGDP funds if they fail to meet certain conditions, or perform below 50 percent in the assessment. This is necessary to ensure that the funds are used effectively, efficiently, and with integrity. If they perform above the expected target score, they are rewarded by an accelerated amount of 20 percent in addition to their regular allocation that is based on population. As many cities performed above the target, the ULGDP disbursed more quickly than expected under the original design. Key Results Achieved Under the ULGDP (Phase I) 27. The ULGDP has recorded a number of tangible achievements during its six years of implementation, particularly in the 18 smaller cities that received both capacity building and performance grants. Substantial institutional capacity was built in these 18 cities in the key areas of planning and budgeting, financial and asset management, O&M, revenue enhancement and participatory planning. In addition, with regards to urban infrastructure, these cities investments in infrastructure had high rates of economic return, such as in roads and drainage. Addis also recorded institutional improvements, although to a more limited extent than the other ULGs, under ULGDP, which included the preparation of robust revenue enhancement and the establishment, for the first time, of an asset management plan. In those cities that only received capacity building grants with the additional financing provided in 2011, tangible, though modest, capacity was developed. This helped them put in place basic functioning systems for urban governance, such as financial management systems, internal audit systems, asset management planning framework, revenue enhancement plan, capital investment plan, and core local government staff to support implementation of urban infrastructure and services. 12 11 Some of these funds were used for technical assistants who supported ULGs in procurement, engineering, environment and social systems management. Additionally, these funds were used by MUDHCo to procure consultancy services for the annual performance assessments, environment and social audits, and other studies. 12 Staff includes (a) an economist in change of preparing the participatory capital investment plan, (b) a financial management specialist, (c) a procurement specialist, (d) an environmental and social safeguards specialist, (e) a municipal/infrastructure engineer and (f) an urban planner. 8 28. More specifically, major achievements were obtained in the following areas: • Infrastructure and services have improved. As of July 2013, some 2.6 million people had benefited from the infrastructure and services financed under ULGDP. Some 670 kilometers of roads and 588 kilometers of drainage system, 171 latrines and 110 community water points have been constructed, with 29,000 people given access to improved water sources. As a result of the roads built by program funds, particularly cobblestone, mobility for residents has increased, flooding has diminished, property values and small enterprises have increased. These changes are transforming city and town centers into lively and welcoming places in which to live and work. • ULGDP has contributed to wider local economic development. The ULGDP’s emphasis on labor-intensive construction practices has created an estimated 312,460 permanent and temporary jobs in small and micro enterprises, about one-third of which have been taken by women. The majority of jobs have gone to people with little previous experience in formal employment. Importantly, a large number of small and micro enterprises have been involved in project execution. The experience gained in business development and operation is expected to contribute to future local economic development. • Citizen participation in planning has become much more robust. Citizen participation in local investment planning is now routine across all 18 participating cities, with a doubling of the number of citizen groups taking part in the annual planning process from 226 citizen groups in 2008 to 521 in 2012. • Budgeting and local government planning capacity is greatly improved. In 2008, none of the ULGs had urban development plans, capital investment plans (CIPs), assets management plans (AMPs), or revenue enhancement plans (REPs). As of 2013, all 18 participating ULGs produce updated CIPs, AMPs, and REPs and related annual action plans and procurement plans. Twelve of the ULGs have also established proper links between all these core planning and budgeting instruments to ensure consistency across the planning documents. All ULGs are collecting higher revenues (both state and municipal) than at the start of the Program, although the increase in municipal revenue remains uneven. • Transparency of local government operations has increased. All 18 ULGs now routinely disseminate information on their operations to their citizens. Twelve ULGs have achieved the highest score on the program’s transparency indicators by making public all core documents, including plans, budgets, contract awards, and physical and financial progress on infrastructure investments. • Cities’ financial management is significantly enhanced. All cities now prepare timely financial reports using the government’s computerized accounting program, the Integrated Budget and Expenditure (IBEX) system. In the most recent program annual assessment, 14 of the participating 18 ULGs received the top score with all reports submitted on time, up from zero in 2008. The 4 ULGs that did not receive the top score missed it because reports for one quarter were submitted late. Audit reports confirm 9 steadily improving financial management. In 2008, no ULGs had audited accounts but by 2012, 18 ULGs had cleared their audit backlogs. Importantly, whereas six ULGs had adverse audit opinions as recently as 2009, none of them had adverse audit opinion in their most recent audit report— all ULGs obtained qualified audit opinions. ULGDP phase two, the PforR 29. Under phase 1, ULGDP established a robust local government performance grant system, which has successfully delivered both institutional strengthening and associated infrastructure results in the limited number of cities within its scope. The government now wishes to expand the Program to include additional cities, bringing the total to 44 ULGs, and to deepen the involvement of the nine regional governments. The 26 new ULGs (including 18 that received only capacity building grants under ULGDP) represent the next tier of important cities in the country based on population. In total they account for 4.3 million people, or about 26 percent of the total urban population. Given the increased scope of the program, under phase two, the government plans to assist the country’s nine regional governments to more effectively play their role in supporting urban growth and development. 30. In expanding the program, a number of challenges which emerged during phase one will be addressed. In particular: • Institutional capacity gaps at ULGs. Although much stronger than when the ULGDP started, the 18 ULGs in the current Program still have gaps in capacity in all key areas of urban management, including participatory planning, fiduciary management, generation of own source revenues, engineering, contract management, monitoring and evaluation, and environmental and social systems management, and the like. All urban administrations (44) will require continuous capacity building support to enable them to adequately fulfill their mandates. This will be more challenging in ULGs that are new to the program. • Delays in procurement of the Annual Performance Assessment. MUDHCo was unable to procure the services of a firm to carry out the annual performance assessment in time for the exercise to be completed by January/February each year. As a result, cities had to prepare their budgets based on notional rather than actual allocations. Once they learned their actual allocations they were required to revise their budgets to reflect the actual allocations. • Funding levels were an insufficient incentive for Addis Ababa. In contrast to other smaller sized participating cities, the per capita funding amount available to Addis Ababa under the ULGDP was a tiny fraction of its annual revenue. The Addis Ababa city government therefore had little incentive to assign staff to coordinate the Program. As a result, Addis Ababa’s score in the annual performance assessment was only satisfactory twice since the inception of the Program, each time with relatively low scores. As the institutional, infrastructure and financial needs of Addis Ababa are distinctly different from other smaller ULGs, the program design was not appropriate for Addis Ababa. 10 • Inadequate systems for tracking the specific use of Program funds. The IBEX accounting system was not designed to allow cities to specify the infrastructure projects for which they have used Program funds. Instead, to date, it aggregates data for expenditure on works, goods, and services. Tracking program funds is therefore a more complex exercise. 31. The ULGDP II will address these challenges. First, the Program provides considerable support to address institutional capacity gaps in ULGs (see section II D, below for details of the Program’s capacity building approach). Second, the Program uses a disbursement linked indicator (DLI) to provide a stronger incentive for MUDHCo to procure the services of the consultant for the annual performance assessment (APA) in a timely manner. Third, Addis Ababa will not be included in the ULGDP II. Fourth, although IBEX will be used by all participating cities to record transactions and to produce reports at all levels, adequate capacity building will be provided to cities to enable them to utilize this software effectively to record use of Program funds and to track funds across main expenditure groups. 32. ULGDP II, the PforR Program, will have the following key features: • Program duration: five years: July 2014 through December 2019. • Program budget envelope: US$556.55 million (see Table 3, below). • Main expenditure items:  Performance based grants to 44 ULGs for urban infrastructure and services investments and capacity building (US$499.55 million)  Regional governments’ capacity building and oversight/support to participating ULGs (US$30.00 million)  Support to MUDHCo to administer and coordinate the program, and strengthen its capacity to support and guide the regions and ULGs (US$27.00 million). Table 3: Program financing Source Amount (million) Percent of Total Government 13 US$176.55 32 IBRD/IDA US$380.00 68 Total Program Financing US$556.55 100 33. The performance-based grants (including matching funds) to ULGs account for 90 percent of total funding for the ULGPD II. As in the ULGDP, these performance-based grants are allocated according to a simple population-based formula and in direct proportion to the performance of that local government. The annual allocation for each full grant cycle will range from US$78.74 million (IDA: US$50.14 million, government: US$28.60 million) for the Program start year (fiscal 2015) to US$105.20 million (IDA: US$68.21 million, government: US$36.99 million) in each of the following four years. Unlike the 18 cities that participated in 13 The regional government and ULGs will be making funding contributions at various levels, as detailed in the annex. The contribution from the ULGs will constitute one of the minimum conditions to be met for each ULGs to qualify to receive funding from the Program. 11 ULGDP I, in the initial year of ULGDP II, the 26 new ULGs that are entering the program will receive performance grant based on compliance with minimum access conditions, but will not receive the funding related with the more qualitative performance measures. During their first year in the Program, they will receive considerable support to strengthen their capacity for effective urban management. Starting in the second year of the Program, the performance of the 26 new ULGs will be assessed through the APA, providing them with feedback on what they are doing well and what needs to be further improved. 34. On average, the Program’s IDA funds will provide about US$14.86 per capita per year for investment in urban infrastructure and services. When disaggregated, the IDA funds will provide about US$13.38 per capita per year for the new 26 ULGs and about US$15.69 per capita per year for the 18 ULGs currently benefiting from the Program. Including the financing from the regional and urban local governments, total Program financing will provide an average of US$22.98 per capita per year, of which the 26 new ULGs will receive US$19.59 per capita per year and the 18 ULGs already in the Program will receive US$24.89 per capita per year. 14 35. APAs will be carried out each year to review each city’s performance. The APA will review (a) a set of minimum conditions that each ULG will be required to fulfill each year of the Program, and (b) a list of performance measures which track each city’s progress each year. Minimum conditions will function like green and red lights and the performance measures will determine each city’s score. Key results areas measured are (a) participation of citizens in planning and budgeting, (b) fiduciary management, (c) generation of own source municipal revenues, (d) delivery of new infrastructure and services, and operation and maintenance of existing infrastructure and services, (e) accountability and oversight systems and (f) environmental and social safeguards. The results of the APA will also be used to verify the DLIs, which are elaborated in later sections. In addition, the APAs will review the performance of the regional government in the areas of (a) capacity building, (b) carrying out timely annual audits of ULGs, (c) performing social and environmental audits, and (d) supporting ULGs’ with respect to urban revenue generation. Comparing ULGDP and ULGDP II 36. The ULGDP II will maintain many of the design features of ULGDP. These include the performance orientation and measurement of progress and results through independent annual performance assessments. Also similar to the ULGDP, ULGs may use Program funds only for activities specified in the investment menu, including urban roads and drainage, sanitation services, public parks, street lighting, and other core urban infrastructure and capacity building activities menu (see Annex 1). Notably, ULGs cannot use Program funds for investments that could have significant negative environmental impacts or that would result in the resettlement of more than 200 people. Compliance with the investment and capacity building activities menu will be a minimum condition and will be verified each year through the APA. 14 The main reason for the difference in the per capita amounts to participating 18 ULGs and the newly added 26 ULGs is that the first group will receive funding under DLIs 1, 2 and 3 from year 1 of the Program, and the latter group of 26 ULGs will receive DLI 1 in year 1, and DLIs 2 and 3 starting in year 2. Details provided in the technical assessment summary and DLI matrix on Annex 3. 12 37. ULGDP II will consolidate and expand the achievements of ULGDP in strengthening social accountability. In particular, the ULGDP II will further strengthen the engagement between ULGs and citizens, by promoting participatory budgeting, financial transparency, and publication of local government budgets. The rigor of the social accountability measures in the Program’s performance system will be strengthened. This will require, among other things, that each Program ULG: • Has a functioning complaints handling mechanism, as required by Ethiopian law (minimum condition to access Program funds). • Ensures participation of citizens in the planning process (performance measure). • Identifies the top three basic municipal services in accordance with citizen demand, and prepared a standard for their delivery along with citizen charter (performance measure). • Strives to deliver the municipal services as per the standard and citizen charter (performance measure). • Disseminates the summary of annual budgets, approved projects, expenditures, audited accounts and results of the procurement decisions in ULG offices and other public places, or web-pages, newspapers (performance measure). 38. The design of ULGDP II takes into consideration the key challenges faced in ULGDP and supports the government’s new urban policy and strategy as highlighted below. • The Program’s technical focus will continue to leverage institutional results across ULGs. As mentioned above, as a result of phase one, the capacity in the 18 ULGs has improved, although gaps still remain. Additionally, the new set of 26 ULGs requires strong incentives for institutional enhancements. The Program’s capacity building design, explained in detail in Annex 1, fully takes this differentiation between two sets of Program ULGs into account. • All ULGs will be assessed on the set of minimum access conditions every year, not just at the start of the Program. This is to ensure that cities maintain the staffing and basic systems required to effectively administer urban local governments. • ULGs will receive disbursements in line with their score on the APA. This is in contrast to the current system, which provides all cities which score above a threshold of 20 percent an accelerated allocation. In the new system, every point counts, strengthening the incentives for continuous improvements. • Several new targets and results areas have been added to the performance assessment, reflecting new government policies and the growing administrative sophistication of cities. For example, results areas now include (a) urban land management and urban planning, and (b) employment generation. In addition, all cities are now expected to screen all investments for environmental and social impacts, and to prepare environmental and social impact assessments, and related documents to address any adverse impacts. All cities are also expected to reflect Program funds in IBEX, rather than using a separate accounting system. 13 • The challenges with generation of urban revenues have been addressed through strengthening of the minimum conditions (matching funding is a condition for access to funds), and performance measures, as well as through support for more conducive environment dialogue and support between the ULGs and their regional governments. 15 Performance measures under DLI 2 are now more focused on results through provision of incentives to ULGs to (a) generate additional municipal core revenues, and (b) contribute more towards capital investments (rewards for a higher level of matching funding). 16 Furthermore, the targeting of the regional governments’ support to ULGs in own source revenue generation will be strengthened by promoting stronger consultations and dialogue, and through capacity building support within this core area. • Financing for the regional governments and federal government entities (including MUDHCo), will no longer be input based, but will also be results based. As detailed in the DLIs which target these two levels of government, Program funds will be disbursed to these entities only after the verification of the results for which they are responsible. • Disbursements will flow to cities in two annual tranches, rather than on the basis of Interim Financial Reports and withdrawal applications. • ULGDP II will not include Addis Ababa as its institutional, infrastructure, and financial needs are distinctly different from the other, significantly smaller, ULGs in Ethiopia. 17 • A more structured and systematic approach is adopted for capacity building to support all three levels of government: federal, regional and local. (Details about capacity building are provided in the later section and in the Annex 1) B. Program Development Objectives 39. The Program Development Objective (PDO) is to assist the Recipient in enhancing the institutional performance of participating urban local governments in developing and sustaining urban infrastructure and services. C. Program Key Results and Disbursement Linked Indicators 40. The proposed key Program results indicators are: • Score in the APA for institutional performance of participating ULGs, averaged across all cities. 18 • Score in the APA for achievement of urban infrastructure and service targets by ULGs, averaged across all cities. 15 Under the ULGDP, state revenues (which are primarily transfers from regional governments) have improved much faster than municipal revenues. 16 The current performance measures only focus on existence of revenue enhancement plans and compliance with planned targets for total revenues (state and municipal together). 17 A possible Addis Ababa-specific project is currently being discussed between the government and the World Bank. 18 In the areas of planning and budgeting, assets management, public financial management, procurement, own source revenues, accountability and transparency, environment and social safeguards, land management, and strategic urban planning. 14 (The complete table on the results framework and monitoring is provided in Annex 2.) 41. All Program funds will be disbursed against DLIs. All the DLIs focus on strengthening institutions of urban management, by providing incentives to entities at all three levels of government that have a role to play. The first set of DLIs (1 through 3) aim to strengthen ULG institutions roles in the delivery of infrastructure and services. The second set of DLIs (4 through 7) will target strengthening of regional government entities so that they can properly fulfill their mandates to support ULGs. The third set of DLIs (8 and 9) focus on strengthening the capacity of federal government entities to assist both regions and ULGs. Together, the nine DLIs provide strong incentives for improved management of urban areas. 42. DLIs focusing on ULGs. A total of US$499.55 million (IDA: US$323.00 million, government: US$176.55 million) has been allocated for these DLIs. • DLI 1: ULGs have achieved Program minimum conditions as demonstrated in the APA. • DLI 2: ULGs have strengthened institutional performance as demonstrated in the APA. • DLI 3: ULGs have delivered infrastructure, maintenance and supported job creation as per their capital investment plans and their annual action plans, as demonstrated in the APA, and ensured that value for money is achieved. 43. All funds disbursed to ULGs through these three DLIs will be expensed as per expenditure framework and for infrastructure investments as specified in the Program investment menu in Annex 1 of this document. DLIs 1, 2 and 3 support the Program’s overall results orientation. As such, these three DLIs in particular build on the ULGDP performance assessment system and aim to ensure that: • Basic fiduciary, project planning and execution, and environmental and social management systems are in place such that local governments can absorb the Program funding. • ULGs continue to strengthen their institutions of urban management. • ULGs use Program funds effectively in creating infrastructure and delivering services. 44. The disbursement system for DLIs 1, 2, and 3 is flexible and rewards actual performance of ULGs. It is particularly important to note that if Program ULGs perform better (or worse) than expected (as set out in disbursement targets in the DLI matrix below), disbursements will be adjusted accordingly. This means that if the Program ULGs perform better than expected, they will receive additional funds. If many ULGs perform better than expected, Program funds will be disbursed more rapidly than currently anticipated, and additional financing will be needed. The government and Bank will jointly review the performance of ULGs at the end of each year on the basis of the APAs, and adjustments will be made to the Program design as necessary. 15 45. DLIs focusing on regional government entities. A total of US$30 million IDA has been allocated for these DLIs. • DLI 4: Regional government capacity building and support teams in place and support urban service delivery. • DLI 5: Offices of the Regional Auditor Generals (ORAGs) carry out timely audits of ULGs’ financial reports (by January 7 of each financial year). • DLI 6: Regional environmental protection agencies (REPAs) timely review ULGs’ safeguards compliance. This indicator will be fulfilled when the regional environmental protection agencies have carried out the safeguards reviews/audits of ULGs in their jurisdictions before the start of the annual performance assessment in each year. • DLI 7: Regional revenue authorities support ULGs’ efforts to generate revenue. 46. DLIs focusing on the federal MUDHCo. A total of US$27 million IDA has been allocated for these DLIs. • DLI 8: The annual MUDHCo capacity building activities for Program ULGs, regional governments, and the ministry completed. • DLI 9: The APAs, independent procurement audits (IPAs), and value for money audits are procured and completed on time. 19 47. The government and Bank team will review the appropriateness of the design features of the ULGDP II each year, following the completion of the APA. The teams will focus in particular on the DLI allocations, the DLI indicators, targets, and scoring system. Based on the experience from implementation, the design may be adjusted. Box 1: Tanzania Urban Local Government Strengthening PforR: Lessons learned during the first year of implementation The objectives and the overall design of the Tanzania Urban Local Government Strengthening Program (ULGSP) PforR are similar to that of the Ethiopia ULGDP II. The objective of the ULGSP is to improve institutional performance for urban service delivery in 18 local governments across Tanzania. The Tanzania Program links disbursements to the achievement of verified results in key areas of urban management and service provision; municipalities can use the funds to prepare and build basic urban infrastructure. The Tanzania Program also includes capacity building support to local governments to help them achieve the performance targets. The independent performance assessment mechanism is functioning well. Based on its findings, the Program is on track. The first round of performance-based disbursements was made on schedule, cities have benefited from the new opportunities introduced for training and to strengthen the community of practice between 19 Value for money audits will assess the quality, timeliness, and cost effectiveness of completed infrastructure (a sample of projects will be selected in each ULG) against standard benchmarks in line with the terms of reference for the auditors. The value for money audits will be conducted from the third assessment (of performance of investments during fiscal 2015), and the results will have a weight in the performance-based allocations of grants (see annex 10 for details). 16 municipalities, and the first phase of municipal investments is under construction. Three important lessons from the Tanzanian experience have informed the design of the Ethiopia ULGDP II. The first is that independent verification of the findings of the APA helps to ensure greater confidence in the results of the APA. In Tanzania, the Bank contracted independent consultants to visit a random sample of cities to check the findings of the first APA carried out under the Program to verify its accuracy. This quality review confirmed the findings of the APA and provided the national government with the assurance it needed to rely on its findings in making the allocations. The second lesson is that, given its sensitivity, the independent review should be conducted by a team that is neither comprised of Bank or government staff. The third lesson is that, choosing performance-based indicators that can be objectively tracked and that are not subject to interpretation is important to avoid disputes. The design of the Ethiopia ULGDP II includes all three measures. D. Key Capacity Building and Systems Strengthening Activities 48. Under ULGDP II, a more structured and systematic approach will be adopted for capacity building activities focused on all three levels of government. First, capacity building activities throughout the Program period will be supported by dedicated federal and regional mobile teams. In addition, capacity building support will be tailored to the needs of federal, regional and local levels, as follows: • ULGs: will be supported through both supply and demand side interventions aimed at raising their general capacity to meet their mandates. • Regions: will be supported to strengthen their urban governance and management roles. They will, in turn, provide capacity building support to ULGs in their jurisdiction. • MUDHCo: will be supported to strengthen its coordination, oversight, and backstopping functions in serving the regional and local governments. 49. The main focus of the capacity building is on enhancing urban governance and management to achieve better service delivery. Due to the cross-cutting nature of the subject, capacity building will aim to strengthen the governments’ capacity in a variety of areas. These include participatory planning, budgeting, revenue generation, financial management, procurement, infrastructure asset management, contract management and execution, urban planning, environmental and social safeguards, audit, ethics, fraud and corruption, monitoring and evaluation, and others. The intention is to strengthen human resources and management systems in areas, such as IT system, accounting systems, and the like. The APA will provide a comprehensive, regular check on each entity’s capacity improvements and identify gaps and weaknesses to be strengthened in the future, including issues raised on procurement and financial management. 50. The capacity building activities will be carried out in two phases. This will enable a smooth transition from ULGDP to ULGDP II. The key activities are captured in the table below. 17 Table 4: Main capacity building activities in phases 1 and 2 Phase 1 (November 2013 to December 2014) Phase 2 (August 2014 to December 2019) • Federal mobile team. • Expanded federal mobile team and • Two technical consultant teams to provide functions. capacity building support for ULGs (phased • Four new regional mobile teams. out by end of period). • New urban management course for • GIZ financed support for capacity building of ULGs. regional governments and eight cities (phased • Capacity building support for ULGs on out by end of period). the basis of demand. 51. Capacity Building for ULGs. The supply side interventions will primarily comprise an urban management course to be provided by the Ethiopian Civil Service University (ECSU). MUDHCo will facilitate access to the course. Key staff of the new 26 ULGs joining the ULGDP II will be expected to complete a one-time modular course with funding from MUDHCo. However, the course will be optional for staff of the 18 ULGs currently participating in the ULGDP— it can serve as a refresher or introduction for new staff in these ULGs. These 18 ULGs will be expected to use their own resources to send staff to attend any or all of the modules. In addition to the supply side interventions, each ULG will be able to spend up to 5 percent of their performance-based grants on other eligible capacity building activities, as laid out in the capacity building menu in paragraph 26 in annex 1. The menu allows ULGs to design their capacity building program to their specific needs, and to address weaknesses (such as issues on procurement and financial management) that are identified in the APA. Expenditure on activities not included on the menu will be ineligible for financing under the Program. The APA will monitor expenditure on capacity building each year. ULGs will have to demonstrate adherence with the menu as a minimum condition to access the performance grant. Further details on the overall design of capacity building activities under ULGDP II are presented in Annex 1. III. PROGRAM IMPLEMENTATION A. Institutional and Implementation Arrangements 52. Implementation responsibilities by level of government. The institutional arrangements of the ULGDP II are based on the experience from ULGDP, with a clear division of responsibilities between levels of government, as per the government structure, and consistent with existing legal provisions, regulations, and guidelines. The roles and responsibilities of the relevant entities are summarized below. Details are included in Annex 1. Federal level 53. At the federal level: • MUDHCo will have the following main tasks:  Overall responsibility for day-to-day coordination of the Program. 18  Capacity building, including direct support to regional and urban local governments, and issuance of guidelines and standard regulations for matters such as municipal revenue generation, assets management, service delivery standards, and the like.  Program management, including the procurement and management of the APAs and the value for money audits.  Overall monitoring and evaluation.  Program reporting, including the annual midyear report and Program report.  Accounting for the ULGDP II funds to Ministry of Finance and Economic Development (MoFED). • MoFED will be responsible for ensuring that Program resources are budgeted for and disbursed within the expenditure framework. MoFED will also be in charge of financial management, including reporting, program auditing, and compilation of federal fiscal reports. • Several other federal entities will have guiding and supporting roles in ULGDP II. These include the Office of the Federal Auditor General (OFAG), especially for the annual program audits; the Federal Public Procurement and Asset Management Agency on procurement procedures; and the Federal Ethics and Anti-Corruption Commission (FEAC) on fraud and corruption monitoring and reporting. 54. As under the ULGDP, the Urban Governance Capacity Building Bureau (UGCBB) in MUDHCo will be responsible for daily coordination of the Program. The significant geographic and technical scale up of the Program under the proposed PforR, as well as existing staffing gaps, if unaddressed, pose considerable risk to the achievement of the operation’s development objective. There is therefore a serious need to fill the personnel gaps and further strengthen capacity of UGCBB. The current MUDHCo multi-disciplinary team comprising 12 specialists will be further strengthened to include a minimum of 23 specialists and one long-term international advisor. The adequacy of the staffing levels will be reviewed annually, and, if necessary, the number may be increased. The strengthened team will boost the capacity within MUDHCo to perform the necessary functions required under ULGDP II, and allow the ministry to provide greater capacity building support to the regions and the ULGs. 55. A steering committee will be established, comprising (at a minimum) representatives from MUDHCo and MoFED to ensure strong coordination on issues such as planning, allocations, flow of funds, compilation of data, and approval of the results from the APAs. A technical sub-committee comprising key technical staff of MUDHCo and MoFED will be formed under this committee. It will review the results of the APAs and ensure their quality. It will also respond to complaints that cannot be resolved at entity level. The technical committee is expected to meet quarterly and review Program implementation against objectives, bring policy issues to the Steering Committee, and ensure that the Program is implemented in line with the Program Operations Manual. Regional level 19 56. At the regional government level: • The respective regional bureaus of urban development (BUDs) will be responsible for daily coordination of the Program at the regional level. Specifically, the BUDs will be in charge of:  Capacity building support of the ULGs in their jurisdiction.  Preparation of progress reports covering all ULGs in their jurisdiction.  Oversight and backstopping support related to aspects of the Program. • The other regional entities involved are: (a) ORAGs for conducting external audits of ULG financial reports; (b) REPAs to oversee the Program’s environmental and social safeguards agreements; (c) Bureaus of Finance and Economic Development (BoFEDs) for managing regional fund flow and reporting, regional public procurement and asset management agencies to guide and support on procurement procedures and capacity building; (d) regional revenue authorities support ULGs in the areas of own source revenue generation; and (e) the Regional Ethics and Anti-Corruption Commission (REAC) for fraud and corruption monitoring and reporting. 57. Under the ULGDP II, regional governments will assume a greater role in providing oversight and in helping ULGs within their jurisdictions build their capacity to perform. However, there is a risk that regional governments may lack capacity and sufficient incentives to undertake these expanded responsibilities. The four regional governments with relatively better capacity, with the assistance from MUDHCo, will put into place mobile teams that will help the regional bureaus of urban development strengthen their own capacity to guide and support the ULGs. In the four new ULGDP II regional states, with modest capacity, MUDHCo will create a multi-disciplinary mobile team comprising some 23 specialists (12 existing and 11 new) that will provide capacity building support to regional states and their ULGs. Urban local government level 58. At the ULG level: • The mayor’s office in each urban local government will be responsible for overall performance. It will ensure compliance with all financial management, procurement, and Program environmental and social safeguards and regulations. It will also facilitate access to the information required as part of the annual performance assessments. • The offices of the city manager will be responsible for day-to-day Program coordination. It will lead the participatory planning process, procure and manage works contracts, disseminate information about the Program (including contract awards, physical and financial progress of works contracts, and the like). It will also ensure that such contracts are implemented in accordance with the Program’s environmental and social safeguards. 20 • The offices of finance and economic development will be responsible for ensuring that all Program funds are included in IBEX and that financial reports are submitted to ORAG as soon as possible after the end of the Ethiopian fiscal year. • The ethics liaison unit of the ULG will be responsible for handling complaints and dealing with fraud and corruption. 20 • City councils will be responsible for reviewing and approving their capital investment plans, revenue enhancement plans, and asset management plans. 59. ULGs require a wide range of expertise to successfully carry out their mandates. An analysis of staffing carried out as part of Program preparation reveals that most ULGs have the necessary staff, but a few need to fill key positions to access Program funds. As would be expected, the 26 cities joining the Program’s performance grant mechanism have the greatest percentage of unfilled positions. All ULGs are expected to have the necessary core staff in place at the start of the Program as a minimum condition; ULGs that do not meet this minimum condition will not be able to access Program funds in year one. B. Results Monitoring and Evaluation 60. Objectives. The objective of the monitoring and evaluation (M&E) system is to generate timely and relevant feedback on the Program’s implementation progress and achievement of expected outcomes to enable the stakeholder to address issues as quickly as possible once they arise. 61. Design. Monitoring and reporting will take place at all three levels of government. Like the ULGDP, the M&E specialist based at each ULG will be the key person in the system, collecting and reporting primary data related to the indicators of the Program’s key results areas. The M&E specialist will be responsible for the M&E system at the city level, and prepare comprehensive Program reports twice a year (the midyear report and the annual report) containing agreed data and transmit it to the regional government. The M&E specialists at the federal and regional levels (in the federal or regional mobile teams) will assist in establishing a computerized M&E system, provide training and back-stopping support to staff at the regional, and in turn, local levels to ensure that the city-specific reports are timely, comprehensive, and accurate. The regional M&E specialists will compile each city’s progress report into a regional progress report and submit it to MUDHCo. Similarly, the federal M&E specialists will, depending on need, assist in compiling the regional progress reports into a national report and submitting it to the World Bank for review. 62. M&E system and arrangements for ULGDP II will consist of three different layers: • ULG level. These systems already exist to capture information necessary for ULGDP. ULGs will use these systems to report on Program implementation, and to capture data on administration, local infrastructure and services delivered by Program funds. 20 Note that units with the same mandates have different names in different places. 21 • Regional level. The regional bureaus of urban development will collect Program related data from ULGs, consolidate this in a report along with their own inputs, and submit the reports to MUDHCo. • Federal M&E system managed by MUDHCo. MUDHCo will strengthen its existing M&E system to compile data from all 44 ULGs participating in the ULGDP II and produce the midyear and annual Program progress reports. 63. Data generation and collection. The data to track many of the key performance indicators will come primarily from the government’s own systems, as tracked by the three layers of government outlined in paragraph 62 above. The table below summarizes the various inter-linked tools which will be used to monitor and report on the Program. Table 5: Data generation and collection Type of information Means Frequency Implementation experience, ULGs, regional governments, and Two reports a year, with institutional performance, physical MUDHCo, each with responsibilities as the content as laid out progress and outputs, technical aspects described above. below in paragraphs 66 of the Program, and achievement of and 67. the key performance indicators. APA Annually Achievements of infrastructure plans APA Annually and targets Value for the money Value for the money audits, results to feed Every year starting the into the APA and impact on allocations 2nd year Financial reporting (use of funds, Annual financial statements, semiannual Twice a year expenditure composition, and the like) financial reports, internal audit reports, annual external audit reports Review of implementation experience, Annual progress report and APA Annually achievement of the key performance indicators, and progress towards the PDOs. Detailed review of implementation Midterm review Once in the Program experience, achievement of the key (2017) performance indicators, and progress towards the PDOs. 64. MUDHCo is responsible for planning and supervising the implementation of the APA and the value for money audit. The APA will be carried out by an independent firm to ensure the objectivity of the findings. The assessment will be carried out in line with the Program Operations Manual, which is being developed by MUDHCo, with its content and quality acceptable to the Bank. The Program Operations Manual will provide clear definitions for each indicator as well as comprehensive guidance on the scoring. Adjustments which might be needed to the performance indicators and scoring will be done throughout implementation and particularly at the midterm review to ensure that the system is manageable and robust. In year three of the ULGDP II will also launch value for money audits carried out by independent firms under terms of reference acceptable to the Bank. Results of the value for money audits will be captured in the APA. 65. Reporting. MUDHCo will be responsible for overall Program reporting. It will consolidate and analyze the field data submitted by regions and ULGs and update the Program’s 22 results framework twice a year. It will also produce and submit to the World Bank a midyear and an annual Program report, with information on the following: 66. The midyear Program report will cover the following issues: • Summary of aggregate Program expenditures and Program infrastructure delivered by ULGs. • Execution of MUDHCo capacity building plan. • Summary of aggregate capacity building activities undertaken by ULGs and regional governments. • Summary of aggregate environmental and social performance reports from each ULG, including information on grievances. • Summary of progress against Program’s performance indicators. 67. The annual Program report will include all the above, plus: • Summary of the assessment results, including the performance of Program ULGs and the disbursed amounts. • Summary of aggregate information on procurement grievances. • Summary of aggregate information on fraud and corruption issues. 68. Capacity building for M&E. The Program provides support for one or two additional M&E specialists at the federal level. Moreover, each regional mobile team will include at least one M&E specialist. Cities are required to appoint an M&E specialist to their Program team as a minimum access condition. The Program will finance regular training of M&E specialists, technical assistance, and other capacity support required to establish and operate an effective M&E system. C. Disbursement Arrangements and Verification Protocols 69. Disbursement of Program funds will be handled accordingly: DLIs 1, 2 and 3 will be made twice a year; DLIs 4, 5, 6, 8, and 9 will be made annually; and DLI 7 will be disbursed twice during the Program period (in FY17 and FY19), upon verification of the delivery of intended results as detailed in the verification protocol (Annex 3). The basis of the verification protocol for DLIs 1 through 7 will be the independent APA. The terms of reference of the firm carrying out the APA must be acceptable to the World Bank. IDA will disburse funds to MoFED only once a year based on independent annual performance reviews. 70. The APA will measure the performance of ULGs against the Program’s minimum access conditions and performance indicators (see Annex 10 for detailed list of Program minimum conditions and performance measures). The results of ULG compliance with minimum conditions will determine the disbursement of DLI 1. The results of ULG performance against the Program’s performance measures will determine disbursement of DLIs 2 and 3. As part of DLI 3 verification, starting in year three, the findings of value for money audits will be included in the APA. In addition, the APA will also measure the performance of regional governments with respect to capacity building, timely completion of ULG financial audits, timely review of 23 ULG safeguards practices, and support to ULG revenue enhancement, which will determine the disbursement of DLIs 4, 5, 6 and 7, respectively. 71. The APA consultants will submit the APA simultaneously to the government and the Bank for review. The Bank, after discussions with MUDHCo, will retain the right to make the final decision whether a DLI has been achieved or not. In addition, the Bank may contract independent consultants to spot-check the findings of the APA as an input to the Bank’s review. Except for factual errors, the findings of the APA (as confirmed by the Bank) will be taken as final. The APA consultants will calculate the allocation to each ULG and regional government as per the formula in the Bank’s disbursement table, and will submit the suggested disbursement amounts (along with the full assessment report and its findings) simultaneously to the government and the Bank for review. 72. For DLIs 1, 2 and 3, ORAG’s audit results for ULGs will be used to verify that a ULG has met the minimum condition of having a clean audit. The sum of these individual amounts will comprise the disbursement to be made for that year. For DLIs 1 through 7, as part of the due diligence and implementation support, the Bank will review (a) the assessment results, and (b) the allocations for each ULG and regional government. 73. The verification of DLIs related to central government performance (DLIs 8 and 9) will be based on administrative reports and information from the APA. The information will be confirmed by the Bank during its regular implementation support missions. 74. For all DLIs, IDA will disburse funds to MoFED once a year. Disbursements from MoFED to BoFED, and from BoFEDs to ULGs’ offices of finance and development (OFED) will be twice a year, based on the results of the APA (flows to ULGs will be in the beginning of July and January of each year). The disbursement schedule will be reviewed at the end of the first year and adjusted if necessary. For DLIs 4 through 7, MoFED will transfer funds to the regional governments’ BoFEDs once a year. BoFEDs will transfer funds to the regional entities (DLIs 4, 5, 6, and 7). To ensure predictability, ULGDP II indicative planning figures (see Annex 1) will be shared with ULGs and regional governments, although actual annual disbursements will be based on performance and achievement of the DLIs. ULGs will be informed in February of each year of their actual disbursement for the following fiscal year, as soon as the annual performance assessment is complete and the ULG audit results (financial audit, IPA, and the value for money assessment) are available. Disbursement of funds associated with the federal government (DLIs 8 and 9) will be made from MoFED to MUDHCo once a year. IV. ASSESSMENT SUMMARY A. Technical (including program economic evaluation) 75. Strategic relevance. Ethiopia is urbanizing rapidly. While effective urbanization is key to Ethiopia’s growth, there are serious challenges to it, comprising (a) infrastructure and service delivery gaps and urban administrations institutional capacity weaknesses, (b) increasing urban population and higher demand for the already limited services and infrastructure, and (c) a significant fiscal gap to help ULGs overcome these challenges. The fiscal gap is due mainly to 24 the inadequacy of the current fiscal system in Ethiopia to meet the financing needs of these fast growing ULGs. Within the fiscal system, ULGs receive recurrent support from regions through block grants to meet their mandate to carry out the state functions which have been delegated to them from the regional governments and some financing for core public sector employee salaries. In addition to these resources, there is almost no support for capital investments. In most cases, ULGs have to meet the infrastructure investment financing through their own source revenues. The government wishes to implement ULGDP II to address these shortcomings, in the context of the overall evolution of its intergovernmental fiscal system. In this context, the Program rationale is to address the current urban infrastructure gaps and strengthen the institutions of both the ULGs involved in service delivery and the regions and MUDHCo for support for urban management and improved urban services. As such, the Program will be in important continuation of the improvements in infrastructure and services made in the 18 cities under ULGDP, and an important step in rolling out the approach to the next group of 26 ULGs. Given the importance of urbanization and the role of ULGs for Ethiopia’s overall economic growth on the one hand, and the current fiscal gap which prevents ULGs from fulfilling this role on the other, the Program has high strategic relevance for Ethiopia’s development priorities. 76. Technical soundness. ULGDP II draws heavily from the extensive experience in the urban sector, most recently under the ULGDP. These experiences, and those from other similar operations in relevant countries with the similar modalities, have proved that the types of activities to be implemented using the Program funds at the ULG, regional, and MUDHCo levels are highly likely to produce results of improved coverage and quality of core urban services. They are also likely to strengthen institutional capacity of the participating ULGs, regions, and the federal agencies involved. In addition to building on the experience of the ULGDP, the Program design also addresses challenges faced. These include ensuring that the annual assessments are undertaken on time, strengthening the capacity building support (supply and demand side), taking Addis Ababa out of the Program scope to ensure that the unique circumstances of the city are addressed properly through Addis Ababa specific projects, and expanding the incentives to support at all tiers of governance, including regional governments. In addition, the design of the Program has benefitted from the knowledge and experiences of internal and external experts and the experiences from performance-based grant systems from various countries. An increasing number of countries have introduced performance-based grant systems, and many of these are linked to PforR operations with focus on urban investments, such as Uganda and Tanzania. 77. Further, to ensure the sustainability of investments financed by Program funds and of the existing stock, each ULG will be assisted with asset management, and in planning capital investments, operations and maintenance, and revenue generation. Support for ULG enhancement of own source revenues will include: expanding the revenue base by source and revenue targets, billing, collection, enforcement, complaint resolution, information, communications, and capacity building activities. To this end, the basic tenets of the current assessment system have been refined to enhance ULGs’ capacity for: generating own source revenues; managing fiduciary, social, and environmental systems; implementing projects; and maintaining and operating urban infrastructure and services. Own source revenue generation challenges experienced in ULGDP at ULG level have been addressed through the strengthening of the minimum conditions and performance measures related to own source revenue. Minimum 25 conditions, comprising requirements in planning, public financial management, social and environmental systems management, and procurement must be achieved and maintained by participating ULGs throughout the Program. If ULGs do not achieve the minimum conditions, they will not get access to the funds from DLIs 1, 2 and 3, but will be supported through the capacity building activities. In addition to the minimum conditions, a sub-set of the performance measures target urban institutional performance in core areas such as planning, budgeting, public financial management, own source revenue generation, procurement, assets management, governance and infrastructure delivery. These measures are detailed in the performance assessment guidelines, prepared by the government for the Program. The performance results approval and verification protocol process will be formalized through systems and procedures for approval, complaint handling, and publication. The performance assessment will be conducted on time for the ULG budgeting and planning cycle Like ULGDP they will continue to be outsourced to a private, neutral, company to ensure that results are objectively measured, credible, and that the general credibility of the entire system is maintained. The systems and procedures developed under the ULGDP are largely the same, with a number of core refinements to ensure the timeliness of the assessments, sharpen and strengthen minimum conditions and performance measures, and strengthen the incentive mechanism by adjusting grants to match changes in the performance of the ULGs. Based on the above, the technical design of the Program will contribute to the overall goal of efficiently producing results. The Program technical design reflects international good practice in determining the grant size. In addition, the design ensures, to the extent possible, that the incentives are in place for Program stakeholders to effectively contribute to the Program’s success. 78. Expenditure framework. The Program’s expenditure framework (as per table below) consists of a total of US$556.55 million, of which US$499.55 million (US$176.55 from the government and US$323.00 from IDA) will constitute the performance-based grants and go directly to Program ULGs for investments specified under the investment menu (Annex 1). A total of US$52.00 million will support capacity building efforts for the regional and federal government level activities and results directly linked to the execution of the performance-based grant system; and US$5.00 million will support the federal government’s efforts to administer the Program (focusing on APAs and value for money audits). Program funds at the ULG level will finance goods, services and training. These funds will flow from the federal government to the urban local governments, through regional governments, and will be disbursed on a bi-annual basis. The current ULGDP funding flow system will be maintained with a few improvements such as bi-annual, timely and predictable disbursements. The Program will use these well- established channels which form part of the current Ethiopian budget system. 26 Table 6: Program expenditure framework (US$ million) Classification FY2015 FY2016 FY2017 FY2018 FY2019 21 Total 22 23 78.75 105.20 105.20 105.20 105.20 499.55 Performance based fiscal transfers to 44 ULGs (DLIs 1, 2 and 3 which measure Program minimum conditions and performance measures) Of which from regions and cities* 28.60 36.99 36.99 36.99 36.99 176.55 Of which from regions only 13.13 18.22 18.22 18.22 18.22 86.01 Of which from cities only 15.48 18.77 18.77 18.77 18.77 90.53 Capacity building and ULG support 5.20 5.20 7.20 5.20 7.20 30.0 by regional governments (linked to DLIs 4, 5, 6 and 7) Federal support and capacity building 5.40 5.40 5.40 5.40 5.40 27.00 Program administration (DLIs 8 and 9) Total 89.35 115.80 117.80 115.80 117.80 556.55 * Regions and cities contribute to the performance-based allocations as follows: regions participating in ULGDP: (Amhara, Oromia, SNNPR, and Tigray) will contribute 30 percent of funding in addition to the IDA grants, new regional states participating in ULGDP II will contribute 20 percent. New cities in these (developing) states will contribute 10 percent, new cities in the other regions will contribute 20 percent, and the cities benefiting from the ongoing ULGDP will contribute 30 percent. Dire Dawa and Harar will contribute 50 percent of the IDA grant. Notes: Figures in the table may not add up due to rounding. 79. Economic evaluation. The economic analysis of the Program assessed: (a) the rationale for public provision of infrastructure and services, (b) their economic impact, and (c) a counterfactual scenario where the Program is not introduced. The rationale for public provision and financing to increase the institutional capacity and performance of ULGs to deliver urban services is strong. Good local governance is a combination of creating the proper legal, political, and institutional framework and of actively building capacity of local governments. At the ULG level, the Program will finance investments in core urban public goods and services—such as roads, drainage, sanitation, and solid waste management—which would not be provided without significant public interventions. 80. Various studies show the benefits of investing in these areas. First, a study undertaken by “Sanitation and Water for All” indicates that the economic rate of return is high, and in the range of 15-20 percent for urban investment projects in Ethiopia. Within the most important sector for ULGDP—the road sector—gravel roads have an economic rate of return ranging from 7–60 percent, depending on the length of the road. The highest rates of return are on the shortest 21 Program expenditure framework ends in FY19, as this is the final year of disbursements. The Program will continue to be implemented, using the funds disbursement in FY19 though the first half of FY20. This is consistent with the results framework and the expected IDA disbursements table in the PAD datasheet. 22 Comprised of US$50.14 million IDA and US$28.60 million government funds from regions and ULGs. 23 Comprised of US$68.21 million IDA and US$ 36.99 million government funds from regions and ULGs. 27 length of the roads, exactly the types of roads to be supported by the Program. Furthermore, cost-effectiveness analysis for the roads sector on the basis of data collected under the current ULGDP shows that unit costs are generally lower than in non-ULGDP projects. Moreover, the costs of cobblestone roads in particular—which have absorbed the majority of ULGDP funds— are much lower than similar sized asphalt roads, and create similar benefits with lower maintenance costs. Table 7: Cost of cobblestone roads compared with asphalt roads, selected cities Cobblestone Road Cost Asphalt Cost City (ETB per square meter) (ETB per square meter) Adama 400–500 1,430 Hawassa 320 1,090 Mekelle 300 1,000 Axum 320 1,300 Source: ARPEDS CONSULT. 2011. “Assessment of the quality and value for money of investments undertaken under ULGDP.” 81. A specific cost benefit analysis has been undertaken for the investments in cobblestone roads. With and without project scenarios have been defined in order to identify the net benefits of the investment, with cash flow discounted at 10.23 percent (a discount rate developed by MoFED as a proxy for the opportunity cost of capital in Ethiopia, which is consistent with the 10–12 percent notional figure used for evaluating Bank financed projects). The analysis considers the stream of costs and benefits over a 20 year period (2015–2039). In addition, several other potential benefits, including improvements to the quality of urban dwellers' lives brought by facilitating mobility, flood-reduction and positive health and productivity externalities created, are not factored into the cost-benefit analysis because of lack of reliable data. Therefore, the estimated benefits from the cobblestone investments can be considered conservative, and it can reasonably be assumed that the actual benefits will be much higher. Results of the project economic viability as measured by the net present value (NPV) and the economic rate of return (ERR) and its sensitivity analysis to changes in cost and benefit streams are summarized below. Table 8: Summary of the economic analysis of investments in cobblestone roads Description NPV (US$ million) ERR (percent) Base case 98.7 20 20 percent cost increase 72.7 16 20 percent revenue reduction 52.9 15 82. The NPV amounting to US$98.7 million and an ERR of 20 percent indicates that investments in cobblestone roads are economically viable, even without considering other non- quantifiable benefits. The economic impacts of the project for all economic agents, including the transport users as well as the residents of the Program ULGs is significant. An analysis of the project sensitivity test results for a 20 percent increase in cost and a 20 percent reduction in benefits shows that the rate of return and the net present value remain at acceptable levels. The internal rate of return remains higher than the 10 percent opportunity cost of capital in all cases 28 and NPVs are found to be positive, thus confirming the viability of the project under various scenarios. 83. The exact composition of investments which will be undertaken across Program ULGs are not known at this time, since they will be determined through a participatory planning process. However, the experience of the current program and other similar interventions indicate several potential benefits, which will be quantifiable after conducting post-construction evaluation and the value for money audits, which will start from year 3 of the Program. At this stage of design, baseline data and appropriate assumptions on the stream of benefits and costs over the life of the Program can be made to estimate quantifiable benefits for sample categories of sub-projects which will be most likely chosen by the ULGs. These results will be validated after the post construction evaluations of the sub-projects are subjected to value for money audits, cost effectiveness analyses, and cost benefit analyses. Assessment of (a) the counterfactual scenario where the Program is not available and where the fiscal gap mentioned above continues, and (b) the potential economic impact of the Program discussed above, shows strong rationale for the proposed intervention. 84. Under the counterfactual scenario without the Bank-supported Program, the target ULGs would continue to face a large fiscal gap and increasing deficits of urban infrastructure and institutional capacity. This in turn would hinder the economic development of Ethiopia. This alternative route will mean that the Program ULGs will face serious challenges in meeting their ever-increasing residents’ expectations of delivering reliable urban services, as well as a possible deterioration and, in some cases, a collapse of existing infrastructure. Without the proposed Bank-supported Program, the support to ULGs under the existing intergovernmental fiscal architecture would be severely inadequate in achieving the objectives of the government’s GTP and urban policies. 85. To the extent possible and appropriate, the Program will promote local private sector development. As under the ULGDP, the implementation of almost all Program activities will be contracted out to the private sector. More than 2,000 medium and small enterprises have been involved in the construction of investment projects under the ULGDP. These numbers are expected to rise with the proposed investment menu and likely investments. ULGs, as implementing agencies, will retain their supervisory roles. MUDHCo, as the main executing ministry, will retain oversight and quality assurance role for Program implementation. These arrangements are considered adequate in terms of economy, efficiency, and effectiveness in addressing the urban development issues at hand. B. Fiduciary 86. An integrated fiduciary assessment for the proposed Program was carried out on the fiduciary systems of MUDHCo, and in a sample of participating regional and urban local governments that will implement ULGDP II, consistent with Operational Policy/Bank Procedure (OP/BP) 9.00, Program-for-Results Financing. A special survey was designed for assessing the financial management performance of cities. During September and October 2013, teams visited all 26 new cities joining the program to collect this information. For the 18 cities in ULGDP, data was obtained and analyzed from the last three year’s APAs. As part of the fiduciary 29 assessment, the Bank carried out a procurement system assessment for the proposed ULGDP II between May and September 2013. The review included applicable procurement systems, rules and procedures, including oversight mechanisms at the program implementing entities. The program implementing entities include MUDHCo, regional BoFEDs, and participating cities. All the regions and 18 of the 44 participating cities have been visited and assessed. Fraud and corruption and complaint handling mechanisms were also assessed. 87. The fiduciary assessment entailed a review of the capacity of the sample participating entities on their ability to (a) record, control, and manage all Program resources and produce timely, understandable, relevant, and reliable information for the Recipient and the World Bank; (b) follow procurement rules and procedures, capacity, and performance focusing on procurement performance indicators and the extent to which the capacity and performance support the program development objectives and risks associated with the Program and the implementing agency; and (c) ensure that implementation arrangements are adequate and risks are reasonably mitigated by the existing framework. Financial management 88. At the national level, the assessment notes that the Public Expenditure and Financial Accountability (PEFA) assessment ratings of 2010 place Ethiopia in the top tier of countries in the Africa Region in public financial management. Some of the areas where further improvements were needed are: multi-year planning, unreported government operations, revenue generation (including tax collection), budget execution, external and internal audit and external oversight. The government has a well-designed public financial reform program that is addressing these weaknesses in a systematic manner. 89. This financial management assessment builds on the lessons learned during the implementation of the ULGDP (2008–2014). The challenges faced by the ULGDP were that the program was implemented as a special purpose grant outside of government systems at the region and city level, and that cities used a mixture of manual accounting, the IBEX accounting system, and discrete systems such as Peachtree to account for the ULGDP expenditures. In the initial years of the program, this led to large variations in reporting on ULGDP between the city, regional, and federal levels. Since the APA did not take place in a timely manner as scheduled, there were delays in release of funds, resulting in cities being forced to manage two capital investment budgets, their own and those funded by ULGDP. The flow of funds was therefore a challenge. Internal audit is an area of weakness across the country. In the cities covered by ULGDP this has remained a major area of weakness. While the backlog of external audits has been resolved and the ratings of all cities have now been classified as “qualified,” there is significant variation in risk between all the cities classified as “qualified.” There is need to improve the quality of external audits and their coverage. ULGs also need to address issues highlighted in the audit reports. There are five cities where follow up to audit report findings varies from 0–40 percent, and this is a major area of concern. On the revenue side, while cities seem to have made remarkable progress in increasing own source revenue, there is a possibility of “gaming” with 11 of the 18 cities exceeding their own revenue targets in EFY 2004; progress has been most significant on the state revenues rather than on the municipal revenues. Going forward there is a need for clear targets to improve revenue collection, and for performance 30 measures that focus on municipal revenue generation and on the budgetary contribution of ULGs for urban investments and maintenance. 90. Many of these issues will be addressed during ULGDP II. It has been agreed that ULGs will follow an agreed template for proclaiming the budget. This budget will not only specify the flow of resources to the city level but will also enable the tracking of funding used at the sub- program level within the city. Fund flows will greatly improve, since funds will be disbursed twice a year through government systems, and cities will have a predictable flow of resources. All 44 cities covered by ULGDP II are now using IBEX for accounting for government funds. The use of IBEX will be standardized for ULGDP and resources for equipment and training will be provided to the cities. This should greatly improve accounting and reporting. On internal audit, BoFED’s inspection department will take the lead in improving the quality and timeliness of internal audit reports. They will engage with the internal audit units in the 44 cities and provide ongoing support in this area. In the area of external audit, OFAG will take responsibility for ensuring that quality audits are produced in a timely manner. OFAG will engage with ORAGs to ensure that this happens in a cost efficient and timely manner. To ensure effective follow up of external audit findings, an incentive system is being built into the DLI system under ULGDP II. Through these initiatives, it is expected that most of the financial management issues of concern under the ULGDP would have been adequately addressed. Procurement 91. The detailed procurement assessment reveals that in all regions and ULGs there is an adequate legislative framework and systems in place for public procurement and contracts management. The major issues with all the implementing agencies, aside from MUDHCo, are the weak implementation of applicable public procurement rules and procedures, including oversight mechanisms. The regions as well as the ULGs have limited capacity to follow the rules and procedures and there is therefore a risk of the entities’ poor performance in implementing the applicable procedures under the program. The overall performance of procuring entities (ULGs) in complying with the established system and therefore ensuring transparency, efficiency, and economy is found to be deficient. Risk mitigation measures have been defined which will be part of DLIs and performance measures, procurement audits, and the Program action plan. 92. Four types of risk mitigation measures are proposed. The first is the use of minimum conditions and performance measures for ULGs participating in the Program. Only those cities that have appointed a focal person for procurement can access Program funds for infrastructure and service delivery. In addition, performance with respect to preparation of procurement plans and compliance with procurement procedures is a performance measure, and will be assessed each year. The second risk mitigation measure is the implementation and monitoring of the agreed Program Action Plan (PAP). There are a number of measures in the PAP aimed at strengthening capacity of ULGs and other entities for procurement and contracts management. These have been agreed with the Recipient and are summarized in the table below. The third risk mitigation measure relates to the procurement issues in the APAs and the IPAs. Currently, the Regional Public Procurement Agencies (RPPAs)—although mandated to carry out procurement audits in their jurisdictions—do not have the capacity to carry out IPAs. Therefore, 31 during the first two years of implementation, the APA will cover in detail indicators of procurement audits. In the third year of implementation, the RPPAs are expected to conduct the annual IPAs and to provide management corrective measures in response to their findings. The capacity building for MUDCHo, regions, and ULGs will address the identified weaknesses revealed in the APA and independent procurement audits. Fraud and corruption 93. The main factor that leads to fraud and corruption is a weak fiduciary environment. Improving this environment in the participating ULGs is a specific goal of the Program, and will be addressed directly through various program design features. Specifically, these are: • Minimum conditions and performance indicators. The annual performance assessment will include as minimum conditions and performance indicators measures related to the (a) quality of financial management and procurement systems, (b) adequacy in handling grievances related to fraud and corruption, and (c) transparency and accountability in procurement and financial management. • Capacity building program. Elements of the capacity building program will focus on accountability and monitoring at all three government levels to minimize the fraud and corruption risk. Moreover, the capacity building mobile teams (federal and regional) will include core fiduciary staff. • Value for money audits. Value for money audits will be conducted as part of the annual assessment (starting in year 3). 94. There is a robust legal framework for addressing fraud and corruption in Ethiopia. The government has established the Federal Ethics and Anti-Corruption Commission (FEACC) with a mandate to expand and promote ethics and anti-corruption education, to prevent corruption (through review of working procedures and systems), and to investigate and prosecute alleged corruption offences since 2001. 24 The government has also declared that it follows a zero-tolerance policy toward corruption. The FEACC has received political support at the highest level in the country. Since 2007, all the nine regional governments have established their own Regional Ethics and Anti-corruption Commission (REACC) as per the regional laws. FEACC is responsible for coordinating efforts of Anti-corruption across regions including ULGs and preparing a national report on anti-corruption efforts across the country. 95. Complaints handling mechanisms. Complaints handling mechanisms are in place at all levels of government, as per the requirement of two national proclamations (433/2005 and 434/2005), and institutional level operational guidelines. These proclamations clearly define the procedures to follow for suspected corruption offences as well as for administrative complaints related to the Program. There are a number ways of engaging citizens in complaints handling, and in promoting transparency. At the grassroots level, citizens have experience in forming community groups, or in appointing committees or representatives to liaison with government and seek solutions. Some ULGs have created forums to promote dialogue between citizens and service providers, and for joint monitoring and assessment of performance. Although the system 24 Proclamation 433/2005 and regulation 144/2008 provide for the role, powers, duties, and responsibilities of FEACC. 32 of complaints handling is very well established in Ethiopia, MUDHCo and the regional and local governments will take full responsibility in ensuring that the Program beneficiaries are regularly informed about the complaints system—an important requirement that will help in ensuring the program meets its development objectives. 96. Complaints regarding the Program. These can be received from internal or external clients through various channels, including in person or in writing. At the ULG level, complaints are lodged in the city complaint handling body, in the unit consisting of ethics liaison unit officers, with the police, with other delegated bodies, or directly with REACC. Information on fraud and corruption and complaints regarding the Program Complaints lodged at the ULG level will be compiled at the Regional level and shared with FEACC. FEACC will share the reports twice a year with the Bank. 97. Complaints handling related to procurement. The federal procurement proclamation established the “Board for Review and Resolution of Complaints in Public Procurement,” and appointed a board with five members. A complaints review unit in the public procurement agency receives and compiles complaints and presents them to the board. It also receives offence reports from procuring entities against suppliers. The board refers any procurement complaints perceived to involve fraud and corruption to FEACC or to REACC, or to both, for investigation. 98. Revised procurement legislation and directives of each regional state. These provide mechanisms for submitting complaints with which ULGs are required to comply. Complaints from suppliers or bidders can be submitted to the procuring entity; the head of the procuring entity responds to the person making the complaint. If the person lodging the complaint is not satisfied, he or she will appeal the case to the procurement complaint review board (the majority of the board members are public officials and from procuring agencies), and may then take the matter to court if not satisfied. The head of BoFED or the head of the economic and social development department gives final approval of the recommendation of the board or committee. 99. If the complaint review board/committee suspects the case is related to fraud and corruption, then the case is directed to the REACC or FEACC. Any bidder, procuring entity, or citizen, including ethics unit officers, and federal and regional auditor generals, can lodge procurement related complaints to REACC or FEACC. In addition, as mentioned above, the ethics liaison unit officer of each entity report fraud and corruption related cases. Although the anti-corruption law in Ethiopia makes provision for people to complain directly to the FEACC and REACC, if they suspect a case of fraud and corruption, the Program coordinators will emphasize this point to all the procuring entities as part of the Program’s information dissemination. 100. Fraud and corruption risks associated with fiduciary risk. To address these risks, the proposed ULGDP II will be aligned to the Bank’s Anti-Corruption Guidelines, “Guidelines on Preventing and Combating Fraud and Corruption in Program-for-Results Financing,” dated February 1, 2012. The memorandum of understanding signed between the Bank's Integrity Vice Presidency and FEACC on October 3, 2011 provides a framework for cooperation and sharing of information on fraud and corruption allegations, investigations and actions taken through the 33 Program, including on procurement. The memorandum of understanding will provide the Bank and its Integrity Vice Presidency with a foundation for expanding the existing working relationship to cover future cooperative investigations under the Program when needed, and for helping to ensure that the government and the FEACC can implement their commitments under the Anti-Corruption Guidelines. The government also committed to use the Bank’s debarment list to ensure that persons or entities debarred or suspended by the Bank are not awarded a contract under the Program during the period of such debarment or suspension. Annex 5 contains detailed information on how the ULGDP II addresses the issue of fraud of corruption. 101. Overall fiduciary risk. For these reasons described above, overall, the fiduciary assessment concludes that the ULGDP II’s financial management and procurement systems are adequate to provide reasonable assurance that the financing proceeds will be used for intended purposes, with due attention to principles of economy, efficiency, effectiveness, transparency and accountability, and for safeguarding Program assets once the proposed mitigation measures have been implemented. Appropriate systems to handle the risks of fraud and corruption, including effective complaint-handling mechanisms, have been agreed on and established. An action plan for mitigation of risks has been included in the main report of the fiduciary assessment. C. Environmental and Social Effects 102. In accordance with the requirements outlined in the OP/BP 9.0, an Environment and Social Systems Assessment (ESSA) has been undertaken. This included a comprehensive review of systems and procedures followed by MUDHCo, regional, and ULGs to address social and environmental issues associated with the ULGDP II. The ESSA report provides an assessment of the extent to which the existing program procedures for social and environment management conform to the core principals of environmental and social sustainability, outlined in OP/BP 9.0. It also recommends an action plan to address shortfalls. 103. The ESSA confirms that Ethiopia has an adequate legal framework for environmental and social management in the urban sector. Specifically, the country has a robust set of environment and social regulations, a functioning court system, and accountability provisions integrated into the system. However, the quality of implementation and the effectiveness of existing provisions of the environment and social regulations are very uneven. An assessment of environmental and social regulations, policies and procedures, including institutional capacity and practices indicate risks associated with the program design and implementation. Many of the risks relate to implementation, including lack of application of standard procedures for risk screening and for implementation of mitigation measures among ULGs, lack of coordination among various agencies, and lack of technical capacity and resources. 104. Given significant variation in the capacity of participating ULGs for environment and social management of risks, the ESSA identified the following three key areas for strengthening: 34 • Institutional arrangements. The institutional arrangements for program implementation will be strengthened based on the experiences from ULGDP. There will be a clear division of tasks and responsibilities between federal, regional, and ULGs, consistent with existing legal provisions, regulations and guidelines. • Defining an environmental and social management system at city level. Under the ULGDP II, as a minimum condition, ULGs must demonstrate that they have established a functional system for environmental and social management that outlines specific roles and responsibilities for environmental and social risk screening, due diligence and regulatory requirements, consultation and coordination with other local and regional agencies, technical tools for implementation and monitoring, a staffing and capacity building plan, and the like. After the first year, as part of the performance indicators, ULGs will also be required to demonstrate that all projects are screened for impacts, that mitigation measures are defined, and that all projects have environmental approvals from the REPAs prior to initiating works. • Technical guidance and capacity building. ULGs can benefit significantly from sector specific technical guidelines that integrate environmental and social requirements for activities such as road construction, waste management, management of slaughter houses, provision of sanitation services, and others. MUDHCo is compiling such guidelines to be shared with the ULGs. • Addressing resource constraints. Measures to overcome constraints with respect to human and financial resources are incorporated into the Program’s incentive structure, as well as capacity building and training. 105. A public consultation meeting was held to discuss with various stakeholders the key findings and proposed recommendations of ESSA. Key points raised by participants pertained to the design of the program, processes required to access funding, areas to improve environmental and social management at city and regional levels, issues pertaining to dealing with encroachers and squatters, issues of environmental impact assessment screening and scoping requirements, challenges in monitoring and reporting on compliance during implementation, environment and social management capacity of REPAs and ULGs, lack of capacity in new participating ULGs, and issues in dealing with vulnerable groups. The meeting participants provided broad support to the program, including ESSA’s key findings and approach for future capacity building. The meeting endorsed the recommended approach taken to integrate the environment and social sustainability requirements into the Program’s DLIs, and to focus on incentives for improved performance with respect to environment and social management at ULGs, regions, and MUDHCo. 106. Activities to be financed under the ULGDP II will be the same as those being financed under the ULGDP. These include core urban infrastructure investments in roads, sanitation services, solid waste, public parks and greenery, and street lighting. To maximize gains and minimize risks, a well-defined menu has been prepared to exclude World Bank environmental assessment category A projects from the Program. 35 107. The design of the ULGDP II addresses environmental and social challenges and gaps. For example, ULGs must comply with the following to participate in the Program: • Council endorsement of city level environment and social management systems document, which includes procedures for screening of subprojects for environmental and social risks, measures to minimize and mitigate such risks, and plans for (a) monitoring environmental and social impacts and (b) implementation of mitigation measures. • Evidence of adequate institutional capacity and systems to properly address environmental and social risks, including appointment of an environmental and social safeguards focal person. • Establishment and operation of a grievance and redress system. 108. In addition, the following measures have been incorporated into the ULGDP II Program Action Plan to further strengthen environmental and social safeguards: • Pre-requisite for environmentally and socially sensitive investments. Investments in sanitary or controlled landfills could cause significant environmental and social concerns if not planned, screened, and managed properly. Experience from the ULGDP indicates that a preventive approach in planning landfills has minimized the environmental and social risks. This preventive approach follows the guidelines and procedures for planning solid waste management, including for final disposal of solid waste using scientifically designed landfills. The guidelines include requirements for identification of location which is away from habitation; has a geology that causes least environmental harm to the ground water and soil of the area; requires the landfill to have a high density polyethylene liner to prevent any leaching of polluting overflow into ground water; requires a leachate collection and treatment system; and requires monitoring of ground and surface water during the operation of landfill. ULGs must also comply with the Ethiopian environmental regulations that require that an environmental and social impact assessment is undertaken for each site in consultation with the neighboring community, submit the report to the relevant REPA, and obtain REPAs clearance before proceeding with the subproject. In addition, under the Program, ULGs must demonstrate a sound and efficient system of waste segregation, recycling, collection, transportation, and treatment before they proceed with the investment to further minimize environmental and social risks of any landfill, regardless of size. All such screening of risks will be part of the environmental and social management system (ESMS) that is a Program minimum condition, and on which specific training will be provided to each ULG by a team of national and international experts. The screening procedures and implementation of environmental management planning for each site and city will be verified through an independent assessment to be undertaken annually by the REPA, and verified through another assessment, before disbursement. 36 • Evidence of implementation of social and environmental safeguards. The ULGs will be required to generate evidence (for independent verification) that all capital projects in the previous fiscal year were screened against the set of environment and social criteria in the planning stage. They must also show that prior to starting works (a) they have received approval from REPA for environmental management plans and resettlement action plans (where relevant), (b) implemented the resettlement action plans. • Incentives to ULGs for being environmentally responsible and socially inclusive. Regional governments will be able to access Program funds by monitoring verification of a functioning environment and social management system of all ULGs under their jurisdiction. D. Integrated Risk Assessment Summary 1. Integrated Risk Assessment Summary Table 9: Integrated Risk Assessment Summary Risk Rating Technical Substantial Fiduciary Substantial Environmental and Social Moderate Disbursement Linked Indicators Moderate Overall Risk Substantial 2. Risk Rating Explanation 109. Although MUDHCo, the regional governments, and the ULGs have gained considerable experience with managing a performance-based grant system under ULGDP, the Program risk is assessed as Substantial compounded by four main risks. The first risk relates to the weak capacity of the 26 newly participating cities to successfully manage significant new responsibilities and resources. The second major risk is that the large number of ULGs (44) that will receive performance grants will stretch the ability of the regional governments, MUDHCo, and the Bank to provide adequate implementation support to cities. A third risk is that cities may not be able to fully address the fiduciary risks arising from implementation of infrastructure subprojects. The fourth risk relates to the addition of the regional governments as participating entities. As regional governments did not participate in ULGDP implementation, their capacity and willingness to timely and adequately execute their responsibilities to support cities is untested. Significant measures have been included in the Program design to mitigate the identified risks. These measures include the minimum access conditions, detailed annual performance assessments, value for money audits, independent procurement audits, strengthening of 37 complaint and grievance handling mechanisms, and annual capacity building plans. The Bank’s Program team will continuously monitor performance to ensure that both anticipated and unanticipated risks are addressed as quickly as possible once they arise. The Program action plan follows a risk-based approach and outlines the main measures through which risks to the achievement of Program’s development objective will be mitigated. E. Program Action Plan 110. To address the risks, MUDHCo, the regional governments, and the ULGs will address the key issues as presented in the Program Action Plan. The most immediate of the actions are listed below. The full Program Action Plan is presented in Annex 8. • To ensure sufficient capacity in MUDHCo to manage the ULGDP II, MUDHCo will fill its vacant positions and engage additional staff by early 2015. • To ensure that the independent annual performance assessment is completed on time, MUDHCo will contract a firm by end August each year. • To ensure sufficient capacity in regional governments to support Program ULGs, the regional governments will fill staffing gaps in core positions such as procurement, M&E and engineering and planning support during implementation. • To ensure that ORAGs execute their audit responsibilities towards ULGs, regional governments will provide adequate funding and agree with the ORAGs that they will complete audits of their respective ULGDP II cities by January 7 of each year. The ORAGs will also deal urgently with any backlogs in audits. • To ensure that ULGs have sufficient capacity to participate in the Program, ULGs will throughout implementation maintain focal persons under the coordination of the city manager in the following areas: revenue generation, procurement, environmental and social sustainability, M&E, civil engineering, public financial management, and internal audit. 38 Annex 1: Detailed Program Description Ethiopia: Second Urban Local Government Development Program PDO 1. The Program Development Objective (PDO) is to assist the Recipient in enhancing the institutional performance of participating urban local governments in developing and sustaining urban infrastructure and services. Program Scope 2. Under the proposed ULGDP II, the government of Ethiopia intends to expand the coverage of the performance-based fiscal transfer instrument to 26 additional ULGs, bringing the total covered to 44. These 26 ULGs represent the next tier of important cities in the country with the highest populations. Over time, the government intends to roll out the performance-based fiscal transfer instrument to all 85 ULGs in the country, including Addis Ababa. The existing ULGDP constitutes phase 1 of the policy; the proposed ULGDP II covering 44 ULGs will be phase 2. ULGDP II will support cities with a total population of 4.3 million, or about 26 percent of the total urban population. 25 In addition, the government plans, under ULGDP II, to assist the country’s nine regional governments to more effectively play their role in supporting cities growth and development. 3. ULGDP-II’s main features are defined as: • Program duration: five and a half years – July 2014 through December 2019. • Program budget envelope: US$556.55 million (table 1, below). • Main expenditure items:  Performance based grants to 44 ULGs for urban infrastructure and services investments and capacity building (US$499.55 million);  Regional governments capacity building and oversight/support to constituent ULGs (US$30.00 million);  MUDHCo to administer and coordinate the program, and strengthen its capacity to support and guide the regions and ULGs (US$27.00 million); Table 1: Program financing Source Amount (million) Percent of Total Government 26 US$176.55 32% IBRD/IDA US$380.00 68% Total Program Financing US$556.55 100% 25 The most recent official national census was completed in 2007. The official Central Statistics Agency provided updated estimate of cities’ populations 2013. As agreed with government, the Program uses these figures. 26 The regional government and ULGs will be making funding contributions at various levels as detailed in the annex 4. Contributions from ULGs will constitute one of the minimum conditions to be met for each of the ULGs to qualify to receive funding from the Program. 39 4. ULGDP II will maintain most of the design features of ULGDP such as the performance orientation and the measurement of progress and results through independent annual and performance assessments (APA). Also similar to the ULGDP, ULGs may only use Program funds for activities specified in the investment menu—mainly core urban infrastructure such as urban roads and drainage, and sanitation services, public parks, street lighting—and capacity building activities menu (see later section). In addition, cities cannot use Program funds for investments that could have significant negative environmental impacts or that would result in the resettlement of more than 200 people. Compliance with the investment and capacity building activities menu will be a minimum condition and will be verified through the APA each year. An ULG that has used Program funds for activities outside of these menus will not receive Program funds for the following year. 5. The ULGDP II program design takes into consideration the key challenges faced in ULGDP and attempts to align with new government urban policies and strategies (such as the Ethiopian Cities Prosperity Initiative, 2013/14–2025) that have come aboard since. The key changes to the ULGDP II program design addressing these are highlighted below: • All cities will be assessed on the set of minimum access conditions every year, not just at the start of the Program. This is to ensure that cities maintain the staffing and basic systems required to effectively administer urban local governments. • Cities will receive disbursements in direct relationship with their performance score on the APA. This is in contrast to the current system, which provides all cities, which score above a certain threshold with a 20 percent extra (accelerated) allocation. The new system will ensure that every point is having an impact on the actual allocation. • Several new results areas and targets have been added to the performance assessment, reflecting new government policies and the growing administrative sophistication of cities. For example, results areas now include (a) urban land management and urban planning, and (b) employment generation. In addition, all cities are now expected to screen all investments for environmental and social impacts, and to prepare environmental and social impact assessments, and related documents to address any adverse impacts. All cities are also expected to reflect Program funds in IBEX, rather than using a separate accounting system. • Financing for the regional governments and federal government entities (including MUDHCo), will no longer be input-based, but will also be results based. As detailed in the DLIs which target these two levels of government, program funds will be disbursed to these entities only after the verification of the results for which they are responsible. • Disbursements flow to cities in two timely and predictable annual tranches, rather than on the basis of withdrawal applications. • ULGDP II will not include Addis Ababa. Addis Ababa’s institutional, infrastructure, and financial needs are distinctly different than the other ULGs in Ethiopia. Therefore, a possible Addis Ababa-specific project is currently being discussed between the government and the World Bank. 40 • A more structured and systematic approach is adopted for capacity building to support all three levels of government: federal, regional and local. 6. The performance-based grants (including matching funds from ULGs and Regions) to ULGs account for 90 percent of total funding in ULGPD II. As in ULGDP, these performance-based grants are allocated according to a simple population-based formula and in direct proportion to the performance of that local government. The annual allocation for each full grant cycle will range between US$78.74 million (IDA: US$50.14 million, government: US$28.60 million) for the Program start year (fiscal year 2015) and US$105.20 million (IDA: US$68.21 million, government: US$36.99 million) for each of the following four years. In the initial year of the Program, the 26 ULGs that are coming into the program will not participate in the performance assessment. Instead, they will receive allocations for fulfilling the minimum conditions. On average, the Program’s IDA funds will provide about US$14.86 per capita per year for investment in urban infrastructure and services. When disaggregated, the IDA funds will provide about US$13.38 per capita per year for the new 26 cities and about US$15.69 per capita per year for the 18 ULGs currently benefiting from the Program. Including the financing from the regional and urban local government, total Program financing will provide an average of US$19.59 per capita per year for the 26 new cities and US$24.89 per capita per year for the 18 cities already in the Program. The indicative Program allocations to ULGs are presented below. The city population figures, as presented in the table below, will remain fixed until the Central Statistics Agency provides new official figures. Table 2: City populations and Indicative Program allocations City City Population (2013 IDA Funding Government Total indicative Estimates) (US$) Funding Program (US$) Funding (US$) Dire Dawa 269,134 $21,112,695 $10,556,347 $31,669,042 Adama 282,974 $22,198,398 $13,319,039 $35,517,437 Mekele 286,624 $22,484,729 $13,490,837 $35,975,566 Gondar 264,964 $20,785,572 $12,471,343 $33,256,915 Hawassa 225,686 $17,704,339 $10,622,604 $28,326,943 Bahir Dar 198,909 $15,603,770 $9,362,262 $24,966,032 Jijiga 152,674 $10,213,497 $3,064,049 $13,277,546 Jimma 155,434 $12,193,296 $7,315,978 $19,509,274 Dessie 153,691 $12,056,564 $7,233,938 $19,290,502 Shashemene 129,084 $10,126,224 $6,075,734 $16,201,958 Bishoftu 128,408 $10,073,194 $6,043,916 $16,117,110 Harar 112,781 $8,847,306 $4,423,653 $13,270,959 Sodo 109,225 $8,568,349 $5,141,010 $13,709,359 Arba Minch 107,542 $8,436,323 $5,061,794 $13,498,117 Hosaena 100,528 $6,725,064 $3,362,532 $10,087,596 Nekemte 96,657 $6,466,104 $3,233,052 $9,699,156 Asela 86,441 $5,782,680 $2,891,340 $8,674,020 Dilla 84,952 $6,664,211 $3,998,526 $10,662,737 41 City City Population (2013 IDA Funding Government Total indicative Estimates) (US$) Funding Program (US$) Funding (US$) Debre Brehan 83,479 $5,584,530 $2,792,265 $8,376,795 Debere Markos 79,980 $5,350,456 $2,675,228 $8,025,683 Kombolcha 75,078 $5,889,627 $3,533,776 $9,423,403 Adigrat 76,447 $5,997,021 $3,598,212 $9,595,233 DebreTabor 71,149 $4,759,685 $2,379,842 $7,139,527 Gambella 64,499 $4,314,817 $1,294,445 $5,609,262 Sebeta 63,391 $4,240,694 $2,120,347 $6,361,041 Shire Enidasilase 62,769 $4,924,026 $2,954,415 $7,878,441 Burayu 62,806 $4,201,559 $2,100,780 $6,302,339 Ambo 61,900 $4,140,950 $2,070,475 $6,211,425 Woldiya 59,046 $3,950,025 $1,975,013 $5,925,038 Axum 59,269 $4,649,462 $2,789,677 $7,439,139 Robe 57,031 $3,815,227 $1,907,613 $5,722,840 Zeway / Batu 56,104 $3,753,213 $1,876,606 $5,629,819 Adwa 53,763 $3,596,606 $1,798,303 $5,394,909 Butajira 47,978 $3,209,604 $1,604,802 $4,814,407 Alamata 44,092 $2,949,641 $1,474,821 $4,424,462 Areka 45,109 $3,017,676 $1,508,838 $4,526,514 Yirga Alem 43,586 $2,915,791 $1,457,895 $4,373,686 Asosa 40,686 $2,721,788 $816,537 $3,538,325 Wukro 40,103 $2,682,787 $1,341,394 $4,024,181 Mota 33,500 $2,241,064 $1,120,532 $3,361,595 Finote Selam 33,162 $2,218,452 $1,109,226 $3,327,678 Mizan 33,240 $2,223,670 $1,111,835 $3,335,505 Humera 28,744 $1,922,899 $961,450 $2,884,349 Samera 25,209 $1,686,417 $505,925 $2,192,342 Total 4,347,828 $323,000,002 $176,548,206 $499,548,207 Source: Population figures are based on data from the Ethiopia Central Statistics Agency. 7. Annual performance assessments (APAs) will be carried out each year to review each city’s performance. The APAs will review (a) a set of minimum conditions that each ULG will be required to fulfill each year of the Program, and (b) a list of performance measures which track each city’s progress each year. Minimum conditions will function like green and red lights and the performance measures will determine each city’s score. Key results areas measured are (a) participation of citizens in planning and budgeting, (b) fiduciary management, (c) generation of own source municipal revenues, (d) delivery of new infrastructure and services, and operation and maintenance of existing infrastructure and services, (e) accountability and oversight systems and (f) environmental and social safeguards. The results of the APA will also be used to verify the DLIs, which are elaborated in later sections. 42 8. The APA will be aligned with the ULG planning and budgeting process to ensure that results are available prior to the planning of the investment for the coming financial year. Table 3 below shows the overall time-plan for the assessments when the system is fully operational. Some of the major milestones are: (a) the internal assessments to be completed no later than August, (b) external assessments to be completed in October/November, including quality assurance and verification, (c) input to the planning process (indicative planning figures) to be provided in December/January, and (d) the final input—the audit reports of the previous fiscal year—to be given in January. The assessments in the first year will be delayed due to the start-up of the program, and transitional arrangements are planned. The first assessment will start in March and be completed prior to the start of Ethiopia’s financial year 2014/15. Table 3: Overview of the timing of core activities in the assessment cycle Activity Timing Responsibility General Assessment Cycle Review of experiences from past Future years: February– MUDHCo and Bank assessment and necessary changes. March Information to cities about the Four weeks before the MUDHCo assessments with overview of the external assessments— minimum conditions and early August performance measures Internal assessments Undertaken continuously ULGs but no later than two weeks before the external assessment teams arrives Private firm or firms contracted to August MUDHCo conduct the APA. Draft reports sent to MUDHCo and October APA firm the World Bank simultaneously for review. First meeting on APA and November Technical Program Committee discussions of the results, for quality with broad representation of assurance and review. MUDHCo and MoFED. Audit reports sent simultaneously to By January 7 ORAGs BoFEDs and MUDHCo Results of ULG audits of financial January APA firm reports incorporated in the final APA report. Second meeting on APA reviews the January Technical Program Committee APA for quality assurance. with broad representation of MUDHCo and MoFED Final endorsement of results (after February Program Steering Committee and review by the World Bank). Bank Note: As part of implementation support, the Bank team will review the quality of the assessment results. The Bank retains the right to make the final decision whether a DLI has 43 Activity Timing Responsibility been achieved or not. Workshop with ULGs to share February MUDHCo results of the APA and the allocations for the coming financial year. Inclusion of the figures in the budget February/March MoFED drafts. Dissemination of results to the ULGs February/March MUDHCo, regions, and the cities and the public. Planning and budgeting by ULG. February–May ULGs Disbursement of first tranche July MoFED Disbursement of second tranche January MoFED Note: In the first year prior to the assessments, the average likely figures for the ULGDP performance- based grants will be announced. However, the exact figures will depend on the performance of the cities. 9. In the future, assessments of the performance of the cities in the previous financial will be conducted each year from September–November. The results will determine the Program allocations in the subsequent financial year. For example, the assessment to be conducted in September–November 2015 of cities’ performance during 2014/15 (Ethiopian fiscal year 2007) will determine the Program allocations for 2016/17 (Ethiopian fiscal year 2009). However, as the audit results are only available by January 7 after the financial year for which they are conducted, this will be the last “trigger” in the APA. 10. In the first year, minimum conditions for all ULGs will be applied. However, the performance measures will apply only to the 18 ULGs currently participating in the Program. The first assessment, which will be completed later than in the future years, is expected be completed by May 2014 and to be used to determine the allocations for 2015/16 allocations (Ethiopian fiscal year 2007/08). The APA cycle, as planned, is presented below (with the noted delays in the first financial year): First Assessment: For allocations in year 2014/15 • December 2013: Indicative planning figures, based on expected full city compliance with the minimum conditions (all 44 cities), and average scores on the performance measures (the 18 cities in the current Program). • January/February 2014: ULGs budgeting process for 2014/15 starts using the indicative planning figures. • Minimum requirement assessment and assessment of performance (upon completion of contract with firm, expected in May 2014). • June 2014: Final disbursement figures for 2014/15 announced. • July 2014: Results incorporated in the ULGs’ plans and budgets for 2014/15. • July/August 2014: ULGs receive 50 percent of the total allocation for fiscal 2015. • January 2015: ULGs receive 50 percent of the total allocation for fiscal 2015. Second Assessment: For allocations in 2015/16 44 The APA will be conducted tracking most performance measures. • August 2014: Assessment of minimum conditions and performance measures started in all 44 ULGs. • October 2014: Assessment completed, except for the audit findings. • January 2015: Audit results are incorporated in the APA. • February 2015: Allocations announced. • February 2015: ULG budgeting process for 2015/16 starts, based on actual allocations. • July 2015: 50 percent of annual allocation disbursed. • January 2016: 50 percent of annual allocation disbursed. Third assessment: For allocations in 2016/17 The full APA will be conducted tracking all performance measures. • August 2015: Assessment of minimum conditions and all performance measures started. • October 2015: Assessment completed, except for the audit results. • January 2016: Audit results are incorporated in the APA. • February 2016: Allocations announced. • February 2016: ULG budgeting process for 2016/17 starts, based on actual allocations. • July 2016: 50 percent of the allocations disbursed. • January 2017: 50 percent of annual allocation disbursed. Fourth assessment: For allocations in 2017/18 • August 2016: Assessment started. • October 2016: Assessment completed. • January 2017: Audit results incorporated. • February 2017: Allocations announced. • February 2017: ULG budgeting process for 2017/18 starts, based on actual allocations. • July 2017: 50 percent of annual allocation disbursed • January 2018: 50 percent of the annual allocation disbursed. Fifth assessment: For allocations in 2018/19 • August 2017: Third full assessment started. • October 2017: Assessment completed • January 2018: Audit results are incorporated. • February 2018: Allocations announced. • February 2018: ULG budgeting process for 2017/18 starts, based on actual allocations. • July 2018: 50 percent of annual allocation disbursed. • January 2019: 50 percent of annual allocation disbursed. 45 • December 2019: End of Program. Typology of Program activities 11. The menu of investments eligible for funding under the Program will be the same as in the Operations Manual of the ongoing ULGDP, with a few modifications. The full list is presented in the table below. ULGs are encouraged to focus on projects that will contribute directly to creating jobs and increasing incomes, including those using labor-intensive techniques. Table 4: ULGDP II performance grant investment menu Infrastructure/Service Type Roads Expenditure group 1 • Cobblestone, gravel and red ash roads. Expenditure group 2 • Rehabilitation of roads • Bridges, fords and culverts • Pedestrian walkways • Street lighting, etc. Construction or rehabilitation of roads that require significant resettlement of people (more than 200 people) will not be eligible for funding under the ULGDP II. Integrated multiple Expenditure group 3 infrastructure and land services • Servicing of land with utilities (water supply, (residential, micro and small electricity, telecommunications, roads and drains enterprises, industrial zones) (within existing right of way), solid and liquid waste collection and disposal, and other core urban infrastructure). Sanitation (liquid waste) Expenditure group 4 • Sewer reticulation systems (no large canals 27) • Wastewater treatment ponds • Sludge ponds • Community soak away pit and septic tanks • Community latrines: dry pit, ventilated improved pit, ecosan, composting • Vacuum trucks, vacuum handcarts, and the like. Solid waste management Expenditure group 5 • Collection trucks and other collection equipment, collection bins, transfer stations, collection points 27 Sewer reticulation systems canals (primary canals) shall not exceed in diameter 1,000 millimeters or 10 kilometers. 46 • Landfills (of the size of maximum 10 hectares and minimum design criteria as per the solid waste management manual) • Biogas and composting plants • Landfill site equipment including compaction vehicles, and the like. Urban drainage Expenditure group 6 • Drainage systems • Flood control systems, and the like. Built facilities Expenditure group 7 • Urban markets with associated services (water supply, drainage, access roads, and the like) • Development of production and market centers for small businesses • Slaughter houses (abattoirs), with by-products and processing facilities. Urban parks and greenery Expenditure group 8 • Support to urban parks and greenery development projects for beautification. Consultancy services for design Expenditure group 9 and contract management • For studies relating to preliminary and detailed design, contract documentation and supervision relating to the above infrastructure and services, and the like. Capacity Building Support Expenditure group 10 • Up to 5 percent of investment grants can be utilized on capacity building support, see menu for capacity building support below. Capacity building Background 12. The existing ULGDP mainly relied on the legacies of capacity building support from past projects. Capacity building of urban local governments started with the World Bank- financed Capacity Building for Decentralized Service Delivery Project (2003–08). The 18 ULGs that are benefiting under the existing ULGDP all received initial capacity building support from that project. In addition, the Public Sector Capacity Building Program Support Project (PSCAP) (2004–09), provided capacity building support for the federal ministries and agencies, and the nine regional governments. Under the ULGDP, the participating ULGs are benefitting primarily from backstopping support from MUDHCo through a federal mobile team of experts. 13. Three years into the ULGDP, it became apparent that continuous and strengthened capacity building support for urban management and good governance is still required. With the opportunity of Additional Financing for ULGDP in 2011, 18 new ULGs started to 47 receive capacity building support for urban management and governance, to prepare them for participation in the ULGDP II. Two multi-disciplinary consultant teams (with 20 and 25 experts respectively) have been deployed for this purpose. 28 These teams are also enhancing the capacity of the 18 ULGs already participating in the ULGDP. A parallel GIZ-financed Urban Governance and Decentralization Program is providing capacity building support to a further eight cities and nine regional governments on issues such as participatory planning, urban finance, and other areas of urban management. 29 The work of the two consultant teams and of the GIZ-financed program will end in December 2014. ULGDP II Capacity Building Architecture 14. Under ULGDP II, a more structured and systematic approach will be adopted for capacity building activities that will focus on all three government levels: federal, regional and urban. First, dedicated federal and regional mobile teams will support capacity building activities for all levels throughout the program period. In addition, capacity building support will be tailored to the needs of federal, regional, and local levels. For the federal level, capacity building support will aim to strengthen coordination for capacity building, oversight, and backstopping functions in serving the regional and local governments. Regions will be supported to strengthen their urban governance and management roles and in turn, provide capacity building support to ULGs in their jurisdictions. For ULGs, both supply and demand side interventions will be provided to raise their general capacity and enable them to respond to the performance incentive mechanism. 15. The main focus of the capacity building support is on enhancing urban governance and management to achieve better service delivery. Due to the cross-cutting nature of the subject, capacity building will aim to strengthen the governments’ capacity in a variety of areas, such as participatory planning, budgeting, revenue generation, financial management, procurement, infrastructure asset management, contract management and execution, urban planning, environmental and social safeguards, audit, ethics, fraud and corruption, and monitoring and evaluation. The intention is both to strengthen staff skills and systems for urban management (such as IT system, accounting systems, monitoring and evaluation systems, and the like). The annual performance assessments will provide a comprehensive, regular check on the capacity improvements and achievements, and identify gaps and weaknesses to be improved upon for each ULG. Phasing 16. To ensure effective transition from ULGDP to ULGDP II, capacity building activities will be provided in two phases. Phase 1, starting in November 2013 and continuing until December 2014, will be a transition period. Phase 2, starting in August 2014 and lasting until Program closing in December 2019, will constitute the main capacity building efforts of ULGDP II. In Phase 1, current capacity building arrangements under ULGDP and GIZ support 28 The teams include specialists in urban planning, municipal finance, financial management, land management, procurement, environmental management, social development, local economic development, infrastructure/asset management, participation, and service standards. 29 These cities are Adwa, Asosa, Debere Markos, Gambella, Jijiga, Nekemte, Samera, Yirga, and Alem. 48 will continue, and the former will start preparing for ULGDP II requirements. Concurrently, preparations for Phase 2 capacity building activities will commence and be in place before ULGDP II program effectiveness. Phase 2 will overlap with Phase 1 to allow time for proper handing-over. 30 Table 5: Main capacity building activities in each phase Phase 1 (November 2013 to December 2014) Phase 2 (August 2014 to December 2019) • Federal mobile team • Expanded federal mobile team and • Two technical consultant teams with capacity functions building support for ULGs (phased out by end • Four new regional mobile teams of period) • New urban management course for • GIZ financed support for capacity building of ULGs regional governments and eight cities (phased • Demand-driven capacity building for out by end of period) ULGs Federal and regional capacity building mobile teams 17. Underpinning the capacity building provided to all three levels of government throughout ULGDP II are the federal and regional capacity building mobile teams which deliver on-the-job issue-specific guidance. With the expanded scope of ULGDP II to include a total of 44 ULGs, the current MUDHCo multi-disciplinary team comprising 12 specialists will be further enhanced with the addition of some 11 specialists. MUDHCo will procure these specialists. The additional expertise will first boost the capacity within MUDHCo to tackle the greater demands of the program and also afford greater capacity building support to the regions and ULGs. The federal mobile team will be stationed at MUDHCo but will regularly travel to the field to support both regional governments and ULGs. The main functions of the federal mobile team are: • Focused support for:  The four new ULGDP II developing regional states  The four ULGs in the developing regional states  The two single-city regions of Dire Dawa and Harar • Monitoring and evaluation • General backstopping support for all other regions; • Mentoring the four regional mobile teams; • Capacity building for MUDHC 30 IDA support to ULGDP will close on December 31, 2014. The list of investments to be funded under ULGDP II has been agreed. ULGDP transactions are separately budgeted, accounted and reported through quarterly IFRs. This system will continue until the end of ULGDP I. ULGDP II is likely to be approved by the Board in April 2014 and to be effective in July 2014. The APA for ULGDP II is likely be completed by June 2014 and the first releases for ULGDP II will happen in July 2014. The first APA for ULGDP II will scrutinize the investment plans for the cities for EFY 2007. This scrutiny will ensure that there is no overlap between the activities financed by ULGDP and by ULGDP II. ULGDP II resources will be separately budgeted in government budget procedures and also separately accounted and reported on in semiannual financial reports. There will also be separate audits to be conducted for both programs. Thus, the risk that there will be an overlap in activities between ULGDP and ULGDP II is minimal. This issue will be specifically followed up during the semi-annual supervision missions. 49 • Overall coordination and oversight of capacity building activities under ULGDP II including the urban management courses to be provided by the Ethiopian Civil Service University or other institute (described in later sections). 18. Four new regional mobile teams will be formed under ULGDP II. The main functions of the regional mobile teams are to (a) provide capacity building support to the host region, and (b) to provide capacity building support to the 38 participating ULGs in the respective regions. Each regional mobile team will consist of approximately eight multi- disciplinary specialists. Each will be based in the regions with large numbers of participating ULG: Amhara (ten ULGs), Tigray (eight ULGs), Oromia (11 ULGs) and SNNPR (nine ULGs). The teams will be based at the Bureau of Trade, Industry, and Urban Development (BUD) (or their equivalent). Each team will spend one out of four weeks per month working with the regional government, and the rest of the time working with the ULGs. While in the field, they will work closely with the relevant technical staff to provide mentorship and issue-specific support. 19. The regional governments—with technical support from MUDHC—will procure the regional mobile teams. The ministry’s support will include facilitating nation-wide advertisements to identify optimal candidates. As part of the region’s backstopping functions, this process of procuring and managing the regional mobile teams will instill ownership, confer greater responsibility, and strengthen the capacity of regional governments. 20. The capacity of the regional governments to procure and manage these teams is assessed to be adequate. Under past and current Bank-financed operations—including PSCAP, the Protecting Basic Services Program, and the Productive Safety Net Project—the regional governments have procured and are presently managing similar teams. For example, under the urban management capacity building sub-program of PSCAP, the regional bureaus of urban development are responsible for all regional level activities. 31 Almost all regions have been engaged in providing training for mainly city administration staff and specialists on various urban related issues, ranging from urban development policies and good governance to specific knowledge on project planning and implementation, and management and technical skills. As a result, more than 18,000 people were trained in all regions, excluding SNNP. SNNP alone trained more than 160,000 people. Similarly, under the Protecting Basic Services Program, regional governments procured and managed 54 teams of five specialists to provide support and training to woredas. 31 Specifically, for the major activities of training, consultancy and procurement, the BUDs provide specification and purchase orders to purchasing experts in the civil service bureau to effect the purchases. 50 Table 6: Federal and regional capacity building mobile teams proposed functions and composition Function Composition Additional Notes Federal • Focused support for 23 specialists and one Current Proposed • Spends mobile the four new long-term advisor approximately three team developing regional Proposed composition: out of four weeks in states (DRS) and Program coordinator 1 1 the field their constituent Procurement specialist 3 2 • To be procured four ULGs, and Environmental specialist 1 2 directly by Dire Dawa and MUDHCo Harar. Social development 1 2 • Specialists to be • General specialist recruited and in backstopping Engineers 5 7 place by August support for all other Monitoring and 1 1 2014 regions. evaluation specialist • Mentor the four Infrastructure asset 1 regional mobile management specialist teams. Financial management 2 • Overall specialist (accountant) coordination and Urban planner 1 oversight of Land management 1 capacity building specialist activities in Municipal finance 2 ULGDP II specialist (including the Budget planning and 1 urban management participation specialist course). Regional • Provide capacity • One team to be mobile building support to based in each of the teams the four regions: four regions: Amhara, Tigray, Amhara, Tigray, Oromia and Oromia and SNNPR SNNPR. • Spends three out of • Provide capacity Four teams of eight specialists each four weeks in building support to Proposed team composition: ULGs, and one participating ULGs Budget planning and participation specialist week with regional in the respective Procurement specialist administration regions, totaling 38 Financial management specialist • Regions to procure, ULGs. Infrastructure asset management specialist with support from Environmental management specialist MUDHCo (for Social development specialist example, nationwide Project engineer advertising) M&E specialist • Teams to be recruited and in place by August 2014. Notes: The adequacy of the staffing levels of both the federal and regional teams will be reviewed annually, and the number of staff may be increased if necessary, . 51 Capacity building for ULGs NEW URBAN MANAGEMENT COURSE 21. Under the ULGDP II, capacity building for ULGs will comprise both supply side and demand side interventions. The supply side intervention will mainly comprise an ULGDP II implementation course to be provided by the Ethiopian Civil Service University (ECSU). The course content will be based on those key areas of ULGDP II implementation with a strong emphasis on the practitioners at the ULG level. The target group for the capacity building will be the key individuals responsible for ULGDP II implementation in the 26 ULGs participating fully for the first time in the ULGDP. The proposed design of this course comprises eight modules: (a) procurement and contract management (two weeks), (b) participatory planning, capital investment planning, budgeting and financial management (two weeks), (c) monitoring and evaluation, reporting, performance assessment systems, records keeping and IT (two weeks), (d) environmental and social safeguards including fraud and anti-corruption (one week), (e) asset management including O&M (one week), (f) revenue enhancement including land leasing (one week), (g) job creation, micro and small enterprise development (one week), and (h) urban planning and land management (one week). 32 The eight modules will be delivered through resident training at the ECSU of 1 or 2 weeks in duration as indicated above. The eight packages will be offered over a period of four or five months during the first six months of ULGDP II implementation (August 1 to December 31, 2014) and are separated so as not to impose too great an administrative burden on the cities. 22. Key urban staff of the 26 ULGs joining the ULGDP II will be expected to complete the course in urban management to ensure a basic level of capacity for these new ULGs. MUDHCo will pay the costs for staff of these 26 ULGs to attend this one-time course. After the first run, if refresher courses are needed, the 26 ULGs can send officials for further training at their own cost (or from the funding for demand-based capacity building). The course will be optional for staff of the 18 cities currently participating in the ULGDP, but can serve as a refresher or for new staff in the ULGs. These 18 ULGs can use their own resources to attend any or all of the modules. 23. It is envisioned that the MUDHC will be the main facilitator to put the course in place. This will involve inviting ECSU to submit a proposal, based on a course outline provided by MUDHCo. The course outline will (a) describe the eight modules and their duration indicated above. MUDHCo will work with ULGs to identify course participants. ECSU will be responsible for submitting a proposal to MUDHCo that describes the course design (including approach to delivery), course materials, system for certifying participants who successfully complete the course, individuals responsible for delivery of the eight modules. 33 MUDHCo will enter into an agreement with ECSU for delivery of the course. To enable broader outreach, administration of this urban management course may also be provided by other appropriate in the future. 32 In the case of modules (g) and (h) above awareness raising as to the application of ULGDP II investment and capacity building funds will be given due attention. 33 ECSU may, to ensure practicality of the course, recruit trainers with practical experience of program delivery in ULGs) and costs of delivery. 52 DEMAND-DRIVEN CAPACITY BUILDING FOR ULGS 24. In addition to the supply side interventions described above, each ULG will be able to spend up to 5 percent of performance-based grants on specific capacity building activities. This will allow ULGs to meet their specific capacity building needs, especially in response to key areas of weaknesses identified in the annual performance assessment. This demand-based approach, which is new under the ULGDP II, will allow flexibility and cater to the varying needs of each ULG. Each ULG will procure its own training and other services in line with government procurement guidelines and using providers from the pre-qualified lists of relevant ministries and trainers and institutes that have been certified or accredited by the government. In addition, Ethiopia has a robust private market to offer technical assistance and consultancy services to the ULGs on various urban infrastructure and service areas such as sanitation services, drainage and flood control, roads, building, urban planning, waste collection and disposal, urban transport management, and the like. 25. The ULGs will be required to develop a capacity building plan for the use of funds, formulated on the same timing cycle as their physical plans. The capacity building plan, reporting and feedback will use the standard format elaborated in the Program Operations Manual. Regional governments will review those of the ULGs in their jurisdictions for content. MUDHCo will review a subset, and provide its comments. ULGs will be required to report on a quarterly basis on progress with capacity building activities and use of funds. Each regional Bureau of Urban Development regional mobile team will oversee the preparation and execution of these annual capacity building plans. The annual performance assessment will verify the execution of the capacity building plans. 26. The capacity building activities to be funded should adhere to the prescribed capacity building activities menu (as detailed in the table below). Generally, these funds can be used for technical consultant work, backstopping support, advisory support, training, minor equipment and contract staff. Items such as vehicles and administration buildings are not part of this provision. As stated in the Program Operations Manual, should a ULG be in doubt about the eligibility of a capacity building activity, they will contact MUDHC to ensure that the expenditure complies with the ULGDP II expenditure framework. Table 7: Menu of capacity building activities Training, seminar, and • Selected short-term training (up to duration of three months) conferences • Peer-to-peer support across ULGs • Study tours as planned by the ULGs and approved by the ministry • Seminars and conferences andworkshops and meetings • Training materials • Hire of venue /hotel accommodation • Refreshments Technical assistance, and • Consultancy fees and related operating expenses organizational and systems • Printed material and stationery development, and the like. Equipment Office equipment and furniture related with the capacity building support (not vehicles and buildings) including: • Office equipment and furniture. 53 Notes: 1. Total costs not to exceed 5 percent of total performance-based grant received. 2. Compliance with the capacity building activities menu will be a minimum condition for access to the performance grant. Capacity building for regional governments 27. Under ULGDP II, regional governments will begin assuming expanded roles in supporting ULGs within their jurisdictions. The various regional BUDs will be the main coordinating as well as recipient agencies of capacity building activities. The federal and regional mobile teams will provide support to the regional governments to build up their general capacity for urban governance and management. In turn, the regional governments will have greater capacity to provide guidance for the ULGs. In particular, regions will receive additional financial support to achieve results in three focus areas: (a) audit, (b) environmental and social safeguards, and (c) revenue enhancement and generation. The achievement and performance in these areas will be measured in the annual performance assessment. 28. The four regions currently benefiting from the ULGDP—Amhara, Oromia, SNNP and Tigray, which have multiple participating ULGs—will have greater responsibilities to host and provide logistical support to the regional mobile teams. The regional mobile teams will be attached to the BUDs, and will directly assist the regions themselves to enhance their capacity. Capacity building for federal entities 29. Capacity building activities for MUDHC under ULGDP II will focus on three key areas of urban management. These are (a) systems development for urban management and development (such as monitoring and evaluation, IT and database systems, procurement, revenue generation systems and database); (b) equipment related with the enhanced capacity building, including vehicles; 34 and (c) expansion of the federal mobile team and training of the core MUDHCo officials. In addition, it is proposed to have at least one international senior urban development advisor to be attached to MUDHC to provide guidance and oversee the management of capacity building activities throughout the Program. 30. Besides MUDHC, other federal entities will have supporting roles in ULGDP II. As the overall coordinator and implementing agency of the Program, MUDHC will inform these relevant federal agencies (for example, MoFED and FEACC) of the Program, and liaise with them to determine specific capacity building needs that could be covered within ULGDP II. Sustainability 31. The Urban Governance Capacity Building Bureau (UGCBB) of MUDHCo will handle the ministry’s capacity building functions. MUDHCo is in the process of setting up a Center of Excellence for Urban Governance and Capacity Building, which will undertake the functions of (a) capacity building, (b) research and analysis on urban governance, and (c) 34 The equipment and vehicles will be specified in MUDHCo’s annual Program capacity building plan. 54 performance and benchmarking to support the Ethiopian Cities Resilient, Green Growth, and Governance Programs Package. It is envisioned that capacity building support to all three levels of government will be consolidated under this Center of Excellence. 32. At the regional and local levels, ULGDP II will build upon previous projects and programs to continue strengthening their capacity. ULGDP II is particularly focusing on supporting the regions and ULGs that have received less capacity building support in the past. While ULGDP II will in the medium term support the 44 participating ULGs with capacity building, in the long run, government’s intention is to scale up capacity building efforts to cover all 85 ULGs in Ethiopia. The capacity building systems and activities being put in place under ULGDP II, such as the urban management course and demand-driven capacity building activities, could be scaled up and easily applied to other ULGs in the future. Institutional and implementation arrangements 33. Implementation responsibilities by level of government. The institutional arrangements of the ULGDP II are based on the experiences from ULGDP, with a clear division of responsibilities between levels of government, as per the government structure and consistent with existing legal provisions, regulations, and guidelines. The roles and responsibilities of the relevant entities are summarized below (details are included in Annex 4). Federal level 34. At the federal level: • MUDHCo will have the following main tasks:  Overall responsibility for day-to-day coordination of the Program.  Capacity building, including direct support to regional and urban local governments.  Development of core tools to be applied for the capacity building support such as guidelines, standard proclamations, best practices, and the like. 35  Program management, including the procurement and management of the APAs and the value for money audits.  Program reporting, including the annual Program report.  Monitoring and evaluation  Accounting for the ULGDP II funds to Parliament. • The Ministry of Finance and Economic Development (MoFED) will be responsible for ensuring that Program resources are budgeted for and disbursed within the expenditure framework, and for financial management, including reporting, program auditing and compilation of federal fiscal reports. 35 An example of this is revenue generation where MUDHCo in cooperation with relevant agencies will develop standard tariff proclamations, guidelines, and best practices to be used by the regions in their implementation of the framework. 55 • The Office of the Federal Auditor General (OFAG) will be in charge of the annual Program audit, which will cover all Program entities (44 ULGs, nine regional governments, and MUDHCo) and that Program accounts are audited as per statutory requirements. • The Federal Public Procurement and Asset Management Agency will provide guidance to the Regional Public Procurement and Asset Management Agencies and assist with the capacity building of procurement specialists. • The Federal Ethics and Anti-Corruption Commission (FEACC) has the power to prevent, expose, investigate and prosecute corruption offences and impropriety in Ethiopia. Under ULGDP II, it will ensure the Program is aligned with the World Bank’s anti-corruption guidelines. It will be responsible for fraud and corruption monitoring and reporting, and provide guidance and capacity building support to the Regional Ethics and Anti-Corruption Commissions (REACs) and ULGs on similar functions. 35. As under the ULGDP, the Urban Governance Capacity Building Bureau (UGCBB) at MUDHCo will be responsible for daily coordination of the Program. The significant geographic and technical scale up of the Program under the proposed PforR, and the existing staffing gaps, if unaddressed, bring considerable risk to the achievement of the operation’s development objective. Therefore there is a serious need to fill the personnel gaps and further strengthen capacity of UGCBB. The current MUDHCo multi-disciplinary team comprising 12 specialists should be further strengthened to include a minimum of 23 specialists and one long-term international advisor. The strengthened team will boost the capacity within MUDHCo to perform the necessary functions required under ULGDP II and allow the ministry to provide greater capacity building support to the regions and the ULGs. 36. In addition, MUDHCo will be responsible for overall Program reporting and monitoring and evaluation. It will also produce and submit to the World Bank a midyear and an annual Program report, with information on the following: 37. The midyear Program report will cover the following issues: • Summary of aggregate Program expenditures and Program infrastructure delivered by ULGs. • Execution of MUDHCo capacity building plan. • Summary of aggregate capacity building activities undertaken by ULGs and regional governments. • Summary of aggregate environmental and social performance reports from each ULG, including information on grievances. • Summary of progress against Program’s performance indicators. 39. The annual Program report will include all the above, plus: 56 • Summary of the assessment results, including the performance of Program ULGs and the disbursed amounts. • Summary of aggregate information on procurement grievances. • Summary of aggregate information on fraud and corruption issues. 40. A steering committee will be established, comprising representatives from MUDHCo and MoFED to ensure strong coordination on issues such as planning, allocations, flow of funds, compilation of data, and approval of the results from the APAs. A technical sub-committee comprising key technical staff of MUDHCo and MoFED will be formed under this committee. It will review the results of the APAs and ensure their quality. It will also respond to complaints that cannot be resolved at entity level. The technical committee is expected to meet quarterly and review Program implementation against objectives, bring policy issues to the larger coordination committee, and ensure that the Program is implemented in line with the Program Operations Manual. Regional level 41. At the regional government level: • The respective regional Bureaus of Urban Development (BUDs) will be responsible for daily coordination of the Program at the regional level. Specifically, the BUDs will be in charge of:  Capacity building support of the ULGs in their jurisdiction.  Preparation of progress reports covering all ULGs in their jurisdiction.  Oversight and backstopping support related to aspects of the Program. • Office of Regional Auditor General (ORAGs) will conduct, either directly or through delegated authority, the external audit of ULG financial reports. • Regional environmental protection agencies (REPAs) will oversee the implementation of the Program’s environmental and social safeguards agreements. • Bureaus of Finance and Economic Development (BoFEDs) will manage flow of funds at the regional level, and consolidate the fiscal reporting from the ULGs for submitting them to MoFED. • Regional revenue authorities will support the ULGs in revenue generation through conducive dialogue, support and guidance; • Regional Public Procurement and Asset Management Agencies will provide more direct guidance and support to the ULGs on procurement procedures; and • Regional Ethics and Anti-Corruption Commission (REAC) will be responsible for fraud and corruption monitoring and reporting of ULGs under their charge. 42. In contrast to ULGDP, under ULGDP II regional governments will begin assuming expanded roles in supporting ULGs within their jurisdictions to improve urban governance performance. Therefore, ULGDP II provides for the federal mobile and regional mobile capacity building teams to give support to the regional bureaus of urban development to build up their 57 general capacity for urban governance and management, in the range of relevant areas. In turn, the regions will have greater capacity to provide guidance for the ULGs. Urban local government level 43. At the ULG level: • The mayor’s office in each urban local government will be responsible for the overall performance of urban local governments. It will ensure compliance with all financial management, procurement, and Program environmental and social safeguards and regulations. It will also facilitate access to the information required as part of the annual performance assessments. • The offices of urban development and will be responsible for day-to-day Program coordination. It will lead the participatory planning process, procure and manage works contracts, disseminate information about the Program (including contract awards, physical and financial progress of works contracts, and the like). It will also ensure that such contracts are implemented in accordance with the Program’s environmental and Social Safeguards. • The OFEDs will be responsible for ensuring that all Program funds are included in IBEX. They are also responsible for ensuring that annual financial statements are submitted to ORAGs for audit purposes as soon as possible after the end of the Ethiopian fiscal year. • The city councils will be responsible for reviewing and approving cities’ capital investment plans, revenue enhancement plans, and asset management plans to contribute to the funding of the urban investments from their own source revenues. 44. ULGs require a wide range of expertise to successfully carry out their mandates. An analysis of staffing carried out as part of Program preparation reveals that most ULGs have the necessary staff, but a few need to fill key positions to access Program funds. As would be expected, the 26 cities joining the Program’s performance grant mechanism have the greatest percentage of unfilled positions. Based on data from 27 ULGs, about 82 percent of positions at OFEDs filled, with an average of 39 staff. About 84 percent of core financial management and procurement positions are filled, with an average of 22 staff. Some 85 percent of audit and inspection positions are filled, with an average of five staff. In budgeting and planning, some 64 percent of the positions filled, at an average of four staff. The 19 ULGs assessed have an average of seven engineers or similar positions. In terms of education of staff, the ULGs have an average of 15 staff with BA/BSc or higher education. However, there is great variation, ranging from three (Motta) to 44 (Hawassa). The 26 new ULGs have a lower number of filled positions (77 percent are filled with an average of 31 staff in contrast to 86 percent with an average of 47 staff for the 18 existing ULGs. They also have less capacity in the core positions (see Annex 7 and the summary table below). All ULGs are expected to have the necessary core staff in place by Program effectiveness; ULGs that do not meet this minimum condition will not be able to access Program funds. Table 8: Staff positions in ULGs 58 City Required Actual Position Position Position Position filled Position filled - Staff OFED OFED filled filled Filled budget and technical staff with positions filled (average, Finance/ Audit / planning (%) (engineers etc.) BA/BScs (number) (number) %) Procurement Inspection (number) (number) (%) (%) All sample 50 39 82% 84% 85% 64% 7 15 ULGDP 57 47 86% 88% 86% 89% 8 17 Non-ULGDP 42 31 77% 79% 85% 61% 5 12 Number in N=27 N =27 N=27 N=26 N=26 N=15 N =19 N= 27 the sample 45. Given the substantial increase in the funds which will be made available to the new 26 ULGs entering the Program, having key staff becomes critical to ensure that the funds are used in the appropriate fiduciary, budgeting, planning, consultation and other Program framework and rules. The design of Program will mitigate this risk by making core staffing a Program minimum condition. As such, in order for all 44 ULGs to access the Program’s performance grant funding, they have to have these staff members in place each Program year. In addition to this risk mitigation, another measure adopted under Program preparation is the agreement with the ministry that the federal and regional governments will ensure that the Program ULGs have the following requisite staff by Program effectiveness: (a) city administrator, who is also the main coordinator of the ULGDP II operations, or another dedicated officer (b) finance officer, (c) procurement officer, (d) municipal engineer, (e) physical/urban planner, (f) environmental and social systems management officers. 59 Annex 2: Results Framework Matrix Ethiopia: Second Urban Local Government Development Program Program Development Objective: Enhance institutional capacity of participating ULGs in developing and sustaining urban infrastructure and services. PDO Level Results Unit of Base- Target Values Fre- Data Responsibility Indicators Meas- line quency Source/ for Data Core ure FY14 Method- Collection DLI ology FY15 36 FY16 FY17 FY18 FY19 FY20 1. Score in the APA for 2 Number 0 60 65 70 73 76 80 Annually APA APA firm institutional performance of collects the participating ULGs, averaged basic data on across all cities. 37 performance. MUDHCo and the Bank verify the index. 2. Score in the APA for 3 Number 0 60 65 70 73 76 80 Annually APA See above. achievement of urban infrastructure and service targets by ULGs, averaged across all cities. Intermediate Results Area 1: Institutional Performance 1. ULGs that achieve an 2 Number 0 10 18 24 30 36 38 Annually APA Firm collects the increase of own source data and municipal revenue of at least MUDHCo and 10 percent over the previous the Bank review year under ULGDP II. 38 and confirm. 2. ULGs with timely 8 Number 5 18 32 38 44 44 44 Annually APA Same as above. audit5 39. 3. ULGs with clean 2 Number 0 5 8 12 16 20 22 Annually APA Same as above. 36 Fiscal 2015 is taken as year zero. 37 In the areas of planning and budgeting, assets management, public financial management, procurement, own source revenue, accountability and transparency, environment and social safeguards, land management, and urban planning. The performance of ULGs ranges between 0–100. The percentage reflects the score. 38 The increase is measured in nominal figures. 39 Five of the 18 cities currently participating in the ULGDP have received audits on time (by January 7, 2014) for financial year 2012/13 ((Ethiopian fiscal year 2005). 60 PDO Level Results Unit of Base- Target Values Fre- Data Responsibility Indicators Meas- line quency Source/ for Data Core ure FY14 Method- Collection DLI ology FY15 36 FY16 FY17 FY18 FY19 FY20 (unqualified) audit under ULGDP II. Intermediate Results Area 2: Infrastructure and Maintenance 1. Direct Program √ na Number 0 2.85 3 million 4.4 million 4.4 million 4.4 million 4.4 million Annually Census MUDHCo beneficiaries under the million and APA ULGDP II 1.a. Of which female √ Percent 0 50% 50% 50% 50% 50% 50% Annually Census MUDHCo and APA 2. People in participating √ 3 Number 0 1 million 2 million 3 million 4 million 4.2 million 4.3 million Annually Census MUDHCo urban local governments and APA provided with access to all- season roads within a 500 meter range provided under the ULGDP II 40 3. Urban cobblestone roads 3 Kilo- 0 120 270 420 570 620 730 Annually APA Firm collects the built or rehabilitated under meters data and ULGDP II MUDHCo and the Bank review and confirm. 4. Urban gravel roads built or 3 Kilo- 0 15 45 75 105 120 135 Annually APA Same as above. rehabilitated under ULGDP II meters 5. Serviced land for industry, 2 Hectares 0 300 600 900 1,200 1,500 1,820 Annually APA Same as above. MSEs, and housing. 6. New controlled or sanitary 3 Number 0 0 2 5 9 11 13 Annually APA Same as above. landfills supported under the project under the ULGDP II 7. Public parks and greenery 3 Hectares 0 5 15 25 35 45 55 Annually APA Same as above. under the ULGDP II 8. ULGs that execute at least 3 Number 0 9 22 30 35 37 40 Annually APA Same as above. 80 percent of their O&M budget under the ULGDP II. Intermediate Results Area 3: Capacity Building 1. ULGs that implement at Number 0 9 22 30 35 37 40 Annually APA Same as above. 40 Numbers are indicative only, because the number of kilometers of roads to be constructed with Program funds will not be known until ULGs prepare and execute their CIPs. 61 PDO Level Results Unit of Base- Target Values Fre- Data Responsibility Indicators Meas- line quency Source/ for Data Core ure FY14 Method- Collection DLI ology FY15 36 FY16 FY17 FY18 FY19 FY20 least 80% of the budget presented in the annual capacity building plans. 2. Regions that implement at 4 Number 0 0 3 4 4 4 4 Annually APA Same as above. least 80% of the budget presented in the annual capacity building plans. 3. MUDHCo utilizes the 8 Percent 0 60% 80% 95% 95% 95% 95% Annually APA Same as above. budget presented in the annual capacity building plans. 62 Annex 3: Disbursement Linked Indicators, Disbursement Arrangements, and Verification Protocols Ethiopia: Second Urban Local Government Development Program Disbursement-Linked Indicator Matrix Total As percent of DLI Baseline Indicative timeline for DLI achievement financing total allocated to financing Year 1 Year 2 Year 3 Year 4 Year 5 DLI amount FY15 FY16 FY17 FY18 FY19 DLI 1 ULGs have achieved Program 0 44 ULGs 44 ULGs 44 ULGs 44 ULGs 44 ULGs minimum conditions as demonstrated in the APA Allocated amount $90 million 23.68% $18 million $18 million $18 million $18 million $18 million DLI 2 ULGs have strengthened 60 (average 65 (average 70 (average 75 (average 80 (average 0 institutional performance as score) score) score) score) score) demonstrated in the APA $21.8 Allocated amount $158 million 41.58% $34.1 million $34.1 million $34.1 million $34.1million million 41 DLI 3 ULGs have delivered infrastructure, maintenance, and supported job creation as per 60 (average 65 (average 70 (average 75 (average 80 (average 0 their CIPs and annual action score) score) score) score) score) plans, as demonstrated in the APA, and ensured that value for money is achieved Allocated amount $75 million 19.74% $10.3 million $16.2 million $16.2 million $16.2 million $16.2 million DLI 4 Capacity 80% in place 80% in place 80% in place Regional government capacity building plan 80 in 0 and 80 % and 80 % and 80 % building and support teams in and terms of place% 42 execution rate execution rate execution rate place and support urban service reference for 41 In the first year, the performance measures will only be applicable to the 18 ULGDP cities. The assessment of progress against performance measures of all 44 ULGs (including the new 26 ULGs will begin in year 2. 42 See verification protocol and the Bank disbursement table for further details. 63 delivery regional government teams are place. Allocated amount $13 million 3.42% $2.6 million $2.6 million $2.6 million $2.6 million $2.6 million DLI 5 ORAGs carry out timely audits 44 ULG 44 ULG 44 ULG 44 ULG 44 ULG of ULGs’ financial reports (by 5 43 audits audits audits audits audits January 7 of each financial completed completed completed completed completed year). Allocated amount $7 million 1.84% $1.4 million $1.4 million $1.4 million $1.4 million $1.4 million DLI 6 REPAs have Regional environmental the terms of protection agencies (REPAs) reference for timely review ULGs’ safeguards the safeguards compliance. reviews/ 44 ULG 44 ULG 44 ULG 44 ULG audits, safeguards safeguards safeguards safeguards 0 environment reviews/audits reviews/audits reviews/audits reviews/audits and social completed completed completed completed specialists in place, and work plan ready Allocated amount $6 million 1.58% $1.2 million $1.2 million $1.2 million $1.2 million $1.2 million DLI 7 44 ULG 44 ULG Regional revenue authorities revenue revenue 0 support ULGs’ efforts to generation generation generate revenues 44 supported supported Allocated amount $4 million 1.05% $2.0 million $2.0 million 43 Five of the 18 cities currently participating in the ULGDP have received audits on time (by January 7, 2014) for financial year 2012/13 ((Ethiopian fiscal year 2005). 44 The regional revenue authorities will need time to build up the capacity within this area, and the tariff proclamations are expected to be up-dated only twice during the program period, hence results will be measured for the third and the fifth year of the Program. 64 DLI 8 Compre- Capacity Capacity Capacity Capacity The annual MUDHCo capacity hensive building plan building plan building plan building plan building activities for Program annual in place, 80% in place, 80% in place, 80% in place, 80% ULGs, regional governments, Program of people in of people in of people in of people in and the ministry completed capacity place and place and place and place and 0 building plan minimum minimum minimum minimum in place and 60% of the 60% of the 60% of the 60% of the terms of plan plan plan plan reference implemented implemented implemented implemented developed Allocated amount $22 million 5.79% 0 $4.4 million $4.4 million $4.4 million $4.4 million $4.4 million DLI 9 APA APA APA and APA and APA and The APAs, IPAs, and value for completed on completed on value for value for value for money audits are procured and 0 time time money money money completed on time completed on completed on completed on time time time Allocated amount US$5 million 1.32% $1 million $1 million $1 million $1 million $1 million US$380 Total Financing Allocated: 100% 0 $60.7 million $78.8 million $80.8 million $78.8 million $80.8 million million DLI Verification Protocol Table # DLI Definition/ Scalabi- Data Source Verification Entity Procedure Description of lity achievement 1 ULGs have The indicator will be Yes ULG compliance Independent private firm MUDHCo hires a private sector achieved satisfied when: with Program carrying out the APA. consulting/audit firm (whose terms of reference Program minimum (Note: The terms of will be acceptable to the Bank) to carry out the minimum The APA, using only the conditions reference of the firm must independent APA. conditions as minimum conditions, has assessed by be acceptable to the World demonstrated been completed and the independent Bank) APA determines whether all minimum in the APA disbursements to Program performance conditions have been met. ULGs have been assessment. Draft verification reports determined on this basis. are submitted for review by The APA firm calculates the allocation to each the verification entity (APA ULG as per the formula in the Bank firm) simultaneously to the Disbursement Table, and provides the government (technical sub- aggregate disbursement amount (along with the committee*) and the Bank. full APA) simultaneously to government and 65 Neither party can modify the Bank for review. such reports except for factual errors. As part of implementation support, Bank will review the assessment results. Bank retains the * The technical sub- right to make the final decision whether a DLI committee will have has been achieved or not. representation from MUDHCo (chair), MoFED and other agencies as appropriate and the World Bank as observer. 2 ULGs have The indicator will be Yes ULG progress Same as above (DLI 1) Same as in DLI 1, MUDHCo hires a private strengthened satisfied when the APA against Program sector firm to carry out the independent APA. institutional has been completed performance APA assigns a score to each ULG. The firm performance (based on the minimum measures assessed will calculate the allocation to each ULG as per as conditions and by independent the formula in the Bank Disbursement Table, demonstrated performance indicators) APA. and provide the aggregate disbursement in the APA and the allocation based amount simultaneously to the government and on the score of all ULGs the Bank for review. has been determined. As part of implementation support, Bank will review the assessment results. The Bank retains the right to make the final decision whether a DLI has been achieved or not. 3 ULGs have Achievement under this Yes ULG progress For Program years 1 and 2, Similar to DLIs 1 and 2 above, in Program delivered indicator for the first two against Program same as above (DLIs 1 and years 1 and 2, this DLI will also be measured infrastructure, Program years will be performance 2). through the APA and therefore the same maintenance, measured on the basis of measures assessed process will apply. For these two years, as in and supported actual delivery of by independent Starting in Program year 3, DLIs 1 and 2, MUDHCo hires a private firm to job creation infrastructure against APA and in addition to the above, a carry out the independent APA. APA assigns a as per their targets laid out in the plan performance as private firm, will verify the score to each ULG. The firm will calculate the CIPS and for the former year using assessed by the value for money aspects. allocation to each ULG as per the formula in annual action Program funds, independent value The APA will include the the Bank Disbursement Table, and provide the plans, as maintenance performance, for money audits findings on the value for aggregate disbursement amount simultaneously demonstrated and performance in job- (which will start money audits. to government and the Bank for review. As in the APA, creation. Starting in in year 3 of the part of implementation support, Bank will and ensured Program year 3, the Program) review the assessment results. The Bank that value for achievement of the DLI retains the right to make the final decision money is will also include the whether a DLI has been achieved or not. 66 achieved outcome of the value for money audits. Starting in Program year 3, in addition to the above, MUDHCo hires a private firm to carry out the value for money audits (under terms of reference acceptable to the Bank). Its results will be shared with the APA firm, and included in the overall results. Then, as under DLIs 1 and 2, the firm will calculate the allocation to each ULG as per the formula in the Bank Disbursement Table, taking into account the findings of the value for money audits, and provide the aggregate disbursement amount simultaneously to government and the Bank for review. As part of implementation support, Bank will review the assessment results. The Bank retains the right to make the final decision whether a DLI has been achieved or not. 4 Regional Achievement of the DLI Yes Regional Same as above (DLIs 1,2 In Program year 1, the Bank will verify that the government will be determined on the (alloca- government and 3) capacity building plans and terms of reference capacity basis of (a) execution of tion per performance for regional government teams are in place. building and regional governments’ region, against capacity support teams capacity building plans, which is plan, assessed by In Program’s second disbursement year in place and and (b) that the four cali- the Bank in year (financial year 2015/16), the annual support urban regional support teams are brated) 1, and by performance assessment (conducted in 2014) service in place, with the requisite MUDHCo in will verify that delivery eight staff in each team. subsequent years. (a) regional government teams are in place and are operating, and (b) regional governments have adopted service delivery standards (as issued by MUDHCo*) and issued those for the cities, and provided guidance in implementation (reports). In Program’s third disbursement (2016/17) onwards: The annual performance assessment will verify that the: (a) Regional government has developed capacity building plan for the 67 ongoing financial year (b) Regional government teams are in place (c) Capacity building plans for the previous year have been executed (d) Regional governments have adopted service delivery standards (as issued by MUDHCo*) and issued those for the cities, and provided guidance in implementation (reports). * This condition is only valid if MUDHCo has issued the service delivery standards to the regions. 5 ORAGs carry This indicator will be Yes Annual Same as above (DLIs 1,2, 3 The private consulting/audit firm will verify out timely fulfilled when the performance and 4) the results against this indicator, following the audits of regional audit entities, or assessment same process as in the DLIs above. ULGs’ their delegated agencies, financial which includes certified reports (by private audit firms, carry January 7 of out and complete the each financial financial audits of ULGs year) in their jurisdictions by January 7 of each year. 6 REPAs This indicator will be Yes Annual Same as above (DLIs 1,2, The private sector consulting/audit firm will timely review fulfilled when the performance 3, 4 and 5) verify the results against this indicator, ULGs’ regional environmental assessment following the same process as in the DLIs safeguards protection agencies have above. compliance carried out the safeguards reviews/audits of ULGs in their jurisdictions before the start of the annual performance assessment in each year. 7 Regional This indicator will be Yes Annual Same as above (DLIs 1,2, The private consulting/audit firm will verify revenue fulfilled when Regional performance 3, 4, 5 and 6) the results against this indicator, following the authorities revenue authorities/ assessment same process as in the DLIs above. The APA support BoFEDs have held will review whether there have been ULGs’ efforts consultations with the consultations, documented with minutes, in the 68 to generate ULGs on tax rates and previous financial year. The assessments will revenue bands, with review of be conducted as part of the third and the fifth revenue enhancement APA, and regions will have to: (a) complete plans and have updated the consultations, (b) reviewed the REPs with the tariff proclamations the ULGs, and (c) updated the tariff for the ULGs proclamations prior to each of these APAs (all three issues will have to be achieved in the previous financial year to fulfil the conditions for the DLI). 8 Completion Achievement of this DLI Yes Comprehensive MUDHCo provides MUDHCo will put in place an annual plan to of annual will be determined on the annual Program information and build capacity of ULGs, regional governments MUDHCo basis of execution of capacity building documentation to the and the ministry. Among other things, the plan capacity activities specified in plan which will World Bank, which will specify the activity, its objective, the building MUDHCo capacity include terms of verifies. resources assigned and the implementation activities for building plan for the reference for timeline. The template for the plan will be Program federal, regional and capacity building, included in the Program Operations Manual. ULGs, urban local governments. and details of 60 days prior to the beginning of the regional activities planned, forthcoming fiscal year (by May 7), MUDHCo governments and staffing will submit the plan to the World Bank, which and the positions. will verify that the plan is in the agreed format ministry. and is satisfactory. Within 30 days of the beginning of the fiscal year (by August 7), MUDHCo will submit a report of the implementation of the annual capacity building plan for the previous year to the World Bank. The Bank will verify the extent to which the plan has been executed and determine the DLI amount to be disbursed. In the first Program year (2014/15), the capacity building plan will include guideline/framework on municipal service delivery standards, job creation measurement, and land development and supply. In the second Program year (2015/16), the assessment will include the ECSU course delivered for 26 ULGs which will have been implemented before the end of 2014/15. 69 9 The APAs, Achievement of this DLI Yes Documentation MUDHCo provides World Bank will review the compliance of the IPAs, and will be determined on the showing that the information and timeliness of the APA and later of the value for value for basis of completion of APA, and later in documentation to the money, with the following timeline: money audits APA by June 2014 in the the Program, the World Bank, which APA are procured first Program year, and value for moneys verifies. The Bank will For Program year one: completed by June and then by November with have been have the right to join the 2014. completed on incorporation of the audit launched and APA and/or value for For subsequent Program years, APA to be time results in January of each completed on money audits in the field, completed by November of the same year with year thereafter, by time. as part of its incorporation of audit results in January prior MUDHCo. Starting in implementation support. to the financial year for which the results will year three of the Program, impact. MUDHCo will also launch the value for Value for money money audits, by August Starting on August 2015 to be completed by of each year to feed into November 2015 and the same timeline the APA cycle. thereafter for each year. 70 Bank Disbursement Table # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank Disbursement from IDA is calculated on the basis of compliance of ULGs with minimum access conditions. (US$18 million per year) ULGs have Formula for disbursement from IDA to government is: achieved • [total annual disbursement] = [total population in all Program minimum condition compliant ULGs] X [US$4.14] minimum By Program 1 90 0 0 0 44 conditions as completion Formula for disbursement from government to ULGs is: demonstrate- • [disbursement to each ULG] = [total population in that ULG] ed in the X [US$4.14], provided that the ULG has complied with the APA minimum conditions. Disbursement will be made provided that previous disbursements from government to ULGs have all been made. Disbursement from IDA to government will be determined as: 1. Compliance of ULGs with minimum access conditions ULGs have measured (as above); strengthened 2. Sum of scores of all ULG calculated (non-minimum institutional condition compliant ULGs are assigned a score of zero) By Program 2 performance 158 0 0 0 100 and divided by 44 (note in the first 2014/15 only the completion as demon- previous ULGDP ULGs (18 ULGs) will get access to the strated in the funds and the adjusted amount for this will be divided APA 45 between those 18 ULGs); 3. A. If score equal to target for financial year, full allocation, 45 Composite index of performance based on performance in the areas of planning, revenue enhancement, assets management, fiduciary systems, procurement, accountability/ oversight systems, environmental and social systems management and urban land management (see annex 10). 71 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank B. If score below target for the financial year, pro-rata reduction, C. If score above target for financial year, pro-rata increase. Disbursement will be made provided that previous disbursements from government to ULGs have all been made. Disbursement from the government to ULGs will be determined as: Total disbursement amount (as calculated above) divided across compliant ULGs in accordance with population and score. Formula for disbursement from IDA to the government is: • [total annual disbursement] = [{sum of individual scores of all ULGs/44 (first year only 18 ULGs)*}/ {target score for the financial year}] X [target disbursement amount, that is US$34.1 million for 44 ULGs from the 2015/16 and the following years (first financial year only US$21.8 million for the 18 ULGs)] Performance targets for this DLI are: 2014/15: 60 points 2015/16: 65 points 2016/17: 70 points 2017/18: 75 points 2018/19: 80 points Formula for disbursement from government to ULGs in 2014/15 is: • [disbursement to any ULG] = [population of ULG X 72 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank performance score of ULG] / [∑ (population of ULG 1-..18 X performance score of ULG 1-..18)] X [total disbursement amount for the financial year], providing that the ULG has complied with the minimum conditions. Formula for disbursement from government to ULGs in 2015/16 and following years is: • [disbursement to any ULG] = [population of ULG X performance score of ULG] / [∑ (population of ULG 1-..44 X performance score of ULG 1-..44)] X [total disbursement amount for the financial year], providing that the ULGA has complied with the minimum conditions. * Note: For the new 26 ULGs, this DLI will only be applied from 2015/16 and the following financial years, hence amount to be distributed (US$21.8 million in 2014/15) will only be allocated across the 18 ULGs ULGs have Disbursement from IDA to government will be determined as: delivered infrastruc- 1. Compliance of ULGs with minimum access conditions ture, measured (as above); mainten- 2. Sum of score of all ULGs calculated (non-minimum ance, and condition compliant ULGs are assigned a score of zero) and By Program 3 supported 75 0 0 0 100 divided by 18 (in the first 2014/15) and by 44 ULGs in completion job creation 2015/16 and the following financial years (2015/16– as per their 2018/19). CIPs and 3. A. If score equal to target for the financial year, full their annual allocation, action plans, B. If score below target for the financial year, prorata as reduction, 73 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank demonstrate C. If score above target for the financial year, pro-rata d in the increase. APA, and ensured that Disbursement from the government to ULGs will be determined value for as: Total disbursement amount (as calculated above) divided money is across compliant ULGs in accordance with population and achieved. 46 score. Formula for disbursement from IDA to the government is: • [total annual disbursement] = [{sum of individual scores of all ULGs/44 (first year only 18 ULGs)*}/ {target score for the financial year}] X [target disbursement amount i.e. US$16.2 million for 44 ULGs from the 2015/16 and the following years (first financial year, the amount is: US$10.3 million for the 18 ULGs)] Performance targets for this DLI are: 2015/16: 60 points 2016/17: 65 points 2017/18: 70 points 2018/19: 75 points 2019/20: 80 points Formula for disbursement from government to ULGs in 2014/15 is: • [disbursement to any ULG] = [population of ULG X performance score of ULG] / [∑ (population of ULG 1-..18 46 Composite index of performance based on areas in infrastructure implementation, maintenance performance, planning and implementation on job creation and value for the money of investments implemented. 74 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank X performance score of ULG 1-..18)] X [total disbursement amount for the financial year], providing that the ULG has complied with the minimum conditions. Formula for disbursement from government to ULGs in 2015/16 and following years is: • [disbursement to any ULG] = [population of ULG X performance score of ULG] / [∑ (population of ULG 1-..44 X performance score of ULG 1-..44)] X [total disbursement amount for the financial year], providing that the ULGA has complied with the minimum conditions. * Note: For the new 26 ULGs, this DLI will only be applied from 2015/16, hence amount to be distributed (US$10.3 million in 2014/15) will only be allocated across the 18 ULGs. Disbursement will be made provided that previous disbursements from government to ULGs have all been made. US$ 2,600,000 per year provided that conditions are fulfilled. First year release for 2014/15: Condition for release is the work- plan and TOR for the 4 regional support teams 32 staff/4 X 8 staff for the core positions defined in the Program Operations Manual, in place as per terms of reference (before the start of 4 13 0 0 X 18 ULGAs 2014/15), checked by APA). Regional government capacity Second disbursement year (2015/16): Teams are in place and building and operating. Minimum 80 percent of the staff in place: 100 support percent allocation, 50–80 percent: 50 percent allocation, less teams in than 50 percent: no allocation. Additional condition is that the 75 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank place and region has adopted service delivery standards (as issued by support MUDHCo),* and issued those for the cities, and provided urban guidance in implementation (reports). (Documented by APA service review October 2014). delivery Third disbursement (2016/17): Teams are in place (minimum 80 percent of the staff), and review of execution rate in 2014/15 (more than 80 percent of planned activities implemented = full allocation 60–80 = 50 percent, less than 50 percent = no allocation). * Note that it is an additional condition for disbursement that the region has adopted service delivery standards (as issued by MUDHCo), and issued those for the cities, and provided guidance in implementation as well as monitoring (report). Documented by APA October 2015. Similar for following years. * This condition is only valid if MUDHCo has issued the service delivery standards to the regions. Calibrated according to number of teams with the required composition and activity level. ORAGs Audit (US$7,000,000)/ 5 years = US$1,400,000 per year carry out timely audits Disbursement calibrated in a manner where each region receives 5 of ULGs’ 7 US$31,818 per ULG, for which the audit has been made for the financial accounts of the previous financial year. If a region has covered reports (by 7 ULGs in a timely fashion, it will be allocated 7 X US$31,818. January 7 of 76 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank each The timeliness of audit is reviewed and verified by the APA financial teams in January each year, with implications for the allocations year) for the following financial year. Amount of funds is calibrated in accordance with number of timely audit in the regions (timely audit means that the final audit report is issued no later than January 7 after the financial year for which the audit concerns. Environmental and social safeguards audit and reviews: US$6,000,000 / 5 years = US$1,200,000 per year: REPAs Disbursement calibrated in a manner where the disbursement is: timely US$27,273 per ULG for which the region has performed timely review review/audit and approval of safeguard documents and review 6 6 0 0 ULGs’ of implementation capacity for environmental and social safeguards mitigation and monitoring measures for CIP and environmental compliance and social audit (annual). If a region has conducted timely audit of 6 ULGs, the allocation will be 6 X US$27,273. US$4,000,000 /2 times (third and the fifth year) = Regional US$2,000,000 per time for 2016/17 and 2018/19). revenue authorities Disbursements are made according to the number of ULGs support where regions have conducted consultative review with ULGs 7. 4 0 0 ULGs’ of municipal revenues/tariff/tax rates and bands, and revenue efforts to enhancement plans, and up-dated tariff proclamations with generate consultation and decisions recorded in regional council minutes revenue in the year prior to the APA: 77 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank Disbursement calibrated as US$44,455 per ULG where conditions are fulfilled. 22 million /5 years = US$4.4 million per year. First year (2014/15): Minimum condition for disbursement: Plan prepared for the technical federal support teams in place: (12 + 11 = 23 staff), covering the developing regional states, Dire Dawa, Harar + remaining regions + and for backstopping support of all ULGs and support to MUDHCo according to standard format as per the Program Operations Manual, and with the details on minimum level visits to ULGs, staff weeks in ULGs, and the The annual like and terms of reference for positions. MUDHCo capacity Following years (2015/2016 and the following financial years): 8. 22 building activities for Minimum 60 days prior to the financial year, MUDHCo Program provides information on capacity building plan in place (up- ULGs, dated for the coming financial year), and review of execution regional rates in the ongoing), see below. Plan should be adopted for the govern- future fiscal year, and minimum 80 percent of the 23 staff must ments, and be in place and the execution rate of the planned activities the ministry should be above 60 percent: 100 percent allocation. completed If minimum 60 percent of staff in place and minimum 40–60 percent execution: 60 percent allocation. Below 60 percent of staff in place and/or below 40 percent execution: No allocation. 78 # Bank Of which Deadline Minimum Maximum DLI Determination of Financing Amount to be disbursed against financing Financing for DLI DLI value value(s) expected achieved and verified DLI values allocated available for Achieve- to be to be achieved for to the ment achieved Bank disburse- DLI Prior Advan- DLI (M to trigger ments purposes US$) results ces disburse- ments of Bank US$5,000,000 = US$1,000,000 per year. Disbursement of funds is made upon timely APAs and from third assessment (value for money audits). “Timely” is defined as by end of January in the year prior to the fiscal year where funds to ULGs are allocated. First year will have an exemption and the deadline will be before the beginning The APAs, of the financial year. independent procurement As the value for money audit is only conducted from the third audits year of the Program (September–December 2017), the APA will (IPAs), and count 100 percent in fiscal 2015 and fiscal 2016 allocations. 9. value for 5 0 0 Thereafter, the two assessments will have an equal weight in the money disbursement rates. audits are procured and The disbursement is on/off where APA and value for money completed audit count 50 percent each, that is, if the APA has been on time conducted timely, US$500,000 is released in the following fiscal year and similar for the value for money audit. In the first two fiscal years, where there is no value for money audit, the APA will count by 100 percent, that is, US$1 million. The procurement audit will be supported and conducted by the public procurement agency from the third year, and the condition is that results are fitting into the APA in the area of procurement, or is covered by the APA. 79 Annex 4: Summary of Technical Assessment Ethiopia: Second Urban Local Government Development Program Strategic Relevance of ULGDP II 1. Ethiopia is urbanization rapidly – with its urban population having doubled in 35 years, from 8.5 percent in 1967 to 17.4 percent in 2012. In addition, the rapid rates of urbanization are expected to continue. The UN expects the rate of urban growth to average 3.57 per cent per annum between 2010 and 2015 placing Ethiopia among the fastest urbanizing countries in SSA. According to UN’s medium variant projection, the urban population is expected to reach 23 per cent in 2030. This is an opportunity for the country, as urbanization will be the key to Ethiopia’s transition to a middle-income country, as it will help provide the ground for the transformation of the country’s economy. Timmer and Akkus (2008) find that rapid urbanization is a necessary condition for structural change. Financing and sustaining effective urbanization will be crucial to sustaining the high rates of economic growth Ethiopia has been recording for the past decade. Ethiopia needs to shift its focus to building its urban economy, not only because this will be the source of growing competitiveness, but also because of its impact on the macroeconomic environment, livelihood improvement and poverty reduction. 2. However, there are serious challenges to effective urbanization, and this limits the country’s overall economic growth. These limitations broadly comprise; (a) infrastructure and service delivery gaps and urban administrations institutional capacity weaknesses, as indicated above in the country and sector context section; (b) an increasing urban population and higher demand for the already limited services and infrastructure, and (c) a significant fiscal gap to help ULGs overcome these challenges. The fiscal gap is due mainly to the inadequacy of the current fiscal system in Ethiopia to meet the financing needs of these fast growing ULGs. As explained above in the “Context” section of the main text, within the fiscal system, ULGs receive recurrent support from regions through block grants to meet their mandate to carry out the state functions which have been delegated to them from the regional governments and some financing for core public sector employee salaries. In addition to these resources, there is almost no support for capital investments. In most cases, ULGs have to meet the infrastructure investment financing through their own source revenues (see table below which presents the financing sources for urban development in the country). 80 Table 1: Urban development spending at different government levels, 2011/12 (EFY 2004) Urban Total public Urban Urban development spending development as development as (ETB million) (ETB million) percent of total percent of total government development budget budget Federal 232.7 52,893.8 0.4 4.5 Federal/regional unassigned capital 223.7 15,532.2 1.4 4.4 Regional (Bureau) 869.6 28,534.2 3.0 17.0 Woreda level 658.3 27,456.5 2.4 12.8 Municipal (own source revenue) 3,148.1 3,148.1 100.0 61.3 TOTAL 5,132.3 127,564.8 3.7 100.0 47 Source: Based on data from IBEX/MoFED. 3. Yet analysis of ULG fiscal position confirms this fiscal gap: Study of 12 sample ULGs shows that even with future improvement in revenue generation at current growth levels, ULGs will need substantive support in order to achieve the government urban development objectives: Revenues of these ULGs vary within a board range of ETB 27 (US$1.5) and ETB 400 (US$22.2) per capita. At the national level, as indicated in the table below, all municipal revenue constitutes only about 3 percent of total public revenues in the country. The most significant revenue assignments are at the federal and regional levels. Given the specific figures in the sample ULGs and the aggregate national picture, the current system of relying on ULG own source revenues to meet most, if not all, ULG institutional and infrastructure/service delivery mandates is not feasible. Without additional funding, ULGs will operate at a sub-optimal level and not fulfill their roles as economic growth engines for the country. Table 2: Revenue profile for Ethiopia (actual revenue collections, FY2011/12, EFY 2004 ETB (million) Percent Consolidated (federal / regional) revenue 102,863.7 97.0 o/w Federally collected revenues 85,879.7 81.0 o/w Regionally collected revenues 16,983.9 16.0 o/w Collected at bureau level 3,910.2 3.7 o/w Collected at woreda level 13,073.7 12.3 Municipal revenue 3,148.1 3.0 Total public revenues (excluding grants) 106,011.7 100.0 Source: MoFED/IBEX 47 As consolidated budget accounts only report on spending from treasury sources (that is, federal/state revenues and block grants) and external sources (international grants and loans), but exclude local expenditures funded from municipal own source revenues. In order to get a view that is as comprehensive as possible, it is assumed that municipal own sources are fully spent on urban development. Caution should be used in interpreting these data, as there are some inconsistencies in categorization and/or coding of the underlying budget data, which makes it difficult to consistently isolate urban development spending. 81 4. ULGDP II is intended to address these in the context of the overall evolution of the government’s program and the intergovernmental fiscal system in Ethiopia. The Program rationale is to address the current urban infrastructure gaps and strengthen the institutions of both the ULGs involved in service delivery and the regions and MUDHCo for support for urban management and improved urban services. The Program will be an important continuation of the improvement of infrastructure and services in the 18 cities currently participating in the program, through performance-based capital grants, as well as an important kick-start on urban development in the new 26 ULGs. The Program will address urban poverty through the provision of employment opportunities during civil works activities in the ULGs, improved infrastructure important for private growth, markets opportunities and improvement of service in core areas of importance for urban development. It will also catalyze enhanced contributions from the regional and city level for core infrastructure and services. 5. To address the fiscal gap, the IDA contribution to the Program will significantly increase the resources for urban infrastructure and service delivery. The contribution of IDA to the annual performance grant of the Program, which will be around on average US$64.6 million per year (US$323 million) or 1,214,480,000 ETB constitutes about 24 percent of the estimated spending on urban development. 48 6. Importantly, the institutional focus and goals of the Program whereby resources to ULGs will be made available only as a result of proven enhancements in their institutional performance address the core issues facing the urban system. This approach is appropriate in the current policy environment where government is significantly enhancing its focus on and support to ULG management and service delivery. 7. There is a strong case for public funding for the Program. The types of public goods supported by the program would never be provided at a sufficient level without the ULG interventions. Private financing for key urban service delivery and infrastructure services, through public-private partnership schemes, is an important option to consider and will play a role. However such schemes are limited in nature—they cannot be used for all urban services or infrastructure-, they require significant local government institutional capacity to formulate, contract out, properly supervise implementation and mitigate various risks of failure by the private companies contracted—which currently does not exist in the majority of local governments; and they can only be implemented in national environments where the overall legal and regulatory framework is conducive and friendly towards public-private partnerships. Given these limitations, among others, in the targeted 44 ULGs in the Program, public financing is assessed to be the optimal decision. 8. The proposed Program will contribute directly to the government’s Growth and Transformation Plan (GTP), especially the pillar on enhancing expansion and quality of infrastructure development, enhancing expansion and quality of social development (e.g. through creation of services and employment opportunities) and building capacity and deepening 48 Ibid, Ibid, Component 2a, Table 4.5 As is the case with all reports generated by IBEX, caution is needed in interpreting the data. For instance, it is possible that inconsistencies in the coding of the underlying budget data allows to identify some—but not all—urban development spending. (Exchange rate: 1 US$ =18.8 Birr to US$ is applied in this case). 82 good governance and the new Ethiopian Cities Prosperity Initiative, where the performance measures in the APA is designed in a manner closely related with the objectives of the new strategy. Urban development is a major tool for ensuring that there are efficient growth centers for the country-wide development and creation of employment opportunities through investments in infrastructure and the benefits of this afterwards for private development in other sectors. The labor-intensive investments funded under the ULGDP, and promotion of the activities of micro and small enterprise development through involvement in the execution of Program infrastructure investments, are key priorities. The focus on improved own source in the incentive system and capacity building support elements are also important in providing a strong, consistent and buoyant ULG revenue base and improved future levels of infrastructure investments. 9. Given the importance of urbanization and the role of ULGs for Ethiopia’s overall economic growth on the one hand, and the current fiscal gap which prevents ULGs from fulfilling this role on the other, the Program is assessed to be strategically relevant. In addition to helping reduce the fiscal gap by raising local government institutional capacity, the Program is also fully aligned with the government’s policy priorities. 10. The World Bank, as a global development institution, can, together with its partners, be an effective broker of knowledge and play a catalytic role as facilitator for the urban reform process in Ethiopia. The Bank is particularly well positioned to assist the government with the evolution of its urban infrastructure finance and management system, due to the long standing partnership in the urban sphere (see paragraphs 14 and 15), its regional -particularly through the design and implementation of urban focused performance-based grants in Tanzania, Uganda and Ghana, among other eastern and southern African countries, and international experience on similar programs and its potential to provide long-term financing as required. Technical soundness of ULGDP II 11. The technical design of ULGDP II draws heavily from the extensive experiences of Bank and government partnership in the urban sector, most recently the ULGDP. The four annual performance assessments of the ULGs supported by the program, a program midterm review in 2011, as well as a number of specific technical design studies, including a comprehensive LG revenue enhancement study49 and a recent benchmarking study of urban service delivery needs and coverage 50are among the body of knowledge produced to determine the technical elements of the Program. 12. The proposed design and the activities to be implemented under the proposed ULGDP will contribute to the realization of the Program results and development objective. Experiences from the first phase of the program and from other similar projects in relevant countries with the similar modalities have proved that the types of activities to be implemented using the Program funds at the ULG, regional and at MUDHCo levels are highly likely to produce results of 49 Dege Consult, Urban Institute and SuDCA Development Consultants: Ethiopian LG Revenue Enhancement Study, Component 2a Report, October 2013. 50 SUDCA, August 2013. 83 improved coverage and quality of core urban services and of strengthening of the institutional capacity of the participating ULGs, regions and the federal agencies involved. 13. The Program aims to strengthen relevant stakeholder incentives to contribute to Program objectives, through the application of the following elements embedded in its design: • Use of government systems to strengthen capacity at both the federal, regional at city level (the participating ULGs) for urban development, within flow of funds, financial management and operations. 51 • Focus on ULGs as the main implementing bodies. The ULGs will be responsible for the implementation of the Program activities at their level. The Program therefore provides an opportunity for the participating ULGs to improve their capacity, thus contributing to the achievement of the Program objective. • Place natural incentives through focus on performance. Although each ULG will be given a tentative allocation (also referred to as indicative planning figure) for the duration of the Program period, the actual amount of funds they receive will be based on them meeting and maintaining the minimum condition throughout the Program period and their performance outcomes. The performance assessment system is at the core of Program design since it will be the main driver for ULG capacity building and is directly linked to the Program results and disbursements. The assessment tool, which is based on the experiences from the current ULGDP and from other relevant cases in different countries, has been refined during preparation, and will be reviewed during implementation, if necessary. By the end of the Program most ULGs are likely to receive less or more than their tentative allocations, or indicative planning figures, depending on their results. The annual performance assessment has therefore adequate inbuilt sanctions and incentives mechanisms. • Get the focus areas right. The incentives will support core urban management areas of such as proper planning and budgeting, revenue generation, asset management planning, procurement and PFM, as well as strengthening of good governance and accountability. • Provide a flexible capacity building to allow ULGs to respond to the incentive mechanism. All participating ULGs will benefit from municipal capacity building, to prepare them to receive the significant performance grants during the next assessment and ensure improved capacity for all ULGs by end of Program period. • Strengthen the links between investments, incentives and capacity building support, whereby the capacity building support and support is applied in a targeted manner to address identified gaps in the annual performance assessments. • Support the incentives of federal and regional level for backstopping support, capacity building, oversight and performance of roles vis-à-vis the ULGs through result-oriented allocations. • Introduce the performance-based grant element gradually for the new ULGs, with a smaller grant funding in the first year linked with compliance with minimum conditions. 51 ULGDP has developed a number of guidelines issues by MUDHCo, including for Assets Management, PFM, Capital investment planning, the Progam Operations Manual, which with slight up-date and refinement, will be used for the second phase as well. 84 • Strengthen the oversight, audit and safeguard procedures at all tiers of government, and address the few bottlenecks identified in the first ULGDP. • Strengthen the sustainability of the Program support through enhanced focus on municipal own source revenue mobilisation through incentives in the grant allocation system to improve municipal revenues, incentives to contribute towards urban development investments and through capacity building support from regions and the federal level. 14. Program design builds on the experience of ULGDP, and addressed the challenges of ULGDP raised in the earlier section of this work. These include ensuring that the annual assessments are undertaken on time, strengthening the capacity building support (supply and demand side), taking Addis Ababa out of the Program scope to ensure the unique circumstances of the primate city are addressed properly under a possible Addis Ababa specific project, and the expansion of the incentives to support at all tiers of governance (especially the involvement of the regional governments). In addition, the design of the Program has benefitted from the knowledge and experiences of internal and external experts and the experiences from performance-based grant systems from various countries. An increasing number of countries have introduced performance-based grants, and most recently linked to PforR operations with focus on urban investments, such as Uganda and Tanzania. 15. Furthermore, to ensure the sustainability of investments created by using Program funds and of the existing stock, each ULG will be supported in undertaking assets management, capital investment planning, operational and maintenance planning, and revenue enhancement planning. The support to improvement of own source revenue will include the update of revenue data base by source and revenue targets, billing, collection, enforcement, complain resolution, and information, communication and capacity building systems. 16. The basic tenants of the current assessment system have been refined to enhance ULG capacity in own source revenue generation, management of fiduciary, social and environmental systems, project implementation, operations and maintenance. Minimum conditions, comprising requirements in planning, PFM, social and environmental systems management and procurement must be achieved and maintained by participating ULGs throughout the Program and are put in place to ensure minimum capacity of the ULGs to handle the Program funds in full compliance with Program’s fiduciary and safeguards requirements. If ULGs do not comply with the minimum conditions, they will not get access to the funds from DLIs I, II and III, but will be supported through the capacity building activities. In addition to the minimum conditions, a set of performance measures target urban institutional performance in core areas such as planning, budgeting, PFM, own source revenue, procurement, assets management and governance as well as infrastructure delivery. These measures are detailed in a transparent performance assessment guidelines, prepared by the government for the Program. The performance results approval and verification protocol process will be formalized through systems and procedures for approval, complaint handling and publication and the assessments will be conducted in due time to fit with the ULGs budgeting and planning cycle, which will be supported through federal incentives for timely completion. The performance assessments will continue to be outsourced to a private, neutral and objective company to ensure that results are objectively measured, credible and that the general credibility of the entire system is maintained. 85 17. The Program will maintain the systems and procedures developed under ULGDP with the following refinements. Table 3: Lessons learned from ULGDP reflected in ULGDP II Area Lessons learned Action taken Annual Performance Important to ensure that results fit with This will be ensured with a clear time-plan and Assessment cycle the ULG planning and budgeting linked with the DLI on timeliness of the APA synchronized with process and value for money audits. ULG planning and budgeting cycle. This will be monitored and disbursed against a DLI. Indicators sharpened Although there were a limited number The system will be simplified with maximum and targeted of performance measures under 20-25 performance measures, and with clear ULGDP, the system of registration, description of how these are measured in the data collection was very APA Manual, which is annexed to the Program comprehensive with more than 70 data Operations Manual. The new indicators are also collection points. more focusing on the results, such as delivery of infrastructure targets, value for money and actual improvements in the ULGs sustainability, such as increase in own source revenues. Second, the system of approval of results will be formalized. The indicators will also be further sharpened to target the PDO of the program. System of Performance-based grant allocations The current static system, where ULGs are performance provide incentives to perform, but can grouped into (1) non-access, (2) static allocation incentives be strengthened through a system and (3) accelerated allocation (+ 20 percent) will strengthened where every incremental improvement be improved and the system of performance will is rewarded. be fully integrated with the allocation formula on a continuous scale where incentives are kept on all levels of performance, on a scale between 0–100. Focus on municipal State revenues have improved faster Strengthening of the incentives to improve own source revenue than municipal revenues municipal core revenue generation (though the and longer term minimum conditions and PMs in the annual sustainability assessment system), and strengthening of the strengthened environment for this through improved dialogue between regions and municipalities and through strengthening of the capacity building support to ULGs within this area. Capacity building Mostly supply driven with one federal Supply side capacity building will be support strengthened team under ULGDP. strengthened and supplemented with a demand driven element. As well, regional governments will now be strong involved in the capacity building support, especially in the 4 regions where many ULGs are targeted. This will also be supported by DLIs for the regional and federal capacity building support to ULGs. 86 Area Lessons learned Action taken Involvement of the The ULGDP has proved the Regions will be more strongly involved and regions in core areas importance of the regions in the encouraged to take active part in the capacity of importance for support of cities building support, facilitation of cities own Program objectives source revenue, social and environmental safeguards, audits, and backstopping support as well as mentoring and monitoring. Supported by a specific DLI. The importance of ULGDP has improved the coverage This will be further strengthened in the ULGDP timely audit and timeliness of audit of cities’ final II through a specific DLI focusing on timeliness accounts of the audit, and through strengthening of the minimum conditions on audit results from previous FY. Flow of funds ULGDP has proved the importance of A more simple, timely and predictable system of improved timely and up-front grant allocations disbursements of grants will be introduced with and disbursements to ULGs to ensure bi-annual equal installments. that absorption and utilization of grants is strengthened 18. Based on the above, the technical design of the Program will contribute to the overall goal of efficiently producing results and reaching the Program’s objectives. The Program technical design reflects international good practice in the overall urban sector and specifically in technical standards and typology of Program activities. As well, design ensures, to the extent possible, that the incentives are in place for Program stakeholders to effectively contribute to the Program’s success. Therefore, the Program is assessed to be technically sound. Program’s expenditure framework 19. The expenditure framework of the Program will be a total of US$556.5 million. US$499.5 million will constitute the performance-based allocations for investments and will go directly to Program ULGs for investments specified under the investment menu (Annex 1). US$30 million will be for the results for which the regional governments will deliver (of which US$14 million are related with capacity building support to the ULGs). Finally US$27 million will support MUDHCo activities and results directly linked to the execution of the performance- based grants, as well as for program management. The table below provides the overview of the main elements in the program expenditure framework. 87 Table 4: Program expenditure framework (US$ million) Classification FY2015 FY2016 FY2017 FY2018 FY2019 Total 52 53 Performance based fiscal transfers to 44 ULGs 78.75 105.20 105.20 105.20 105.20 499.55 (DLIs 1, 2 and 3 which measure Program minimum conditions and performance measures) Of which from regions and cities* 28.60 36.99 36.99 36.99 36.99 176.55 Of which from regions only 13.13 18.22 18.22 18.22 18.22 86.02 Of which from cities only 15.48 18.77 18.77 18.77 18.77 90.53 Capacity building and ULG support by regional 5.20 5.20 7.20 5.20 7.20 30.00 governments (linked to DLIs 4, 5, 6 and 7) Federal support and capacity building Program 5.40 5.40 5.40 5.40 5.40 27.00 administration (DLIs 8 and 9) Total 89.35 115.80 117.80 115.80 117.80 556.55 * Regions and cities contribute to the performance-based allocations as follows: regions participating in the ULGDP: (Amhara, Oromia, SNNPR, and Tigray): 30 percent funding in addition to IDA grants, developing regional states: 20 percent. Existing ULGDP ULGs: 30 percent, new cities in the developing regional states 10 percent and other new cities: 20 percent. Harar and Dira Dawa contribute 50 percent in addition to the IDA grants (both the regional and city contribution). Notes: Figures in the table may not add up due to rounding. 20. Expenditure performance under ULGDP has been satisfactory, with no major expenditure performance issues throughout implementation since 2008. Due to satisfactory implementation and higher than expected disbursements, additional IDA and counterpart funding were added to the Program in 2011. It is expected, albeit with some potential delays in the final completion, that all funds from the current ULGDP will have been exhausted by June 2014, as the ULG commitments are above the available funding from the ULGDP grants whereby ULGs will have to contribute more from own source revenues and/or other sources. The new system of disbursement linked allocations linked directly with the results of the APAs, advanced timing of the APAs, and higher reliance on government systems and procedures, is expected to further enhance the current implementation and absorption rates. 21. The simple population based allocation formula of the ULGDP, which is adjusted according to the performance of the ULG as determined in the APAs will be maintained. Disbursement model will build on and further refine the current system, and be based on the relative performance of ULGs, where every point will count in the calculations of the disbursement amounts, and will ensure that each ULG is compared with the average performance, and rewarded if above this average. The current static system, where ULGs are grouped into (1) non-access, (2) static allocation and (3) accelerated allocation (+ 20 percent) will thus be improved and fully integrated with the allocation formula on a continuous scale where incentives are kept on all levels of performance, on a scale between 0–100. 22. Disbursements of Program funds from IDA to MoFED will be once a year. Disbursements from MoFED to BoFED, and from BoFEDs to OFEDs will be twice a year, based on the results of the APA (flows to ULGs will be in the beginning of July and January of each year). 54 The annual disbursement amount will be predictable as determined in the APAs. Program funding will be predictable and in full sync with local government budgeting cycle. To 52 Comprised of US$50.14 million IDA and US$28.60 million government funds from regions and ULGs. 53 Comprised of US$68.21 million IDA and US$36.99 million government funds from regions and ULGs. 54 Instead of the current systems of fund requests and replenishments. 88 ensure predictability, ULGDP indicative planning figures will be shared with ULGs and regional governments the entire period, although actual annual disbursements will be based on performance assessment results and compliance with the DLIs. Like the current ULGDP, the Program funds will be protected from any budget cuts. Cities will be informed about their actual disbursement for the following fiscal year in November/December (with final confirmation in January) of each year, immediately after the assessment exercise, so as to give the ULGs ample time for their planning and budgeting process which is completed in May of each year prior to the financial year where disbursements take place. 23. The current ULGDP is included in the national budget and it is proclaimed at the federal level under revenue and expenditures for MUDHCo. To ensure that the reporting of the Program expenditures are integrated into the national public financial management system codes will be established in the charts of accounts for regions and cities. This will bring greater ease in accounting for expenditure from the Program, consolidating aggregate ULG figures and strengthening the use of the national public financial management system, IBEX. Ethiopia has a well-developed budget classification and charts of accounts, which the Program will make use of, and few additional codes will be established for the main expenditure items in the government’s charts of accounts. 24. Program grants (performance-based capital grants and capacity building funds) are to be seen as specific purpose grants in the government’s fiscal decentralization strategy 2004, and will target specific outcomes in terms institutional improvements and infrastructure and service delivery, although these are not sector specific, but multi-sectoral reflecting the needs for urban development across sectors. It will promote the future roll out of support to ULGs as a genuine part of the intergovernmental fiscal framework. 25. As explained above, ULGDP performance-based grant will have indicative allocations (see Annex 3 for detailed amounts per each Program ULG). The actual annual disbursement to a given local government will depend on that local government’s performance as determined by the annual performance assessments. The graph below shows the typical range of per capita disbursement depending on the performance of a ULG against the average performance (in this example set as 60 points on a scale from 0–100), and the allocation is the first 2014/15 with an average of US$15.69 per capita (for the existing ULGDP ULGs), and with examples of what average performance scores on the three ULG performance-related DLIs will result in. New 26 Program ULGs will only get access to the DLI 1, the minimum condition linked allocations in the first Program year, to ensure that they gradually build up the capacity to handle and absorb funds. The allocation will range between non-compliance (US$0), compliance with the minimum conditions (only US$4.14), and top performance US$23.2 per capita for 2014/15. The system is designed in manner where every point has an impact on the allocation. For example, an average size ULG with a relatively small increase in average performance on 3 point from 60 to 63 points in 2014/15 on DLI 2 (all other ULGs equal) will receive an extra per capita allocation on US$0.4 (2.5 percent increase) or US$38,538. 89 Figure 1: Range of annual per capita allocation for a typical ULG depending on performance on the minimum conditions and performance measures (2014/15) 25 20 15 10 5 0 Allocation per capita US$ per year against performance Program’s results framework and monitoring and evaluation 26. The Program will be monitored, and evaluated through the use of number of M&E tools throughout implementation including regularly reports from ULGs to MUDHCo, the APAs, value for money audits, and the midterm review. 27. The Program data (revenues and expenditures), including physical investments to be financed, will be captured using the national public financial management system, IBEX. This financial reporting tool will be supplemented by the national ULGDP M&E system managed by MUDHCo which track, among other things, progress across ULGs towards Program’s indicators. Practice under ULGDP will be maintained where the ULGs collect key data and share it with MUDHCo twice a year. The ministry consolidates and analyzes the field data submitted by ULGs and updates the Program’s results framework twice a year. As with current practice, MUDHCo will continue to share the monitoring information and analysis with the Bank on a regular basis. As explained above, it will also use this as part of the annual Program report. The ministry will also develop reporting formats for the use of the capacity building funds (under the general performance-based grant) for ULGs and regional governments. These reports will be aggregated and the information included in the annual Program report. The ministry, in addition to the regular updates of Program’s results framework, also uses the data from the national monitoring system to commission independent reviews and a series of studies of service delivery, benchmarking of services, and the like. This practice, established under ULGDP, will be maintained under the Program. 28. As under the ULGDP, MUDHCo is also responsible for planning and supervising the implementation of the annual performance assessment, which is the major M&E tool to verify 90 the performance of the ULGs. The annual assessment will be carried out by an independent firm to ensure the objectivity of the process. The assessment will be carried out in line with the performance assessment guidelines, which is being developed by the ministry, with its content and quality acceptable to the Bank. The manual will provide clear definitions for each indicator, as well as comprehensive guidance on the scoring. Adjustments, which might be needed to the performance indicators and scoring, will be done throughout implementation and particularly at the mid-term review to address any possible shortcomings or changes on the ground. The internal MUDHCo M&E system will capture key data that will allow an assessment of the decentralization support structure, for example, capacity of MUDHCo to ensure timely and agreed transfers of funds to the ULGs and the institutions’ ability to provide needed capacity development and technical assistance to the ULGs. 29. The results of the annual audits conducted by the ORAGs and the value for money audits which the ministry will commission and will be included in the annual performance assessments, will also be important tools in tracking the institutional and infrastructure performance improvements. As well, the Program monitoring system will include and leverage the results of the internal audit for internal control and the external audits done by (or on behalf of) the ORAGs. Internal audit will play an important monitoring role, going beyond fiduciary aspects and, will include adherence to the Program implementation framework as set in the Program Operations Manual. In addition the internal auditors report to the council and their reports are generally acted upon. Proper functioning of the ULG internal audit will be a performance indicator to promote improved performance in this area. In addition, the annual external audit reports by the ORAGs are tabled to the councils and at the regional level. Analysis of external audit shows that they generally adhere with international standards and practices. 55 30. MUDHCo has been monitoring and reporting on the ULGDP successfully. However, given the increase in the scope of the Program, there will be a need to strengthen the M&E unit of MUDHCo with additional staff and capacity, which is included in the Program action plan. The focus areas of the ministry’s M&E department for the Program will be (a) generation of regular consolidated data on unit costs, spending across sectors and types of investments, as well as benefits of these investments; (b) provision of support to 44 ULGs (focusing mainly on the new 26 ULGs) and regional governments on the use of the reporting formats, application of M&E information for planning and budgeting purposes, and related M&E system to capture activities and impact, and (c) production of high quality analysis regarding trends and development within ULG own source revenues. 31. The current ULGDP has shown ULGs capacity to provide physical and financial reports on a regular basis (although sometimes with delays), although the quality of these reports needs improvement. There will be need for a capacity building support within this area in ULGDP II, especially to the 26 new ULGs. M&E capacity at federal, regional and ULG level will be enhanced through training of staff in M&E, engineering, finance and procurement so that they are able to compile timely progress reports for monitoring the implementation progress of the various activities under the Program. The additional M&E specialist to be recruited under the Program at the ministry will provide hands on support and mentoring to MUDHCo staff and to 55 See Dege Consultant, UI, and SuDCA Development Consultants: Ethiopian LG Revenue Study, October 2013, Report on Component 2a. 91 the regions in M&E issues related with urban development and the implementation of the ULGDP. 32. The Program PDO is to enhance institutional capacity of participating cities in developing and sustaining urban infrastructure and services. The Program will produce enhanced institutional performance in: (a) enhanced community participation in local government budgeting and planning; (b) efficient fiduciary management, (c) increased amount of own source revenues, (d) improved infrastructure, service delivery and operational and maintenance systems; (e) strengthening of accountability and oversight systems. The Program’s specific outcomes, outputs and targets are included in the main text of the Program Appraisal Document. The annual performance assessment system and the adjustment in the allocations are designed in a manner, which ensure that the allocations can be accelerated if the average performance of the ULGs is above the expected levels. Second, each ULG has incentives to improve performance as every point is counting in the result-based allocations. 33. The Program DLIs pertaining to ULGs (the first 3 DLIs) capture the ULG’s performance in relationship with the PDO. These will be measured by: (a) number of cities in compliance with the minimum access conditions; (b) the percentage/number of cities with strengthened performance in core areas such as planning, PFM, procurement, own source revenue, safeguards and accountability; (c) percentage of total planned infrastructure completed by participating cities, and percent planned capital investment plans actually implemented and maintenance performance. The federal and regional DLIs will closely monitor the federal and regional performance under the program in areas of timely annual performance assessments, capacity building support, oversight, and timely audit. 34. First, the annual performance assessments will be synchronized with the ULG planning and budgeting processes, and will be advanced so the results are ready by November of each year (with incorporation of the final audit results in January). Second, the M&E framework will be strengthened to ensure comprehensive information on employment generated, number of beneficiaries, and outputs of the investments in a manner, which can be quantified across the ULGs, and the physical progress reporting system will be standardized and computerized. 56 35. The table below presents the various inter-linked tools which will be used to monitor and report on the Program: 56 The existing manual system of consolidation of M&E reports will be upgraded to a computerized electronic data system, using access, excel, or similar tools. 92 Table 4: Data generation and collection Type of information Means Frequency Implementation experience, ULGs, regional governments, and Two reports a year, with institutional performance, physical MUDHCo, each with responsibilities as the content as agreed progress and outputs, technical aspects described above. with the Bank. of the Program, and achievement of APA Annually the key performance indicators. Achievements of infrastructure plans APA Annually and targets Value for the money Value for the money audits, results to feed Every year starting in the into the APA and impact on allocations third APA Financial reporting (use of funds, Annual financial statements, semiannual Semiannually expenditure composition, and the like) financial reports, internal audit reports, Annually annual external audit reports Detailed review of implementation Midterm review. Once in the Program experience, achievement of the key (2017) performance indicators, and progress towards the PDOs. Governance structure and institutional arrangements 36. The institutional arrangements will be based on the experiences from the current ULGDP, with clear division of tasks and responsibilities between involved parties, as per the government structure and consistent with existing legal provisions, regulations and guidelines. An additional enhancement under the Program to the institutional arrangements established under ULGDP, as discussed earlier, will be the technical involvement of the regional governments in implementation, see below for a summary of the main agencies involved and their roles. Federal level 37. At the federal level, • MUDHCo will have the following main tasks:  Capacity building architecture of the Program, including direct support to regional and urban local governments;  Establishment and operation of the federal mobile teams as described in the annex on capacity building;  Monitoring and backstopping support of the regional mobile teams;  Program management, including the procurement and management of the annual performance assessment and value for the money audits;  Program reporting, including the annual Program report;  Backstopping and guidance in issues such as ULG planning, assets management and own source revenue generation. • MoFED will have the responsibility for transfer of funds, financial management, including reporting and compilation of federal fiscal reports; • The Office of the Auditor General (OFAG) will be in charge of the annual Program audit, which will include all Program entities (44 ULGs, 9 regional governments and MUDHCo) to ensure that Program resources are budgeted for 93 and disbursed according to the Program’s expenditure framework, and that Program accounts are audited as per statutory requirements; • Support to FEAC to strengthen their role in the program 38. As per the current ULGDP, MUDHCo will have the overall responsibility for accounting the ULGDP II funds to Parliament. Day-to-day coordination of the Program will be handled by the Urban Governance and Capacity Building Bureau (UGCBB) as per current practice (see annex for organizational structure of MUDHCo) and a diagram with an overview of the main institutional arrangements in the Technical Assessment. The division of tasks will be clearly outlined in the ULGDP Program Operations Manual, which is currently being updated to be ready for the start of the second phase. 39. As explained above in the capacity building section and in the section on capacity building from the main body of the PAD, MUDHCo will also be responsible for the capacity building architecture, the federal capacity building team, backstopping of the regional teams, and of the Program and management of the annual performance assessments/value for the money audits. The technical focus of the capacity building support will primarily be the gaps identified at the Program’s annual performance assessment. The results of the ministry’s capacity building support to regional governments and ULGs will be annually measured through a distinct DLI (see the DLI section on this for further details). 40. MUDHCo will produce and submit to the World Bank an annual Program report which will provide information on the following: • Summary of the assessment results, including the performance of Program ULGs and the disbursed amounts. • Summary of aggregate Program expenditures and Program infrastructure delivered by ULGs. • Execution of MUDHCo capacity building plan. • Summary of aggregate capacity building activities undertaken by ULGs and regional governments. • Summary of aggregate environmental and social performance reports from each ULG, including information on grievances. • Summary of aggregate information on procurement grievances. • Summary of progress against Program’s performance indicators. • Summary of aggregate information on fraud and corruption issues. 41. MUDHCo has been implementing the current program in a satisfactory way and is to be commended for the Program’s achievements highlighted above. Importantly, however, there are staffing gaps in the ministry, where 73 percent of positions in UGCBB and 64 percent of positions in the program management department are filled. The ministry is also implementing other operations in the country, in addition to the ULGDP, with similar degrees of high capacity and staffing demands. The significant geographic and technical scale up of the ULGDP under the proposed PforR, and the existing staffing gaps, if unaddressed, bring considerable risk to the achievement of the operation’s development objective. Therefore there is a serious need to fill the personnel gaps and further strengthen capacity of UGCBB. The specific actions on this area 94 are detailed in the Program action plan below, and the strengthening of the federal capacity through the mobile teams to provide support to regions and ULGs. 42. As per ULGDP, MoFED will be responsible for handling the flow of funds to the regions and Program ULGs. It will also prepare semi-annual and annual financial reports. The flow of funds will be simplified compared to the existing system, with tranches twice a year based on results of annual performance assessments. Regional level 43. At the regional government level: • Regional government BUDs will be the core coordinating office. They will be responsible for the following:  Capacity building of the ULGs in their jurisdiction;  Consolidation of progress reports from ULGs;  Oversight functions and backstopping support on various tasks related with the Program. • Regional audit offices (ORAG) will conduct, either directly or through delegated authority, the external audit of ULG audits; • Regional environmental protection agencies (REPA) will ensure compliance at the ULG level with the environmental regulations; • Regional revenue authorities will support the ULGs in their initiatives to improve on own source revenue generation; • Bureaus of Finance and Economic Development (BoFED) will manage flow of funds at this level, and consolidate the fiscal reporting from the ULGs for onward submission to the federal level; • Capacity building support to the ULGs, especially organized by the 4 regions Amhara, Tigray, Oromia and SNNPR where there is a stronger capacity available, and where there are several ULGs enrolled, where regional mobile teams will be established to support ULGs. 44. The track record of regional government support to ULGs to date has been mixed. While some regions have been executing their capacity building and oversight mandates vis-à-vis the ULGs in a satisfactory and even sometimes proactive manner, other regional governments have not performed as well, exemplified by delayed external audits, or lack of response to ULG request for the approval of bringing flexibility to tariff and tax structures. Given this mixed track record and the increase, under ULGDP II, in the technical role to be played by regional governments, particularly their role for supporting the enhancement of ULG capacity, and the addition of four more regional governments who did not participate in the ULGDP, collectively increase the risk at this tier of government against the achievement of Program PDO. It should be underlined, however, that the four new regional governments (Afar, Benishangul Gumuz, Gambella and Somali) will only have one Program ULG each in their jurisdiction, with a total population of 284,093, which constitutes 6.5 percent of the total population in 44 ULGs. Therefore, the addition of new four regional governments to the Program is expected to add a marginal risk to the overall risk at the regional government level. The four regions will be supported by the federal mobile team, which will also provide support to Dira Dawa and Harar. 95 The Program design takes these risks into account and mitigates them, to the extent possible, through (a) DLIs which target results at the regional government level and Federal level capacity building and backstopping support, and (b) Program action plan elements which target this tier of government. ULG level 45. At the ULG level, the mayor’s office will be responsible for the overall performance of the ULG, and based on a signed Program participation agreement, the tasks will be clearly defined in areas of matching funding, compliance with minimum conditions, performance criteria, accountability requirements and operations. The project selection and approval will be done at the city council level after involvement of citizens in the process of identification and prioritization and the established appraisal committees with heads of departments, chaired by the mayor or the city manager. ULGs will also ensure compliance with all financial management, procurement and environmental and social safeguards and regulations. If key parts of these areas are not complied with as stated in the Program’s minimum conditions, no Program funds will flow under DLIs 1, 2 and 3. 46. An analysis of staffing carried out as part of Program preparation reveals that most ULGs have the necessary staff, but a few need to fill key positions to access Program funds. As would be expected, the 26 cities joining the Program’s performance grant mechanism have the greatest percentage of unfilled positions. Based on data from 27 ULGs, about 82 percent of positions at OFEDs are filled, with an average of 39 staff. About 84 percent of core financial management and procurement positions are filled, with an average of 22 staff. Some 85 percent of audit and inspection positions are filled, with an average of 5 staff. In budgeting and planning, some 64 percent of the positions are filled, with an average of four staff. The 19 ULGs assessed have an average of seven engineers or similar positions. In terms of education of staff, the ULGs have an average of 15 staff with BA/BSc or higher education. However, there is great variation, ranging from three (Motta) to 44 (Hawassa). The 26 new ULGs have a lower number of filled positions (77 percent are filled with an average of 31 staff in contrast to 86 percent with an average of 47 staff for the 18 existing ULGs. They also have less capacity in the core positions (see the summary table below). All ULGs are expected to have the necessary core staff in place by Program effectiveness; ULGs that do not meet this minimum condition will not be able to access Program funds (see the summary table below). 96 Table 5: ULG staffing, required and actual positions filled City Required Actual Position filled Position filled Position Position Filled Position Filled - Staff OFED OFED (average, %) Finance/ Filled Budget and Technical Staff with positions filled (#) Procurement Audit / Planning (%) (engineers etc.) (#) BA/BScs (#) (%) Inspection (filled) (%) (#) All 50 39 82 % 84% 85% 64 % 7 15 sample ULGDP 57 47 86% 88% 86% 89% 8 17 Non- 42 31 77% 79% 85% 61% 5 12 ULGDP Number in N= 27 N = 27 N= 27 N=26 N=26 N=15 N =19 N= 27 the sample Source: Data based on collected data from 27 ULGs by SuDCA for the ULGDP IFA preparatory work and processed for by the Technical Assessment. For some positions, only data from a lower “N” is available. For the technical staff, data is not available on the official required positions. 47. Given the substantial increase in the funds which will be made available to the new 26 ULGDP ULGs under the Program, having key staff, particularly in these new ULGs, becomes critical to ensure that the funds are used in the appropriate fiduciary, budgeting, planning, consultation and other Program framework and rules. The design of the Program will mitigate this risk by making core staffing a Program minimum condition. As such, in order for all 44 ULGs to access the Program’s performance-based grant funding, they have to have these staff members in place each Program year. In addition to this risk mitigation, another measure adopted under Program preparation is the agreement with the ministry that the federal and regional governments will ensure that the Program ULGs have the following requisite staff by Program effectiveness; (a) city administrator, who is also the main coordinator of the ULGDP II operations, or another dedicated officer (b) finance officer, (c) 2 procurement officers, (d) municipal engineer, (e) physical/urban planner, (d) environmental and social systems management officers. Coordination arrangements 48. A program coordination committee will be established with representatives from MUDHCo and MoFED to ensure strong coordination of issues on planning, allocations, flow of funds, and approval of the results from the APAs. A Program technical (sub-) committee comprising key technical staff of MUDHCo and MoFED will be formed under this committee, which will, among other things, compile and review the results of the APA and provide quality assurance of the results, as well as handling of complaints in a streamlined manner. The Program Technical Committee (PTC) will meet quarterly and also carry out periodic evaluation of program implementation against objectives and provide technical guidance with support from the World Bank. It will bring policy issues to the larger coordination committee and ensure that the Program is implemented in line with the Program Operations Manual. Fraud and Corruption 49. Fraud and corruption during Program implementation that may affect achievement of results will be addressed by strengthening the implementation of existing fraud and corruption policies and measures available at the ULGs level. The detailed discussions of fraud and 97 corruption within the country context, and mitigating safeguards are included in the Integrated Fiduciary Assessment, and the program design contains a number of core initiatives to address the risks of this, such as especially the: (a) minimum access conditions for the performance- based grants, which also encompasses a grievance/complaint mechanism, and conditions for financial management; (b) performance measures on core areas of importance for fraud and corruption such as participation, financial management, procurement, accountability and transparency; (c) procurement audits (first as covered by the APA, and from the third year as conducted separately by the Public Procurement Agency, with results which impact on the level of funding for each ULG; value for money audits (from the third APA); and (d) comprehensive capacity building support from the federal and regional level, including team members in the technical assistance support with expertise on participation, accountability and ethics. 50. The Program has high levels of ownership at all levels of government (federal, regional and local). The coordinating ministry (MUDHCo) has been the lead entity in the implementation of ULGDP. The project management aspect of ULGDP has been consistently rated satisfactory, with the challenge of the timeliness of APA. The ministry, particularly the minister, is the main driver of the policy to scale up ULGDP. Regional and local governments of ULGDP also have a strong commitment to the Program, indicated by their past performance of signing participation agreements annually and having contributed a significant amount of their own revenues as counterpart funding to match the IDA funds. The new 26 urban local governments are equally committed to the Program and have expressed a strong wish to be included over the various rounds of discussions during preparation. Economic justification of the Program 51. Economic evaluation of performance-based fiscal transfer programs internationally indicates that the economic benefits are wide-ranging and mutually strengthening. Moreover, a number of ULGDP specific reviews of the major investments show: (a) a high level value for the money, (b) that the investment are highly labor intensive/ conducive to job creation, and income- generating for local communities, (c) that the modalities for delivery are efficient compared to other modes of service delivery, (d) general high levels of economic rate of return on investments. Finally, the review under the recently conducted revenue enhancement study shows that ULGs have a strong ownership in the operations, and that the incentives provided improve performance and capacity in core areas of ULG operations and management such as procurement, revenue generation and assets management. The box below summarizes some of these findings. 98 Table 6: Key benefits of ULGDP investments • Coverage of significant infrastructure and service delivery gaps with more than a doubling of the resource available at the ULG level for urban investments. • Significant employment creation, that is, more than 300,000 new jobs are expected based on experiences from phase one. • High economic rate of return in areas where most of the funds are utilized, and competitive costs compared to other modalities and investments. • Strong support of institutional improvements, incentives and longer-term sustainability in terms of strengthening of core institutions, planning, PFM, procurement, and safeguard management. 52. Analytical work shows strong economic benefits of ULGDP investments, with strong focus on cobblestone road construction. 57 The key benefits of this and other ULGDP investments include reduced transport costs, small and micro enterprise (private sector) development, and income and job creation activities. The economic benefit of the program towards private sector development is particularly significant. This is because a large part of ULGDP infrastructure investments, including the key infrastructure investment, which is cobblestone road construction, are executed by local small and micro enterprises at the ULG level, with the involvement of the local community. 53. ULGDP investments are highly labor intensive and support job creation. The independent studies financed by the GIZ, which analyzed the ULGDP investments and MUDHCo data and monitoring reports indicate the significant impact on employment generation impact of the ULGDP investments. MUDHCo reports significant full and part time jobs created by the program. Specifically, a total 312,460 jobs have been created in 19 ULGDP cities between 2008/09 and 2013/14 as a result of the investments initiated and funded by ULGDP, supporting the objectives to focus on job-creation in the government’s development policy, the GTP, especially for the local youth and unskilled workers. It should be underlined that most infrastructure investments have a large share of women, youth and un-skilled labor, involved in project implementation (see figure below). 58 57 See GIZ: “Making Good Governance Tangible, GIZ, 2011” and the Draft Report: “Assignment on Money for Investment of ULGDP, Assessment and Evaluation Report”, Volume 1, Main Report for GIZ, 2011. See also Dege Consult, UI and SuDCA Development Consultants, “ELGRS”, Component 2a, Part One Main Report, October 2013 for examples of the benefits. 58 Based on M&E reports from MUDHCo, 2013. 99 Figure 2: Number of people employed on works contracts financed by ULGDP, fiscal 2008– 2013 92,294 87502 100,000 80,000 65,803 60,000 47,554 40,000 19,307 20,000 - 2008/9 2009/10 2010/11 2011/12 2012/13 54. The economic rate of return reviewed by international institutions show the benefits of investing in areas targeted by the ULGDP grants. First, a study undertaken by “Sanitation and Water for All” indicates that the economic rate of return is high, and in the range of 15-20 percent for urban investment projects in Ethiopia. Within the most important sector for ULGDP - the road sector- gravel roads have an economic rate of return ranging from 7 to 60 percent, depending on the length of the road, with the highest on the shortest length of the roads, which is typically the target of the urban ULGDP investments, exactly the types of roads to be supported by the Program. 59 Furthermore, cost-effectiveness analysis for the roads sector on the basis of data collected under the current ULGDP shows that unit costs for ULGDP projects are generally lower than non-ULGDP projects, and that the costs of cobblestone works (supported under ULGDP) are much lower than similar sized asphalt roads, but that ULGDP supported roads are creating similar benefits with lower maintenance costs and other related benefits, see table below. Table 7: Cost comparison of cobble stone roads with asphalt roads, Ethiopian calendar year 2003 Cobblestone road cost (ETB/square Asphalt road cost City meter) (ETB/square meter) Adama 400–500 1,429 Hawassa 320 1,086 Mekelle 300 1,000 Axum 320 1,300 Source: ARPEDS CONSULT, 2011, “Assessment of the quality and value for money of investments undertaken under ULGDP.” 59 Similar investment profiles from other countries show high IRR for urban investments in core infrastructure, see technical assessments for USMID (Uganda, 2012) and ULGSP (Tanzania, 2012). 100 55. The ULGDP modality of incentive based allocations promotes planning, PFM, and governance improvements across a broad range of core areas, and has introduced a good sense of competition and awareness across the ULGs. Compared to the baselines, there are significant improvements in areas of audit reports, planning documents (CIP, procurement plans, revenue enhancement plans, planning and budgeting for maintenance and operations), as well as in accountability and involvement of citizen groups in local planning. The potential for improving the ULG performance in those core areas will be further tapped with strengthening of the targeting of performance incentives under the PforR support. 56. The exact composition of investments which will be undertaken across Program ULGs are not known at this time since they will be determined, like under the first ULGDP, through a participatory bottom-up planning process in ULGs. The experience of the current program and other similar interventions indicate several potential benefits, which will be quantifiable after conducting post-construction evaluation. At this stage of design, baseline data and appropriate assumptions on the stream of benefits and costs over the life of the Program can be made to estimate quantifiable benefits for sample category of sub-projects which will be most likely chosen by the ULGs, like the example above of the cobblestone project and the internal rate of return of water and sanitation projects. These results will be validated after the post construction evaluations of the sub-projects are subjected to value for money (from September 2015), cost effectiveness and cost benefit analysis. Assessment of (a) the counterfactual scenario where Program is not introduced and the fiscal gap mentioned above continues, and (b) the potential economic impact of the Program discussed above, shows strong rationale for the proposed intervention. 57. Under the counterfactual scenario without the Bank supported Program, the target ULGs would continue to face the large urban fiscal gap explained above, where, as a result of the absence of necessary investments in infrastructure and institutional capacity needed to keep up with rapid urbanization and the increase in urban residents in the targeted ULGs, would hinder the economic development of Ethiopia. This alternative route will mean that the Program ULGs will face a serious challenge in meeting their ever- increasing residents’ expectations of delivering reliable urban services, as well as a possible deterioration, and in some cases, collapse of existing infrastructure. It is evident that without the proposed Bank supported Program, the support to ULGs under the existing intergovernmental fiscal architecture would be severely inadequate in achieving the proposed objective in the GTP and urban policies of increased ULGs performance in expanding urban infrastructure. 58. To the extent possible and appropriate, the Program will promote local private sector development. As under ULGDP, the implementation of almost all Program activities will be contracted out to the private sector. More than 2,000 micro small enterprises were involved in the construction of investment projects from ULGDP from 2008–2011 and this is expected to expand with the proposed investment menu and likely investments. ULGs, as implementing agencies, will retain supervisory role and MUDHCo, as the main executing ministry, will retain oversight and quality assurance role for Program implementation. These arrangements are considered adequate in terms of economy, efficiency and effectiveness in addressing the urban development issues at hand. 101 59. The investments supported under the Program are core urban public goods/services such as roads, drainage, sanitation and solid waste management, which would not be provided without significant public interventions. The World Bank’s expertise within support of those areas in Ethiopia and elsewhere are comprehensive, and the experiences from ULGDP shows that in addition to the necessary support for financing of these interventions, the expertise the Bank can offer in the support of the design, technical advice, monitoring and backstopping, is highly appreciated and valuable for the government and the government’s urban program. Evaluation of the technical risks 60. Based on the findings of assessments undertaken for the preparation of the Program, the overall technical risk rating is substantial. The overarching measures to mitigate these risks will be firstly the series of institutional enhancement activities, which will be financed by the two elements of the Program, and secondly the incentive mechanism under the performance-based disbursement mechanism. 102 Annex 5: Summary Fiduciary Systems Assessment Ethiopia: Second Urban Local Government Development Program 1. An integrated fiduciary assessment of program fiduciary systems for the proposed Program was carried out on MUDHCo and a sample of participating regional and urban local governments that will implement the ULGDP II consistent with Operational Policy/Bank Procedure (OP/BP) 9.00, Program-for-Results Financing. A special survey was designed for assessing the financial management performance of cities. During September and October 2013, teams visited all 26 new cities joining the program to collect this information. For the 18 cities in the current ULGDP program, data was obtained and analyzed from the last three Annual Performance Assessments. The Procurement assessment is based upon data collected from 18 cities (sample of old and new cities in the program) that was collected in August and September 2013. 2. The fiduciary assessment entailed a review of the capacity of the sample participating entities on their ability (a) to record, control, and manage all Program resources and produce timely, understandable, relevant, and reliable information for the borrower and the World Bank; (b) to follow procurement rules and procedures, capacity, and performance focusing on procurement performance indicators and the extent to which the capacity and performance support the program development objectives and risks associated with the Program and the implementing agency; and (c) to ensure that implementation arrangements are adequate and risks are reasonably mitigated by the existing framework. A detailed Integrated Fiduciary Assessment is being circulated as part of the project package. PFM System Assessment and Financial Management arrangements 3. At the national level, the assessment notes that the Public Expenditure and Financial Accountability (PEFA) assessment ratings of 2010 had placed Ethiopia in the top tier of countries in the Africa Region in public financial management. 103 4. As can be seen in the table above, there is significant variability between the Federal level and the regions. Some of the areas where further improvements were needed are in the areas of multi-year planning, unreported government operations, tax collections, budget execution, procurement, internal audit and external oversight. Government of Ethiopia has a well-designed public financial reform program that is addressing these weaknesses in a systematic manner through the Expenditure Management and Control Program. Sectoral weaknesses continue to persist and there is need for enhanced capacity building initiatives at the sectoral level, especially in sectors such as roads, energy, education, water, and urban development. 5. The key finding of the financial management assessment and the program financial management arrangements are highlighted below. The conclusion of the assessment is that the financial management risk is rated as Substantial. • Revenue. There is great potential for increasing state revenue and municipal revenue during ULGDP II. In nominal terms for 17 new cities joining the program, between EFY 2002 and EFY 2005 state revenue increased by 360 percent and municipal revenue increased by 233 percent. This is similar to the experience of the 18 cities currently in the program, where the last assessment showed that 11 cities exceeded their revenue targets for EFY 2003. This is not surprising since the tax to GDP ratio in Ethiopia is only 12.5 percent. The draft study (Adam Smith, November 2013) has assessed the tax gap as a percent of revenue as being 37.4% at the Federal level and much higher in some of the big regions where the primary focus of ULGDP II is going to be. • Planning and budgeting. As indicated in the Public Expenditure and Financial Accountability assessments and as the ULGDP show, Ethiopia has a well- functioning planning and budgeting system. The APA for EFY 2004 showed that fifteen of the eighteen cities in the program had fully complied with government planning processes. The program will follow government planning and budgeting arrangements as outlined budget Manuals. The budget will be proclaimed at the federal level as a special purpose grant classified by regions, ULGs, and MUDHCo. At the regional and ULG level, the budget will also be proclaimed without offset and double counting, particularly for their matching fund/contributions. MUDHCo/MoFED, will allocate the ULGDP II budget to regions and ULGs based on their performance. The Program budgeting is structured as an upstream process starting at the ULGs and moving upwards to the regions and the federal level. Each regional bureau will collect all the budget requests from each ULG, consolidate them based on the performance assessment and approved Capital investment plan and submit to MUDHCo. Each ULG is required to prepare a CIP, along with a related budget for each budget year, and send it to the next higher-level for review, approval and consolidation. MUDHCo will prepare a consolidated budget and submit this to the concerned body for approval. Fund transfers by MoFED will be based on approved budgets submitted by MUDHCo. Chart of accounts of the program mapped to the budget 104 and that facilitates budgeting and accounting will be part of the Program Operating Manual. • Budget execution. Budget execution (of the adjusted budget) is good at the national, regional and woreda levels. In EFY 2004, the recurrent budget execution rate for the 18 cities in the program was close to 100 percent and for the capital investment program it was 78 percent. For the 26 new cities joining the program (as an average for three years, EFY 2002 to EFY 2005), the recurrent budget execution rate was almost 100 percent and the capital budget execution rate was 72 percent. In ULGDP there have been significant timing delays in the completion of the APA. There have also been delays in receipt of the regional contribution and the contribution of the city. For this reason, several cities have had to maintain two capital investment budgets, one being their own CIP and the other being the ULGDP CIP. This will need to be addressed as the program moves into its second phase. Semi-annual financial reports also will report on the budget utilization including variances analysis and explanation for the reasons leading them. • Treasury management and flow of funds. The experience during ULGDP has been that absorption and release of funds during the first three years of the program was slow. An initial allocation of US$99 million was made at the start of the program. Three years later, 35 percent of the initial allocation was not utilized. Cities in the ULGDP have voiced their concerns regarding the flow of funds. Things have improved in recent years and the program is expected to fully disburse US$300 million by the end of the program in December 2014. Disbursement of Program funds from IDA to MoFED will be made once a year, upon achievement of the disbursement linked indicators (DLI). Funds will be deposited to the Treasury or a separate foreign currency account. MoFED has expressed a preference to open a separate foreign currency account to which the IDA funds will be deposited. Local currency accounts may also be opened. Upon achievement of the indicators, MUDHCo will work with MoFED to inform the World Bank and provide evidence as per the verification protocols, as justification that results for the DLI have been met. In case of a scalable DLI, the task team will determine the amount to be disbursed on the basis of the programs progress report and DLI verification protocol. A notification will be made to the borrower to advise the amount to be disbursed against progress achieved towards the results of the scalable DLI. Disbursement requests will be submitted to the Bank using the Bank’s standard disbursement forms signed by an authorized signatory. Although PforR operations do not link disbursements to individual expenditure transactions, the aggregate disbursements under such operations should not exceed the total expenditures by the borrower under the Program over its implementation period. If, by Program completion, Bank financing disbursed exceeds the total amount of program expenditures, the borrower is required to refund the difference to the Bank. 105 Once IDA resources reach the separate foreign currency account, the funds can be used to finance Program expenditures or can be transferred to a local currency account. Funds from the local currency account can be transferred to federal level implementing entities and to regions’ BoFEDs. At the regional level, BoFED will as per consultation with the BUDs disburse resources to ULGs and regional entities. Duties and responsibilities of the various implementing entities and their roles in fund flows and management of resources will be documented in the Program Operations Manual. The fund flow chart is below. • Accounting and Reporting. ULGDP has been a special purpose grant that has been provided through MoFED to MUDHCo, and through BoFED to BUDs and the ULGs. During implementation of the ULGDP, cities used a mix of systems to account for ULGDP funds. These were a mix of manual, IBEX, and discrete systems such as Peachtree. Accounting was a major challenge since there were major variations in figures at the city, regional, and federal levels. During implementation of the Program, the quality of accounting and reporting improved significantly, but remains a challenge in some of the 18 cities who joined the Program in 2008. For the 26 new cities joining the program, this is going to be a 106 challenge. In 58 percent of these cities cash flow statements are not prepared on time, some 46–76 percent of cities submit quarterly reports to BoFEDs on time, and only 38 percent of cities generate income and expenditure statements in a timely manner. IBEX has been introduced in all cities for core government operations. Only a few of these cities are using IBEX for accounting and reporting on donor funded projects. Government rules/regulations and directives as well as manuals will be in use for the Program in respect to accounting policies and procedures. The chart of accounts will take on board of program accounting and reporting needs and this will be documented in the Program Operating Manual. IBEX will be used by all participating cities to record transactions and to produce reports at all levels. Adequate capacity building will be provided to cities to enable them to utilize this software effectively for ULGDP II. The Program will allocate adequate financial management staff at MoFED, MUDHCo and ULGs to perform program financial management duties. Semiannual accounting reports, the format of which has been agreed, will be used to report on the use of program resources. These reports will be submitted to the World Bank by MoFED within 45 days at the end of the half year (semiannual end date). Program financial reports will be produced from the existing system and their production will be the responsibility of the each implementing entity which will be consolidated at the higher level and at the end by MoFED. (Reports of the ULG’s and other regional implementing entities will be consolidated by BoFED which will be submitted to MoFED. The BoFED and MUDHCo’s reports will be consolidated by MoFED). The format of the semiannual financial report was agreed at Negotiations. MoFED will also prepare annual Program financial statements in accordance with acceptable standards within three months of the end of fiscal year and provide them to the auditors to enable them to carry out and complete the financial audit on time. • Internal controls and internal audit. Government rules/regulations and directives as well as manuals in regards to Internal Control procedures will apply to ULGDP II. While the internal control framework is generally recognized as being robust, a particular area of weakness is internal audit. This is an area of weakness in the 18 existing cities in the program as well as in the 26 new cities. For example, in the 26 new cities joining the program, audit coverage is low and in 77 percent of cities, internal auditors do not assess the quality of quarterly financial statements submitted by the city to BoFEDs. To deal with this risk, it has been agreed that MoFED’s inspection directorate, in collaboration with BoFEDs’ inspection directorate, will work closely with the relevant internal audit departments of the cities and provide on-going support. The inspector directorate will review internal audit reports on an annual basis, following risk based post audit arrangements for the program activities. To achieve this task, the Directorate will strengthen its capacity and will coordinate with MUDHCo and MoFED/Channel One Program Coordination Unit to review federal and regions 107 and ULGs to review sample regions and ULGs. Internal audit reports will be submitted to the MoFED and MUDHCo within 30 days of completion of the audit report together with a proposed action plan to deal with identified risks. The reports will be shared with the World Bank during annual assessments. • External audit. At the start of the ULGDP, there was a large backlog in audit coverage in the 18 cities in the program and their financial management practices were weak. ULGDP through its scoring system brought a particular focus to this area and over the course of the last five years, all audit backlogs have been eliminated in the cities in the program and there has been an improvement in management of public funds. In EFY 2004 all 18 cities received a “qualified” audit opinion, a major improvement for the six cities that had received an ‘adverse” opinion the previous year. However not a single city has received a “clean” opinion as yet and that is the trajectory for future reforms. Value for money during ULGDP has been mixed. The only value for money audit that has been conducted relates to cobblestone investments that have been made that account for over US$56 million of ULGDP funds. This value for money audit showed that “good” quality work on cobblestone investments ranged from 60–90 percent in the regions and there was large variability on a unit cost basis between regions; the investments made in Bahir Dar had especially high unit costs. For the 26 new cities joining the program, their situation is quite similar to the 18 cities when they joined the program in 2008. For the 26 new cities, they have a major audit backlog from the last five years, which varies from 50 percent to 15 percent of cities per year. Their financial management practices are also weak and between 8–15 percent of these cities received an “adverse” audit opinion per year for the last four years. The main irregularities relate to issues such as weak asset management, poor cash reconciliations, long outstanding advances and payables, weaknesses in procurement and mis-coding of expenditures. A major challenge has been the poor follow up of audit findings. For the 18 cities in ULGDP, the APA for EFY 2004 found that five cities implemented between 0- 40 percent of the findings for the previous year. Due to this audit findings are repeated year after year, with limited follow up and impact. A related challenge is the low audit coverage in the regions where most of the cities for ULGDP II are located. In SNNPR, Amhara, and Oromia, fewer than 30 percent of the institutions are audited every year. The Program is subject to both financial and value for money audits. It has been agreed that the Office of the Federal Auditor General (OFAG) or an assigned auditor will conduct the annual financial audit of the financial statement of the Program. The audit will be conducted in accordance with agreed upon terms of reference following international auditing standards. The terms of reference were agreed during Negotiations. The resultant audit report and management letter will be submitted to the World Bank within six months after the end of the government’s fiscal year. The Bank requires that the Recipient disclose the 108 audited financial statements in a manner acceptable to the Bank; following the Bank’s formal receipt of these statements from the borrower, the Bank makes them available to the public in accordance with The World Bank Policy on Access to Information. In addition to the financial audit, OFAG will also conduct the value for money audits for the Program. The first value for money audit will commence in the second Program year. Terms of reference for the value for money audit will be prepared by MUDHCo in consultation with OFAG and World Bank. • Transparency and accountability. There is need for focusing on this area under the ULGDP II. The finding of the October 2013 assessment was that in 88 percent of cases, cities did not make public audit findings either to the staff or the public. This issue needs to be addressed since parliamentary oversight over the budget process and for ensuring accountability has been identified as probably the weakest area of the PFM cycle in Ethiopia. • Staffing and infrastructure. The core functions for financial management are going to be conducted by the Office of Finance and Development in the participating cities. The October 2013 assessment has shown that 22 percent of positions are empty in Offices of Finance and Economic Development (OFED). The greatest shortfall is on the planning side where 33 percent of staff positions are vacant. In addition, there is high staff turnover. Some 36 percent of the existing staff have been in office for less than two years. There is therefore need to ensure that existing positions are filled and that adequate training is provided to the existing staff to enable them to discharge their functions. The facility survey showed that in almost 75 percent of cities there were major basic facilities and infrastructure deficits that constrained staff from discharging their functions. This is an issue that will need to be addressed during ULGDP II. Procurement systems assessment 6. The Bank carried out a fiduciary (procurement) system assessment for the proposed ULGDP II PforR operation between May and September 2013. The review included applicable procurement systems, rules and procedures, including oversight mechanisms at the program implementing entities. The program implementing entities are the federal Ministry of Urban Development, Housing and Construction (MUDHCo), BoFEDs, and participating cities (ULGs). All the regions and 18 of the 44 participating cities have been visited and assessed. The detail assessment reveals that, in all regional states and ULGs, there is adequate public procurement and contracts management legislative framework and systems in place. The major issues with all the implementing agencies are, except at MUDHCo, the weakness of implementation of the applicable public procurement rules and procedures including oversight mechanism. The regions as well as the ULGs have limited capacity to follow the rules and procedures and therefore there is risk in terms of the agencies’ ability to implement the applicable procedures under the program. The overall performance of procuring entities (city administrations) in complying with established system and therefore ensure transparency, efficiency and economy is found to be 109 underprovided. The conclusion of this assessment is therefore the risk of program procurement system to help achieve the program results is high. 7. Three sets of risk mitigation measures have been defined and proposed to be carried out. These measures are inherent in the design of the program and will be part of Disbursement Linked Indicators (DLI). These risk mitigation measures include: • Minimum conditions. These will be entry conditions for release of funds to a city. Procurement aspects of minimum conditions will include institutional set up for the management of procurement to include core staff, functional tender and complaints review committees, advance orientation of staff in procurement and a procurement plan linked to the budget. These will be assessed every year by a consultant prior to release of funds. • Performance measures. The annual performance assessment will be carried out by a consultant to inform following year allocation to cities. Procurement aspects will include delivery of audit along with management response (accountability), quarterly publication of ICB and NCB awards( Transparency), percentage contracts made within initial validity period (efficiency), reduction in number of direct contracting without justification(economy) and degree to which directives and standard bidding documents are complied with. The Regional Public Procurement and Asset Management Agencies (RPPAMAs) are legally mandated to carry out procurement audits in their jurisdictions. However since these agencies do not have the capacity at the moment, their capacity will be built over the first two years and the annual procurements audits will be carried out after the second year of the program implementation by the respective RPPAMAs. The first and second year procurement audits will be carried out as part of the APA. The audits will assess performance as well as compliance. • Action plan. The program action plan will include activities key stakeholders will carry out to prepare for implementation and during implementation. The program action plan is included as part of the risk mitigation measures and detailed in annex 8 of this report. Fraud and corruption issues 8. There is a robust legal framework for addressing fraud and corruption in Ethiopia. The Government has established the Federal Ethics and Anti-Corruption Commission (FEACC) with a mandate to expand and promote ethics and anti-corruption education, prevent corruption (through review of working procedures and systems), and to investigate and prosecute alleged corruption offences since 2001. 60 The Government has also declared that it follows a zero- tolerance policy toward corruption. The FEACC has received political support at the highest level in the country. Since 2007, all the nine Regional Governments have established their own Regional Ethics and Anti-corruption Commission (REACC) as per the regional laws. FEACC is 60 Proclamation No. 433/2005 and Regulation No. 144/2008 provides for the role, powers, duties, and responsibilities of the FEACC. 110 responsible for coordinating efforts of Anti-corruption across regions including ULGs and preparing a national report on anti-corruption efforts across the country. 9. Complaint handling mechanisms are in place at all levels of governments as per the requirement of the National Proclamations (Proclamation 433/2005 and 434/2005) and institutional level operational guidelines. These proclamations clearly define the procedures to follow under corruption offences as well as for administrative complaints related to the Program. There are a number ways for participation and engagement of citizens in complaint handling, transparency and social accountability. At the grassroots, citizens have shown experience in forming community groups, committee or representative to liaison with constituency and seek solutions. ULGs have started to create forum for receiving in requests and information and responsiveness by local authorities. Such mechanisms include facilitating face-to-face/interface meetings and joint discussion between citizens and providers of services; joint monitoring and assessment performances. Although the system of complaints handling is very well established in Ethiopia, MUDHCo and the regional and local governments will take full responsibility in ensuring that the Program beneficiaries are regularly informed about the complaint system which is an important requirement that will help in ensuring the program meets its development objectives. 10. Complaints regarding the program can be received from internal or external clients through various channels such as suggestion boxes, verbal, written and in person. At the ULGs level, complaints are lodged to the City Complaint Handling Body or unit consisting of Ethics Liaison Unit officers, to the police, to other delegated bodies or directly to REACC. Consequently, information on fraud and corruption and complaints regarding the Program will be collected at the Regional level and shared with the Federal Ethics and Anti-Corruption Commission who will in turn share with the Bank twice a year. 11. The City Complaint Handling Body identifies whether the complaint is a fraud and corruption related complaint or complaints of other nature (such as administrative /system, service provision related complaints) and classifies a fraud and corruption related complaint as petty or grand corruption. 61 It also identifies whether the jurisdictions in which a complaint could be treated is with either FEACC or REACC or delegated to the Police for investigations. If the complaint is classified as an administrative issue related to the Program, the Complaint Handling Body collects the required information and refers to the concerned institution or department and provides advice to take preventive and corrective actions while at the same time reporting to the Ethics infrastructure coordination Department at REACC which keeps track of the complaints that come in on the Program. Response or feedback is provided to the complainer. If the decision is not satisfying to the complainer, he/she can take the case to REACC for further action. 12. On the other hand, if the complaint is found to be related to an allegation of corruption and fraud or related to wrong doing as per the screening, the Complaint - Handling body /liaison unit officer forwards the issue with the necessary data to the registrar of REACC. The Registrar 61 In Oromia Region, cases which are below Birr 100,000 (About 5,000 USD) and not committed by higher officials are considered to be petty corruption and will be referred to the Bureau of Justice for investigation. On the other hand a case which is above Birr 100, 000 or even below Birr 100,000 but committed with the involvement of higher official is considered to be Grand corruption and will be referred to the investigation department in REACC. 111 sorts out the complaint in terms of its jurisdictional responsibility, whether it is petty or grand corruption, and submits to the Deputy Commissioner of REACC. The Deputy Commissioner verifies the complaint and then refers it to the investigation and prosecution team. The investigation team investigates the case and submits its findings back to the Deputy Commissioner. Then the Deputy Commissioner checks the information collected from the investigations, endorses and then forwards to the REACC Commissioner. The Commissioner refers the case to the court /prosecutor for the next action. Sometimes complainers can directly approach the police. The police, in its mandate as a delegated body in this instance, investigate the cases and forward the results to FEACC or REACC depending on the mandate given and the process moves forward as described above after the information gets to the Registrar. In terms of sharing information with the Bank on Complaints regarding the Program, the planning and evaluation section of REACCs will compile reports related to complaints from the Ethics Infrastructure Coordination Case Team, (consolidated reports coming from all ULGs), Investigation and prosecution department in REACC, Registrar, and from the Ethics Officers of the Regional Urban Development Bureau and submit on quarterly basis to FEACC who will then submit a consolidated report to the World Bank bi-annually. The general complaint handling mechanism is shown as follows: 112 Figure 1: Complaint handling flow chart for ULGs Complaint/ tips off Suggestion box, verbal and written complaint, electronic media complaint Ethics Liaison Unit /complaint handling body Police Sorting and selection of complaints by type of issues Administrative and system related Fraud and corruption related complaint allegation Forward to FEACC Refer to concerned ULGs Registrar institution Submit to commissioner or deputy commissioner Administrative action/ improvement or reform Investigation and prosecution team investigates If not If wrong Response to wrong doing complaint doing Response to REACC FEACC compliant case case Investigation and prosecution report to REACC deputy commissioner Deputy commissioner forwards to commissioner with recommendation Commissioner makes decision whether to prosecute or not 13. Complaint handling in public procuring entity related to procurement. The federal procurement proclamation enacted the establishment of “Board for Review and Resolution of Complaints in Public Procurement” and instituted the board with five members. A complaints review unit in PPA (the board member) receives and compiles complaints and presents to the board. In addition, this unit also receives complaint reports from procuring entities against suppliers. The board refers those procurement complaints which have fraud and corruption implications to FEACC and/or REACC for investigation. 113 14. The revised procurement legislation/ directives of each regional state provide a mechanism for submitting complaints that ULGs are required to comply with. Complaints from suppliers or bidders can be lodged to the procuring entity and the head of the procuring entity responds to the complainer. If the complainer is not satisfied, she/he will appeal the case to the procurement complaint review board (majority of the board members are public officials and from procuring agencies) and eventually take the matter to the courts. The head of BoFED or the process head of economic and social development gives final approval of the recommendation of the Board or committee. If the complaint process/procedure is resolved with the complainer satisfied, responses are made to the complainer. On the other hand, the procurement process can be withheld or upheld depending on whether the complaint for wrong doing is confirmed. If the complaint review board/committee suspects the case is related to fraud and corruption, then the case is directed to the REACC or FEACC. Any bidder, procuring entity, citizen including Ethics unit officers, Federal and regional auditor generals can lodge procurement related complaints to REACC or FEACC. Besides, as mentioned above, the ethics liaison unit officer of each entity reports fraud and corruption related cases. Although the Anti-Corruption law in Ethiopia makes provision for people to complain directly to the FEACC and REACC if they believe a case of fraud and corruption has been committed, the Program Coordinators will also emphasize this point to all the procuring entities as part of the program’s information dissemination. 15. The procurement complaint handling mechanism is shown as follows: Figure 2: Compliant handling on procurements flow chart at ULGs 114 16. The grievance redress mechanism on land and other property acquisition to reduce land acquisition risk will require a systematic approach to risk management. The program has seamlessly integrated into the different safeguards instruments being designed and included in the DLI a grievance redress mechanism and any grievance that may arise from economic or physical displacement will be filed at first instance to the city complain hub as discussed above, and will be registered for further action using the above mentioned register. Basically, grievance redress procedures and mechanisms for Program affected people will be established and or incorporated into the existing city administration’s resettlement / Implementation committees. The grievance redress mechanism will ensure that Program affected people will be provided with the appropriate compensation payment and that all administrative measures are in line with the law. The grievance redress procedures will provide opportunity for Program affected people to settle their complaints and grievances amicably. The procedure to be adopted will allow Program affected peoples not to lose time and resources from going through lengthy administrative and legal procedures. Figure 3: Grievances/ dispute management mechanism on land acquisition 115 Alignment with the Bank’s Anti-Corruption Guidelines 17. The government has agreed to implement the program in accordance with the Anti- Corruption Guidelines (ACG) applicable to PforR operations. As follows. 18. Sharing of debarment list of firms and individuals. The Government of Ethiopia commits to use the Bank’s debarment list to ensure that persons or entities debarred or suspended by the Bank are not awarded a contract under the Program during the period of such debarment or suspension. The information on the list of debarred and suspended firms is public information in “Clients Connections”, and on the Bank’s website. Companies and individuals debarred by the Bank and the PPRA will be posted and updated regularly on MUDHCo’s website (www.mudc.gov.et), and advertised publicly by ULGs. MUDHCo will take responsibility in ensuring that the website is updated regularly with information on the list of debarred firms and individuals and share this information with all ULGs in the Program, instructing them to comply by appending the debarment list to the annual transfer of Grant notification which will be made public - and go to all Program ULGs. This list will also be used by procurement officers and council members to monitor ULGs compliance. ULG compliance with the debarment list will also be monitored through the Program annual assessment. In addition the Government also agreed that they would include some disclosure measures in bidding documents for works, goods and services to be financed under the program, including insisting that the firms and/or individuals declare they have not been debarred or suspended and/or have any links with a debarred entity or individual. 19. Sharing information on fraud and corruption allegations. In line with the ACGs, the government (through FEACC) will share with the Bank all information on fraud and corruption allegations, investigations and actions taken on the Program, including on procurement. Since the proposed program is providing support to 44 ULGs, the structure of collecting and sharing information on fraud and corruption on the program governments would involve Regional and local institutions as well, beyond the Federal Government. Consequently, information on fraud and corruption and complaints regarding the Program will be collected at the Regional level and shared with the FEACC which will in turn share with the Bank. The FEACC gets monthly reports from the REACC on fraud and corruption and other relevant activities, but in the case of this program, the FEACC would compile and share information on fraud and corruption with the Bank every six months. The details of this reporting would include the types of allegations and the status of actions taken. A template for recording and sharing the information with the Bank has been provided to the FEACC. 20. Investigation of fraud and corruption allegations. As indicated earlier, FEACC and REACCs were established with powers to prevent, expose, investigate and prosecute corruption offences and impropriety in Ethiopia. Over the past decade, FEACC has investigated some 2,302 suspected cases of corruption and prosecuted a number of suspected offenders; 612 offenders received sentences varying between three and 21 years imprisonment and fines. Among the cases investigated and prosecuted were those involving high-ranking government officials, ruling party members, chief executive officers, and staff of government-owned 116 enterprises. 62 In the last ten years (2001–12), there has been a steady rise in the total number of cases prosecuted as well as an improvement in conviction rates from 77.8 percent to 85.0 percent. All REACCs received 7,037 complaints and tipoffs within their mandate amounting to two thirds of the total complaints under the federal and regional mandate in 2011 and 2012. Out of the total complaints and tips off, 16 percent were convicted with variation among regions. 63 21. The Bank's Integrity Vice Presidency has a good working relationship with the FEACC as part of a memorandum of understanding signed between them on October 3, 2011. The memorandum of understanding provides a framework for cooperation and sharing of information, where appropriate, taking into consideration the legal and policy framework and mandate of each organization. Thus far, the working relationship between Bank's Integrity Vice Presidency and FEACC based on the memorandum of understanding has been cooperative and productive. The memorandum of understanding will provide the Bank and its Integrity Vice Presidency with a foundation for expanding the existing working relationship to cover future cooperative investigations under the Program when needed, and for helping to ensure that the Government of Ethiopia and the FEACC can implement their commitments under the Anti- Corruption Guidelines. More specifically, the terms of the cooperation includes the following: (a) to provide one another (spontaneously or upon request) with information of relevance for detection, substantiation and prevention of fraud and corruption in connection with conduct which may constitute a serious crime under national legislation or a sanctionable offence under World Bank Group and Policies; (b) to undertake joint activities and collaborate when appropriate in each Party’s efforts to detect, substantiate and prevent fraud and corruption; (c) to engage one another on relevant activities which they organize and undertake, and which may be of common interest in the execution of their mandates; (d) to provide a mechanism for the reciprocal referral of inquiries and recommendations pertaining to investigations and actions residing within the mandate and jurisdiction of the respective parties; (e) to designate contact points to facilitate and expedite the effective and confidential transmission of information exchanged, and (f) to meet periodically to identify possible priority areas for cooperation that present common strategic or operational objectives. The memorandum of understanding will therefore make it possible for the Bank’s Integrity Vice Presidency to collaborate with FEACC on any case of suspected fraud and corruption in the Program. 22. FEACC, as indicated earlier has the responsibility for investigating and prosecuting corruption in the country, including for funds specifically from development partners to support the Government of Ethiopia. This responsibility is sometimes delegated by the FEACC to the REACC as part of a memorandum of understanding between them, which provides among other things powers to investigate and prosecute corruption for funds and more specifically funds that seek to benefit the Regions and Cities. In addition, FEACC and REACCs meet twice a year to share information on lessons learned, conduct joint learning programs as well as discuss various issues regarding capacity building and priorities for addressing corruption in the country more broadly. Fiduciary risks and mitigation measures 62 FEACC Annual Reports, 2011 and 2012. 63 Ibid. 117 23. Based on the above reasons, the fiduciary risk assessed for this operation is classified as “substantial”. Overall, the fiduciary assessment concludes that the examined program financial management and procurement systems are adequate to provide reasonable assurance that the financing proceeds will be used for intended purposes, with due attention to principles of economy, efficiency, effectiveness, transparency and accountability, and for safeguarding Program assets once the proposed mitigation measures have been implemented. Appropriate systems to handle fiduciary risks including fraud and corruption, and effective complaint- handling mechanisms, have been agreed on and established. Risk mitigation measures for the identified risks have been discussed and agreed with Government. The risk mitigation measures have a two pronged approach: First a Disbursement Linked Indicator will be provided in the Financing Agreement to support transparency aspects of the Program. Second, specific actions have been proposed that will support the DLI and help improve efficiency and performance monitoring as indicated in the Program action plan. 24. Summary of risks, mitigation measures and action plan is presented below: Risk Description Proposed mitigation measures Time Frame Financial Management Country level The noted weaknesses are No need Continuous being addressed by the to include Weak capacity in selected areas of ongoing Expenditure it in the public financial management, Management and Control DLI or especially multiyear planning, Program and by the Civil PAP unreported government operations, Service Reform Program. tax collections, budget execution, procurement and internal audit; high staff turnover of qualified accountants and auditors, gaps in legal framework especially relating to the accounting profession Entity level The program includes DLI 1, 2 As per dates measures to address audit and 3 set in the Federal level- Reporting challenges back logs, and strengthen DLIs and were noted internal audit function at ULG PAP level. PAP ULG Level- Weak capacity in ULGs, especially the new 26 cities where Federal level quarterly reports large backlogs in external audit, weak still exist and formats are internal audit function and reporting agreed in advance. issues was noted 118 Planning and budgeting The Program includes DLI 2, 3 As per dates requirements to improve set out in Budget execution and analysis of the budget the DLIs variances may not be as expected as a execution/utilization. and result of implementation issues. quarterly Regular semiannual financial financial report to include reports variance analysis. Accounting The Chart of Accounts will PAP As per dates be clarified and set in the Chart of accounts need to be documented in the DLIs and harmonized and clarified Program Operations PAP Manual, and training will DLI IBEX, computerized accounting be conducted system utilization need follow up The Program includes Staff turnover is an issue at all levels measures to use IBEX and all cities will use IBEX and training will be PAP conducted on IBEX/IT. The Program will allocate adequate financial management staffing at MoFED, MUDHCo and ULGs to perform the program duties. The total financial management staff database will be submitted in the first six months of effectiveness and 75 percent of vacant professional positions will be filled with in two years. Internal control Inspection Directorate at PAP As per dates MoFED in coordination with set in the Internal audit is weak at all levels all entities will conduct audits DLIs and and controls in place but need once a year. PAP strengthening The Program includes DLI 2, 3 requirements to address internal audit and internal control challenges/ concerns at ULGs. Treasury management and funds Disbursements twice a year to DLI As per dates flow ensure that regular flow of set in the funds that are linked to the DLIs and 119 Delays in liquidating advances achievement of DLIs. PAP emanating from project implementation issues and thus lead Review of semiannual reports PAP to delay in the utilization of funds. to identify poor implementation and budget utilization. Reconciliation of fund Financing disbursed to the Program with Agree- the expenditure will be ment conducted at the end. Program Financial Reporting Training will be conducted in PAP As per dates report preparation. set in the Delay in report could exist as a result DLIs and of the level of decentralization. PAP Program Audit The Program will conduct Covenant As per dates a financial audit annually set in the There could be a delays in Program on the basis agreed terms DLIs and financial audit report of reference. DLI/PAP PAP/ covenants Value for money audits The value for money audit has not will be conducted. The been adequately conducted Program includes measures Significant audit back logs exist for to follow up on audit the new cities and qualification issues backlogs and follow up of of the all cities are not well followed past audit issues. up Procurement Compliance with national and • Program minimum access Minimum Annually regional directives condition will check on condition and the availability and and DLI 1 continuous There is laxity or lack of knowledge functionality of the of the bylaws and therefore non minimum systems, compliance with national and including legal regional government directives with documentation; regards to procurement planning, use • The PAP will include APA and Annually of direct contracting without DLI 1 and familiarization training appropriate safeguards, failure to use continuous and the mobile support standard bidding documents and team will support the subsequently contract documents and ULGs to address most of inconsistent use of committee the issues related with systems for approval of contract awareness/capacity issues; award. Use of direct contracting is • The Recipient will (a) DLIs 1 Annually common, for those above mandated and 2 and conduct Performance 120 thresholds, national competitive Assessment for the first continuous bidding will be required, as per two rounds (April-May, national and regional directives. 2014, and September- November, 2014) and Independent Procurement audit starting with the third assessment (September –November 2015) and (b) thereafter deliver procurement audit reports with management corrective measures addressing the findings of the audit. • The APA firm will (a) assess procurment performance for the first two rounds (April–May, 2014, and September- November, 2014) and independent procurement audit starting with the third assessment (September–November 2015) and (b) thereafter deliver procurement audit reports with management corrective measures addressing the findings of the audit. Procurement capacity • Minimum conditions will Minimum Annually check the availability of condition, and There are capacity limitations in the minimum procurement DLIs 2 continuous terms of skilled staff to handle staffing (two) in each city. and 9 procurement and contract • MUDHCo will maintain administration. As this is a PfoR DLI 4 Annually its project team and the operation, project units which and mobile support team facilitated procurement processes continuous similar to ULGDP I. under ULGDP may not be available • The program will provide thus further deteriorating the capacity DLI 8 Annually intensive procurement of cities to implement the program. and contracts management The cities are also experiencing high continuous training to the staffs of the staff turnover. In most cities, most ULGs as in the PAP. procurement staffs have been in position for less than 2 years. 121 Transparency and fairness • The cities have agreed to Minimum Annually institute all procedures condition/ and Most cities use incomplete bidding and avail legal document DLI 1 continuous documents without preset during the annual PAP qualification and evaluation criteria assessments. and complete conditions of contract • Familiarization training DLI 9 Annually for the tender, which would impact PAP/ and will be conducted on the on transparency and fairness in bid DLI 4 continuous use of the program evaluation and contract systems. administration. Although it is the • The Recipient will (a) PAP/ requirement of the procurement DLI 2 conduct performance regulations of all regions, the assessment for the first contracts administration and two rounds (April–May Complaints handling set up and 2014, and September- mechanism, in most cities, is November 2014) and inadequate. independent procurement audit starting with the third assessment (September–November 2015) and (b) thereafter deliver procurement audit reports with management corrective measures addressing the findings of the audit. • Continues capacity building will be provided following the Program action plan. • All regions will institute/establish complaint management boards, following the requirement of their regional procurement laws. Competitiveness ULGs will: This will By Negotia- • Seek guidance from the be part of tions There are some government owned regional authorities. the enterprises in sectors of supply of • Follow guidance on Program goods, works and services and there policies on support to Opera- have been observed preference to use MSEs and the level of tions them or allow them to compete preferences that would be Manual alongside private sector. A high acceptable across the margin of preference of up to 18 board to ensure uniformity percent are applied in bids evaluation. and minimize abuse (this 122 Moreover, in many regional states, guidance will be part of there are mandatory provisions to participatory and support medium and small enterprises performance agreement, through reservations or preferences. and Program Operational Although this approach has a lot of Manual). strategic benefits, it also has to be balanced with the principle of fairness with respect to the private sector competitors. Accountability , integrity and • Minimum conditions will Minimum Annually oversight check on the institutions condition and and staff availability continuous Contract management, including (tender committees and contracts delivery quality and cost complaint handling controls, and resolution of contractual mechanisms). disputes are not adequate. Record • PAP will enhance the PAP Continuous keeping is poor. Many states do not program management have independent and effective capacity issue. institutional setup for handling of • The mobile support team PAP Within the complaints. The regional PPAs do initial two and the intensive program not have the capacity to carry out years management training to independent reviews and or the ULGs staff will procurement audits. Many Bank address the capacity issue. debarred firms are operating locally and participate in bidding processes • The program will provide PAP Annually Regional Public DLIs 1 and locally. and 2 continuous Procurement Agencies with procurement audit training. • Annual Performance Assessment and APA/IPA Annually independent procurement and audits together with continuous management corrective measures to the findings of the audit will address the residual risks. • MUDHCo will provide Quarterly regular information to and ULGs regarding Bank continuous debarred firms so that Bank debarred firms will not be awarded contracts under the Program. 123 Proposed Fiduciary inputs to the Program action plan 25. The following are inputs to the program action plan from fiduciary. No Action Pre-Start FY-1 FY-2 FY-3 FY-4 FY 1 Budgeting: Budget execution and analysis of variances is a challenge noted and this will be addressed through semi-annual reports. Review of reports to identify poor implementation and budget utilization will be performed. 2 Accounting: IBEX shall be used for all cities. Fragmented use of systems will be avoided. Chart of Accounts will be clarified by MoFED and shall be included in the Operating manual and Training will be conducted 3 Staffing: OFEDs staff database will be submitted in the first six months of effectiveness, and 75 percent of professional staff positions will be filled within two years. Continuous training shall be provided for the staff to cater for staff turnovers. 4 Internal Controls: Inspection Directorate at MoFED, in collaboration with regional Inspection Directorates at BoFEDs, will oversee the conduct of internal audits at least once per year by ULGs internal auditors. 5 External Audit: In addition to a financial audit (which is a legal covenant), a Value for Money audit will be conducted by OFAG. The first VFM audit will commence from the second year onwards and will be submitted to the World Bank with in 6 124 month of the end of the EFY. 6 Regional PPAs to enforce their legal requirements and provide reminders to Cities and organize training on the use and implementation of the procurement laws, directives, manuals, standard bidding documents and monitor the consistency of practices. 7 Cities will: • Seek guidance from the regional authorities. • Follow guidance on policies on support to MSEs and the level of preferences that would be acceptable across the board to ensure uniformity and minimize abuse (this guidance will be part of participatory and performance agreement, and Program Operations Manual). 8 BoFED will undertake audit capacity building of the regional public procurement agencies. 9 Each participating city’s mayors issue instructions and make all procurement legal documents including SBDs available to the staff and enforce and oversight its applications 10 The weakness in the existing Procurement complaints handling mechanism may be improved through: (a) The RPPAs will conduct business outreaches and sensitize the business community regarding the available procurement complaints redressing mechanism; (b) BoFEDs will review the independence and options for improving the complaint handling mechanism 11 The gap identified with the capacity of FEACC and REACC may be improved through: (a) providing the FEACC and REACC staffs training and capacity building on public procurement and contracts management and (b) the FEACC and REACC use specialized experts to review and investigate fraud and corruption suspicious procurement and contract issues before they take actions on cases reported, and (c) provide training on complaint handling mechanisms and reporting for staff of REACCs and Ethics units in the ULGs. 12 A consultant may be recruited by the Program to prepare a contract administration manual to 125 the participating cities and provide the necessary training on it (the Contract administration manual will be based on the Governments own systems) 126 Annex 6: Summary Environmental and Social Systems Assessment Ethiopia: Second Urban Local Government Development Program 1. In accordance with the requirements outlined in the OP9.0, an Environment and Social Systems Assessment (ESSA) has been undertaken. This included a comprehensive review of systems and procedures followed by MUDHCo, regional, and city governments to address social and environmental issues associated with the ULGDP II. The assessment team also visited sub-projects in 14 representative cities that have been developed under the ULGDP. A public consultation to discuss the findings was held December 4, 2013. The ESSA report provides an assessment of the extent to which the existing program procedures for social and environment conform to the core principals of environmental and social sustainability, outlined in OP9.0 (Core Principle 1: General Principle of Environmental and Social Management; Core Principle 2: Natural Habitats and Physical Cultural Resources; Core Principle 3: Public and Worker Safety; Core Principle 4: Land Acquisition; Core Principle 5: Indigenous Peoples and Vulnerable Groups; and Core Principle 6: Social Conflict). It also recommends an action plan to address shortfalls. The ESSA in particular examined the potential environmental and social effects of the proposed Program, describes Ethiopia’s existing environmental and social management system relevant to urban sector, presents an assessment of institutional capacity of participating cities, including institutions responsible for implementation of environment and social management, presents analyses of Ethiopia’s systems against the six core principles of environment and social sustainability named above, recommends measures to strengthen the system performance, and presents a summary of public consultation on ESSA findings and recommendation that are integrated into the ULGDP II design. 2. Activities to be financed under the ULGDP II will be same as those being financed under the ULGDP. These include core urban infrastructure investments in roads, sanitation services, solid waste, public parks and greenery, and street lighting. Each city’s capital investment plan (CIP) will exclude all activities that are category “A” type of activities, as part of a well-defined investment menu under ULG responsibility to maximum gains and minimize the risks. 3. The ESSA confirms that Ethiopia has adequate legal framework for environmental and social management in the urban sector. Specifically, the country has a robust set of environment and social regulations, a functioning court system, and accountability provisions integrated into system. However, the quality of implementation and the effectiveness of existing provisions of the environment and social regulations are very uneven. An assessment of environmental and social regulations, policies and procedures, including institutional capacity and practices indicate a moderate level of environment and social risks associated with the program design and implementation. Many of the risks relate to implementation stage, including lack of application of standard procedures for risk screening and implementation of mitigation measures among ULGs, lack of coordination among various agencies, and lack of technical capacity and resources. Given a significant variation in the capacity of participating ULGs for environment and social management of risks, the ESSA identified the following three key areas for strengthening: 127 • Defining an environmental and social management system at city level. Under the ULGDP II, as a minimum condition, ULGs must demonstrate that they have established a functional system for environmental and social management that outlines specific roles and responsibilities for environmental and social risk screening, due diligence and regulatory requirements, consultation and coordination with other local and regional agencies, technical tools for implementation and monitoring, a staffing and capacity building plan, and the like. After the first year, ULGs will be required to demonstrate that all projects are screened for impacts and mitigation measures defined, and that all projects have environmental approvals from the REPAs prior to initiating works. Experiences from the ULGDP indicate that environment and social development specialists at MUDHCo have been satisfactorily managing environmental and social risks for cities. However, operational capacity at city and regional levels needs to be strengthened to ensure that procedures—screening of subprojects for environmental risks, preparation and implementation of Environment and Social Management Plan (ESMP), and monitoring under ULGDP II—are adhered to. This is especially important to support the 26 cities that will join the Program. • Technical guidance and capacity building. ULGs can benefit significantly from sector specific technical guidelines that integrate environmental and social requirements for activities such as road construction, waste management, management of slaughter houses, sanitation services, and others. MUDHCo is compiling such guidelines to be shared with the ULGs. Participating ULGs have learned from the experience implementing the environmental and social management framework developed under the ULGDP, the areas that require strengthening through a robust capacity building plan. Also, it is important that regions ensure that ULGs are assisted from the planning through implementation and results monitoring, including independent monitoring and verification against a baseline so that future progress can be monitored and assessed against a baseline. • Addressing resource constraints. This area includes measures to overcome constraints with respect to human and financial resources, through the Program incentive structure, as well as capacity building and training. A capacity building and training program will be key to ensure that staff within ULGs clearly understands their roles, have the capacity to fulfill them, and clearly understand how outcomes will be evaluated through the annual performance assessment. 4. The institutional arrangements for program implementation will be strengthened based on the experiences from the ULGDP. There will be a clear division of tasks and responsibilities between federal, regional, and local governments, consistent with existing legal provisions, regulations and guidelines. At the federal level, MUDHCo will have a core team of environment and social specialists to be responsible for coordination and capacity building of ULGs and regions. At the regional level, the BUDs assisted by REPAs will be responsible for environmental and social aspects of the program. At the local level, the OUDs staffed with environment and social development specialists will be responsible for effective environment and social management. The division of tasks is presented in the ULGDP II Operations Manual, which will be updated prior to the start of the Program. 128 5. A public consultation meeting was organized by the Bank team in partnership with MUDHCo at Ethiopian Management Institute campus in Bishoftu on December 4, 2013 to discuss with various stakeholders the key findings and proposed recommendations. The public consultation meeting was attended by more than 100 stakeholders from various participating cities from nine regions. Participants actively participated and contributed to the consultation objectives. Presentations were made by the Bank team on program details; ESSA process, findings and recommendations, supported by MUDHCo own assessment of ESSA process and lessons from existing ULGD project. Key points raised by participants pertained to - design of the program; process required for access funding; areas to improve environmental and social management at ULGs and regional EPA level; issues pertaining to dealing with encroachers and squatters; issues of EIA screening and scoping requirements; challenges in implementation monitoring and reporting; environment and social management capacity of REPA and ULGs; lack of capacity in new participating ULGs; issues in dealing deal with vulnerable population. The meeting participants provided broad support to the program, including ESSA's key findings and approach towards capacity building, going forward. The meeting endorsed the recommended approach taken to integrate the environment and social sustainability requirements into the program Disbursement Linked Indicators (DLIs); and focus on incentives for improved performance with respect to environment and social management at ULG level, regions and MUDHCo. The Bank team, agreed to consider comments received during public consultation meeting, while revising the ESSA, as well as, any additional written comments received until December 20, 2013. A revised ESSA has been re-disclosed through MUDHCo website and Banks' Info shop by January 5, 2014. 6. The ULGDP II is addressing environmental and social challenges and gaps by including features in its Program design. For example, the following are included in the minimum access conditions: • Prior agreement and advance planning for environmental and social risk screening. A Participatory Performance Agreement (PPA) and an approved city level ESMS document will allow timely environment and social risk-screening and monitoring before endorsing environmentally and socially sensitive investments. • Institutional capacity and system. Key positions, including environment and social development specialists, will be in place at MUDHCo, regional governments, and ULGs. This will ensure that there is a mechanism and capacity to screen environmental and social risks of the CIP prior to implementation. The city level Environmental and Social Management System (ESMS) will include procedures for due diligence; institutional procedures for grievance management and environmental, managing resettlement/land- take processes and environmental social mitigation and monitoring plan. • Grievance and redress system. A grievance redress mechanism committee will be in place, with members who represent the interest of potentially affected people. The committee will receive, review, and address complaints related to environmental degradation, environmental health impacts on people, and loss of livelihood, income, or assets. 129 7. Pre-requisite for environmentally and socially sensitive investments. For any investments in landfill sites, regardless of size, the ULGs will demonstrate a sound and efficient system of waste segregation, recycling, collection, transportation, and treatment before they proceed with the project 8. Evidence of implementation. The ULGs will be required to generate evidence (for independent verification) that all capital projects in the previous fiscal year were screened against the set of environment and social criteria in the planning stage, including preparation and approval by REPAs the environmental management plans and resettlement action plans. 9. Incentive to ULGs for being environmentally responsible and socially inclusive. Regional governments will be able to access Program funds by monitoring verification of a functioning environment and social management system of all ULGs under their jurisdiction. 130 Annex 7: Integrated Risk Assessment Ethiopia: Second Urban Local Government Development Program Stage: Board 1. PROGRAM RISKS 2.1 Technical Risk Rating: Substantial Description: Cities may lack the human resources to Risk Management: Considerable capacity building support will be provided under the comprehensively build their administrative capacities in all Program to entities at all levels of government through the federal and regional teams. areas of urban management. Thus, they may fail to generate Funds will be disbursed to MUDHCo, regional governments, and ULGs on the basis of sufficient resources to meet their funding obligations for the performance, providing a strong incentive to perform well. Program, they may fail to adequately account for the funds, they may fall short of involving the public in planning and budgeting, they may mismanage works contracts, or they may neglect operations and maintenance. Regional governments may lack capacity and sufficient The DLI amounts allocated for regional governments are designed to ensure sufficient incentives to undertake expanded responsibilities in providing incentive (much greater than the estimated costs to carry out the tasks) for them to deliver oversight and capacity building functions to ULGs. the intended results. In addition, the four developing regional states which may encounter the greatest challenges in capacity, account for approximately 6 percent of the total population under the program and thus poses relatively less risk to program overall. The 4 regional governments (with relatively better capacity), with the assistance from MUDHCo will put in place mobile teams to enhance their capacity to carry out their mandate with respect to cities. Resp: Government at Stage: All Due Date : Continuous Status: Ongoing all levels 2.2 Fiduciary Risk Rating: Substantial Description: The fiduciary risk comprises financial Risk Management: Significant measures have been included in the Program design to management and procurement. The details of these risks and mitigate the identified risks. These measures include the minimum access conditions, mitigation measures are further described below. detailed annual performance assessments, value for money audits, independent procurement audits, strengthening of complaint and grievance handling mechanisms, and annual capacity building plans. The World Bank's Institutional Integrity Unit (INT) has a good working relationship with the Federal Ethics and Anti-Corruption Commission (FEACC) documented in a Memorandum of Understanding (MOU) signed between them on October 3, 2011. The MOU provides a framework for cooperation and sharing of 131 information, where appropriate, taking into consideration the legal and policy framework and mandate of each organization. Thus far, the working relationship between INT and FEACC based on the MOU has been cooperative and productive. The MOU will provide the Bank and INT with a foundation for expanding the existing working relationship to cover future cooperative investigations under the PforR Program when needed, and for helping to ensure that the Government of Ethiopia and the FEACC can implement their commitments under the Anti-Corruption Guidelines. Resp: Government Due Date : Stage: All Status: Ongoing at all levels Continuous Financial Management Rating: Substantial Description: PFM: Clear accounting for ULGDP II funds may Risk Management : PFM: The overall PFM reform program of Ethiopia—Expenditure be a challenge, as cities may continue to use manual Management and Control Program—is focused directly on addressing systemic weaknesses accounting procedures rather than IBEX. Data quality and in PFM, procurement, and accountability at all three levels of government along with other variability in figures between the city level, region level and interventions. MoFED has been an area of concern under the ULGDP. A disbursement-linked indicator will be provided in the Financing Agreement to address Budget monitoring and internal controls have been weak at transparency aspects of the Program. ULGs. Specific actions have been proposed for implementation support and technical assistance that will support the achievement of DLI. A detailed Action Plan will include specific risk mitigation measures. Resp: Government at Stage: All Due Date : Continuous Status: Ongoing all levels Procurement Rating High Description: The procurement assessment carried out for Resp: Government Due Date : Stage: All Status: Ongoing Program preparation revealed that cities participating in the at all levels Continuous ULGDP II do not generally adhere to the legal procurement Risk Management: A minimum condition to access Program funds is that ULGs have procedures. All regions do have acceptable procurement legal appointed procurement staff to their Program coordination teams. framework. However, with respect to government’s own Procurement performance is a key results area in the annual performance assessment, and financing, all cities exhibit poor performance in the good performance will be rewarded. implementation of Regional Government Procurement An annual procurement assessment/audit will be conducted starting the second year of the Proclamations. Program by the Regional Public Procurement Oversight Agency or independent consultants. The results will serve as an input to the annual performance assessment. Considerable capacity building support for procurement will be supported under the ULGDP II. Both the federal and regional mobile teams will have procurement specialists. The urban management course offered by the ECSU (or another institute) will include a module on procurement. Resp: Government at Stage: All Due Date : Continuous Status: Ongoing all levels 132 2.3 Environment and Social Rating: Moderate Description: Ethiopia has adequate legal framework for Risk Management: A minimum condition to access Program funds is that a ULG environmental and social management in urban sector, demonstrate it has established a functional system for environmental and social including a robust set of environment and social regulations, a management. court system, and accountability provisions integrated into the ULGDP II will support considerable capacity building for management of environmental system. However, the quality of implementation and and social risks through both federal and regional mobile teams. effectiveness of existing provisions are highly uneven. Risks A DLI provides resources to the REPAs to encourage them to effectively perform their relate primarily to lack of application of standard procedures oversight and backstopping roles. for risk screening and implementation of mitigation measures Resp: at local level, lack of coordination among agencies, and lack of Government at Stage: All Due Date : Continuous Status: Ongoing technical capacity and resources. all levels 2.4 Disbursement linked indicator risks Rating: Substantial Description: There are nine DLIs, targeting 44 ULGs, nine Risk Management: The requirements for the DLIs have been discussed exhaustively with regional governments (and 3 regional agencies in each), and the government and agreed. Both the Bank and government teams view them as one federal ministry. With such a complex system, the achievable. likelihood that some are not achieved is substantial. Targeted entities have been briefed, and can start planning immediately to achieve the DLIs. Considerable capacity building support is being provided under the ULGDP II to assist targeted entities in achieving the DLIs. Resp: Government Stage: All Due Date : Continuous Status: Ongoing at all levels 2.5 Other Risks (Optional) Description : Risk Management : Resp: Stage: Due Date : Status: 3. OVERALL RISK RATING Substantial Legend: L – Low M – Moderate S – Substantial H – High 133 Annex 8: Program Action Plan Ethiopia: Second Urban Local Government Development Program Issue/risk description Action/Completion Timeframe Responsi- Instru- ble Party ment Cross cutting issues Federal level – MUDHCo and MoFED 44 ULGs are fully Produce the performance assessment Prior to the MUDHCo aware of the Program guidelines, as part of the Program launch of first minimum conditions Operations Manual, and share with 44 APA and performance ULGs measures Program is reflected in Program proclaimed at the federal and June 2014 MUDHCo national budget other levels as required and MoFED Sufficient capacity in Current staffing gaps at MUDHCo are One year after MUDHCo DLI MUDHCo to manage filled and additional staff engaged to effectiveness ULGDP II ensure the scale up of the technical and geographic scope of the Program Coordination between Establish the Program coordination Program MUDHCo MUDHCo and MoFED committee for ULGDP with effectiveness to ensure seamless flow representatives for MUDHCo, MoFED, of funds and other entities as required. Independent annual The annual assessment is contracted to (a) For the MUDHCo DLI assessment undertaken an independent private firm. allocations in on a timely basis 2014/15: by In the first two full assessments, the March 2014 independent procurement audit will be (completion in conducted as part of APA. To this end, May), (b) For the terms of reference of these APAs following years will be modified to reflect the IPA procured by scope. July/August 31 each year and APA completed in November (with incorporation of the results from the audit in January) prior to the FY for which funding is affected. Capacity limitation with (a) Provide the FEACC and REACCs Within the first MUDHCo DLI the FEACC and staff training on public procurement and year of the and REACC to conduct contracts management. program regional investigations on fraud (b) The FEACC and REACCs use effectiveness BUDs and corruption specialized experts to review and suspected cases investigate fraud and corruption suspicious procurement and contract issues in order to produce high quality assessment., (c) provide training on complaint handling mechanisms and reporting for staff of REACCs and ethics units in the ULGs. 134 Issue/risk description Action/Completion Timeframe Responsi- Instru- ble Party ment Quality assurance of Establish Program technical sub- Program MUDHCo APA results and committee comprising key technical effectiveness monitoring of Program staff of MUDHCo and MoFED. progress Robust supply of • Procure and ensure implementation of Program MUDHCo DLI capacity building for standard urban local government implementation ULGs management training program from the Ethiopia Civil Service University and other designated centers of excellence for urban development and management. • Form and deploy to the field mobile capacity building teams. Capacity building of • Develop capacity building plans for Program MUDHCo, DLI regional governments is second generation four emerging implementation with the planned properly regional governments. Bank to • Facilitate and support first generation review the regional government capacity building plans efforts. annually Absence of awareness • Develop guidelines for setting service During the first MUDHCo DLI and inconsistency of delivery standards and citizen charters. year of program municipal service • Develop guideline for job creation and implementation delivery standards and measurement measurement Regional Governments Legal foundation Enter into a Program Participation Program MUDHCo Covenant underpinning the Agreement with the federal government, effectiveness and participation of regional committing to the Program’s rules and regional governments in the regulations, including the necessary govern- Program. financial contribution to the Program’s ments performance-based grants for ULGs. Sufficient capacity at Fill staffing gaps in core positions such Program Regional DLI regional governments to as procurement, M&E and engineering implementation govern- support Program ULGs and planning support. ments, with the Bank to review the first year’s plans and in subsequent years as needed. ORAGs execute their Ensure that the ORAGs are supported Program Regional DLI audit responsibilities and that agreements are made to implementation govern- towards ULGs complete audits of all the ULGDP II ments cities by January 7 of each year, and to deal urgently with any backlogs in audits. ULGs Legal foundation Enter into a Program Participation Program MUDHCo, Covenant underpinning the Agreement with the federal and regional effectiveness Regional participation of regional government, committing to the govern- governments in the Program’s rules and regulations, ments, and Program. including the necessary financial ULGs 135 Issue/risk description Action/Completion Timeframe Responsi- Instru- ble Party ment contribution to the Program’s performance-based grants Sufficient capacity at ULGs will throughout implementation Program ULGs Minimum ULGs to implement maintain focal persons under the implementation condition Program coordination of the city manager in the following areas: revenue generation, procurement, environmental and social sustainability, M&E, civil engineering, and public financial management, and a functioning internal audit unit. Fiduciary Federal Government Procurement and Procurement audit, which is required by Annually MUDHCo DLI contracts audit Ethiopian law, will be part of the APA in the first two years of the Program. In the meantime, the capacity at Regional Public Procurement Agencies (RPPA) will be built by MoFED and respective BoFEDs. During implementation, the capacity of RPPAs will be regularly assessed by Federal PPA, those RPPAs which are assessed to have sufficient capacity will start executing the procurement audits. The Recipient will (a) conduct performance assessment for the first two rounds (April-May, 2014, and September-November, 2014) and independent procurement audit starting with the third assessment (September – November 2015) and (b) thereafter deliver procurement audit reports with management corrective measures addressing the findings of the audit. MUDHCo guidance to MUDHCo will: Program MUDHCo ULGs on procurement • Require ULGs to justify to the Implementation BoFEDs the use of government owned enterprises where private sector suppliers exist in advance of contracting; • Require ULGs to exclude award to Bank debarred firms through providing regular information • Provide guidance to ULGs on policies on support to medium and small enterprises and the level of preferences that would be acceptable across board to ensure uniformity and minimize abuse (this guidance will be part of the Performance and Participation Agreement and in the Program Operations Manual). Contracts management (a) MUDHCo and Bank support the First year of MUDHCo capacity enhancement cities with provision of contract Program management and administration training. implementation. 136 Issue/risk description Action/Completion Timeframe Responsi- Instru- ble Party ment (b) A consultant will be recruited (in the mobile team) by the project to prepare a contract administration manual to the participating cities and provide the necessary training on it (the Contract administration manual will be based on the government’s own systems). MUDHCo has Sufficient budget is provided for all Program MUDHCo sufficient budgetary MUDHCo Program activities related to implementation and resources to undertake annual assessment, capacity building and MoFED Program activities procurement audits, and budgeted amounts are released from MoFED on a timely basis to MUDHCo throughout the Program. Regional Governments Regional public Regional public procurement and asset Regional DLI procurement and asset management agencies: public management agencies • Organize training for ULGs on the use By program procure- monitor and enforce the and implementation of the procurement effectiveness ment and regional procurement laws, directives, manuals, standard asset legal requirements bidding documents; manage- • Monitor the consistency of During Program ment procurement practices across ULGs and implementation agencies enforce the implementation of the procurement regulations including instituting an independent complaints review committee • Conduct business outreach and During Program sensitize the business community the implementation existence of complaint redressing mechanism. • From the third assessment of ULGs Starting the third (September –November 2015), the assessment of the Regional public procurement asset ULGs (Sept– management agencies will start Nov 2015) conducting Independent Procurement Audit (IPA) and deliver audit report with management corrective actions on the findings will be shared with the Bank for further technical supports. Consultations with Regions’ revenue authorities consult Program Regional DLI ULGs on tax/tariff with ULGs on tariffs/taxes implementation govern- levels and ceilings proclamations in order to provide ments conducive opportunities for ULGs to enhance revenues. Procurement and BoFEDs will undertake audit capacity During the initial Regional DLI contracts management building of the regional PPAs. two years of the govern- capacity building of • The mobile support team will program ments ULGs provide hands on support on this. implementation Urban Local Governments Internal audit of funds conducted by Program ULGs DLI Audit ULG internal auditors implementation Safeguards 137 Issue/risk description Action/Completion Timeframe Responsi- Instru- ble Party ment Adverse environment Screening for Environment and Social Prior to final MUDHCo, DLI and social impacts risks of all proposed investments at city selection of a site regions, and resulting from poor level: for construction. ULGs planning during • Incorporate environmental impact and tasked with construction at city risk criteria in the site selection carrying out level. This may result screening forms for all city level the site from failure to investment in physical works through the screening adequately identify and ULGDP II window. Ensure that the exercise for mitigate adverse screening is explicit in addressing site selection environmental impacts natural habitats and physical cultural of all of the works leading to resources considerations in order to construc- environmental damage, avoid siting of infrastructures in areas tion including loss of natural that would cause significant adverse activities at habitats and known or impacts. city level. unknown physical • Appropriate mitigation measures to cultural resources. Risk address induced impacts should also be of increased identified during the site screening environmental pollution process for all new construction and occupational health activities proposed through the ULGDP impacts. II. Lack of capacity for Develop an environment and social Program MUDHCo Partly environmental and development unit with trained implementation and regional supported social management: environment and social development govern- by DLI Capacity gaps may lead specialists to service and coordinate with ments to a weak planning, regions and ULGs: implementation and • This will include working with the monitoring of REPAs on capacity building programs environmental and • Working closely with the Department social management plan of Labor to improve implementation of at city, regional and occupational health and safety issues federal levels. Risks of loss of income • Improve capacity to document Program MUDHCo, Partly and livelihood for consultations and participatory implementation - regional supported project affected people approaches where communal land is prior to govern- by DLI due to inadequate Land used or vulnerable person is involved. validating civil ments, and acquisition, resettlement • Provide systematic training on works contracts ULGs and compensation environment and social management procedures as outlined in the environmental and social management framework and the resettlement policy framework of existing ULG project to all participating ULGs and regions • Provide for grievance redress mechanism • Undertake annual review of performance of implementation of environmental and social management planning. 138 Annex 9: Implementation Support Plan Ethiopia: Second Urban Local Government Development Program Due to the complex nature of the Program, there will be focused implementation support that will be provided by the Bank. This support will focus on the implementation of the Program action plan, providing the necessary World Bank support and monitoring progress towards the achievement of the PDO. The support will include due diligence for DLIs. To ensure rigor, the Bank will commission and undertake independent quality assurance reviews of the annual performance assessment to check for accuracy and robustness. Main focus of Implementation Support Area Skills Needed Estimate Staff Time Needed Procurement support and Procurement 5 staff weeks monitoring of Specialist implementation of PAPs including for RPPAs Procurement and contract Procurement 5 staff weeks management training Specialist Financial management financial Management 4 staff weeks training Specialist Task Team Leadership TTL 10 staff weeks Financial management, Financial 2 staff weeks disbursement and reporting Management 8 staff weeks Specialist Local Government Specialist Technical support Municipal Engineer 4 staff weeks Environment/social Environment 2 staff weeks monitoring support Specialist Social Specialist 2 staff weeks Fiscal flows/ fiscal Economist 5 staff weeks decentralization/ local government performance measurement Skill mix needed Skill Number of Travel Frequency Location Staff Weeks (annual) (annual) Task Team Leader 20 4 field trips Country office based Urban Specialist 15 4 field trips Country office based Procurement 10 2 and field trips as Country office based required Financial Management Specialist 6 2 and field trips as Country office based 139 required Environment Specialist 4 2 and field trips as Country office based required Social Development Specialist 4 2 and field trips as Country office based required Senior Urban Economist 5 2 and field trips as HQ based required Urban Transport Specialist 4 2 and field trips as HQ based required Communication Specialist 4 2 and field trip as Country office based required Senior M&E Specialist/Urban 12 4 field trips Country office based Economist 140 Annex 10: Program Minimum Conditions and Performance Measures Ethiopia: Second Urban Local Government Development Program Entry-level condition – Prior to Release: Participatory performance agreement (PPA) signed Show commitment by all parties and defines the Update the PPAs. Should be included in the ULGDP II with MUDHCo rules of the system Operations Manual. DLI: Minimum Conditions No. Minimum Condition Reason Comments, phasing in and others 1. ULG has produced and the council approved Document minimum capacity in planning and The subject for review is the plans developed in the a: project handling. previous year for the year where assessments are conducted, e.g. if assessment is conducted in August • Rolling three year capital investment plan Implementation readiness. 2014, it is the plans for FY 2014/15 /EFY 2007), which (CIP) with are typically developed from March – June 2014. • Annual action plan; • Annual budget In the assessment for FY 2014/15 (EFY 2007) budget • Annual procurement plan allocations, which is expected conducted in March 2014, it is the plans for FY 2013/14 (EFY 2006), which are • The planned use of the performance- reviewed, hence the exact plan will depend on timing of based grants from ULGDP II is in the APA. compliance with investment menu (only from assessment in 2015 of the To make this effective it is important that the APAs are performance in FY 2014/15). conducted timely in the future, see Section on APA procedures. Transitional arrangements. For new ULGs, procurement plans will only a minimum condition for the second year, see also below. The investment menu will only be assessed from the second assessment where there has been the first planning/budgeting on the use of the performance-based grants. From the third assessment, the actual utilization of grants in the previous year will also be assessed. 2. Submission of financial statements for the last Show evidence on minimum capacity in PFM In order for the external audits to start as early as possible FY (closure of the FY on time). cities should close their accounts by end of September/ each year. 141 No. Minimum Condition Reason Comments, phasing in and others Phasing in the first year: The new ULGs participating in the Program should have completed the financial statements before the start of the assessment. 3. Audit report from previous fiscal year should To reduce fiduciary risks It should be ensured that audit quality continues, and not be adverse or with a disclaimer opinion. there is need to combine with other minimum conditions to ensure sufficient safeguards on PFM. Compared to previous system, this is a strengthening of the requirements, as it is reviewing the audit report from previous FY. If the ORAG cannot conduct the audit in time, external audit firms will have to be contracted, and their results applied. (ORAG should clear the TOR and makes QA/endorsement of the results). Transitional arrangements: A waiver is provided in the first FY for the new ULGDP ULGs providing them with sufficient time to improve, but as a minimum they should have completed the financial statements from previous FY. For the first year for the “current ULGDP” ULGs, the deadline is prior to the effectiveness. Second year: All should be on time, i.e. January 7. The audit report is the last “trigger” in the assessment process, and will be checked after the field-work, but prior to the consolidation of the results. 4. Co-funding requirements (defined with Reflect sustainability of the program and ensure Is combined with performance measures so that various rates of co-funding depending on the that the rule on counterpart funding is adhered contribution above the minimum level is rewarded. type of ULG). The co-funding requirements with. The co-funding is set at a realistic level are the following: and further contributions are promoted through Co-funding should be budgeted for prior to the start of the performance measures. the fiscal year, and by the end of a fiscal year ULGs 10 percent for the new ULGs in the DRS should have contributed with the specific percent, 20 percent for the new ULGs in the non-DRS Promote improved revenue generation and measured by actual use of funding on capital investments regions. incentives to focus on longer-term sustainable on areas defined in the investment menu and source of 30 percent for the “old” ULGs. urban finance. funding (IBEX coding). 50 percent for Dire Dawa and Harar. Transitional arrangements/Phasing in: ULGs can only 142 No. Minimum Condition Reason Comments, phasing in and others A higher level of co-funding is promoted in budget for this in the second assessment, as they do not the performance measures. know the level for this coming FY. The assessment of actual utilization of funds can only be done in the assessment following a year of actual disbursements of ULGDP funds, i.e. from the September 2015 assessment. 5. Key positions in place/coordination team with To ensure that there is minimum capacity to The positions should be in place at point of time for the the following positions under the coordination handle the entire program implementation assessments. of the city manager: focal persons for revenue, process at the ULG level. procurement, environmental and social sustainability, M&E, PFM, and civil engineering, plus a functioning internal audit unit. 6. Safeguards: ULGs have demonstrated that To ensure that there is a mechanism and capacity Defined by: they have established a functional system for to screen environmental and social risks of the environmental and social management as a CIP prior to implementation. Initiation of recruitment of environmental and social minimum condition to access the safeguards focal person at the city level; performance-based grant, including an environmental and social safeguards focal Endorsement of city level ESMS document that includes person. procedures for due diligence; institutional procedures for grievance management (see below under number 8) and environmental, managing resettlement/land take processes and environmental social mitigation and monitoring plan. Only from second APA (September 2014) 7. Functional institutional set-up for procurement Procurement is a high-risk area, hence need to system in place according to public ensure that basic systems, and functioning of this procurement proclamation including: is in place prior to transfer of PB grant 1. Procurement function and minimum core installments. staff in place – at least two procurement specialists; The existence and functionality of the 2. Functional tender committee/tender procurement system is basic to make sure that award committee (TAC) in place; Program systems coupled with the mitigation 3. Participating cities have the copies of measures provide reasonable assurance that the their respective region’s procurement law, financing proceeds will be used for intended directives, manuals and standard purposes with due consideration of economy, procurement documents and staffs are efficiency, transparency and fairness. familiar with these legal documents 143 No. Minimum Condition Reason Comments, phasing in and others 8. Complaints handling system in place, Receiving, reviewing and addressing complaints including system for reporting of complaints, within core areas such as areas related to Only from the second APA (September 2014). system for receiving and addressing environmental degradation of the surrounding: complaints and reporting on corrupt practices Environmental health impacts on people; loss of The Program Operational Manual will further define the and complaints, through the ethics unit. livelihood, income or assets is an important requirements within this area. aspect of any grievance redress mechanism. The system will encompass a system for complaints received, registration of these, description of where to send the various types of complaints, to whom, and how?; and description of the procedures. The information about these procedures should be published. DLI 2: Institutional Performance Below is a presentation of the institutional performance measures. Main changes compared to existing ULGDP performance assessment system are: • Division of institutional and service delivery targets in two sets of indicators under each DLI 2 and 3. • Movement of CIP utilization rate to separate DLI (DLI 3), performance linked allocation; Similar for the utilization of maintenance budget. • Improvement and sharpening of indicators in most areas. • New indicators more focusing on the ULGs gaps and areas of importance for activities linked with achievement of targets of the program. • Reorganization of some of the performance areas, and regrouping. • Links to the government policy on Ethiopian Cities Prosperity Initiative are included. DLI 2: Institutional performance Improvements Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative 1 Planning and Budgeting (maximum 10 points) 1.1 Rolling three year CIP, with linkages • Consistency of figures and alignment Promote efficient Pillars 2, 3 Existing between the annual budget, annual action with revenue enhancement plan and planning, budgeting and 4 plan, and annual procurement plan asset management plan: 2 points. and procurement for 144 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative • Capturing of operational and recurrent efficient (Maximum 3 points) costs of investments in the plans: 1 infrastructure point. development Pillar 3 Existing 1.2 Participation of citizens in the planning • Evidence of participatory planning Citizens involvement Pillars 3 and Yes, but process to meet service delivery priorities process with involvement of citizens and good governance 7 strengthened identified by citizens Measured by: (Maximum 4 points) • Number of public consultations (minimum two per year: 1 point) • Increase or stable level of number of people involved in planning discussions and participation of women is 40 percent or more: 1 point. • Existence of a meeting agenda and other information has been shared in advance and evidence that issues discussed have included the prioritization of projects in the update of the CIP/annual plan: 1 point. • Good governance procedures on planning reflected by minutes from the consultation meetings: 1 point. 1.3 Budget appropriation • Budget approved by Council and Promote political Pillar 1 New (Maximum 2 points) proclaimed in the budget proclamation leadership and following the standard charts of governance accounts: 2 points. Note that both conditions have to be complied with to achieve the points. 1.4 Budget reliability • Variance in percent between total Promote proper Pillars 3 and Existing (but (Maximum 1 points) budget and actual for the previous FY budgeting and 5 only partial) 145 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative (related with total budget expenditures implementation on municipal services) is less than 10 percent: 1 point. 2 Assets Management (10 points) 2.1 Assets management plan prepared and • Asset inventory updated, featuring a Strengthen Pillar 5 Existing updated tabular and spatial database of all management of (Maximum 10 points) infrastructure, with specification and infrastructure and characteristics, at least for the five assets. categories of municipal assets (roads and drainage, solid and liquid waste, socioeconomic infrastructure and public parks and greenery, utilities, public buildings including abattoirs (2 points) • Conditions of assets reflected in asset inventories correctly (professional input) (2 points) • Asset inventory show an asset value and deficit, which calculates the remaining asset value, maintenance and rehabilitation deficit based on annual depreciation rates. (2 points) • City updated the AMP according to the AMP 10 steps (as per the guideline for asset management preparation if exists) elaborating its implementation strategy, which details individual activities and their respective budgets over the course of the year (2 points) • AMP clearly show related budget for asset maintenance, rehabilitation and new assets, which lists all necessary costs (2 points) 146 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative 3 Public Financial Management (Maximum 15 points) 3.1 Accounting and timely reporting • Use of integrated IBEX for all Strengthen Pillars 1 and New (Maximum 4 points) operations including ULGDP grants and accountability 3 reporting on these: 1 point • Charts of accounts adhered with, New including: On site analyses of correctness of coding – in particular of municipal revenues: 1 point. • Timely financial reporting: 1 point Existing • Monthly cash count report and Bank reconciliation submitted to region on time (within 15 days after the end of the month): 1 point New 3.2 External audit backlogs cleared • All audit backlogs cleared for previous Strengthen Pillars 1 and Existing (3 points) years (minimum 5 years back): 3 points. accountability 3 3.3 Audit Opinion for the previous audit • The audit report from the previous audit Strengthen Pillars 1 and New (3 points) has a clean audit opinion: 3 points. accountability 3 3.4 Compliance with audit recommendations • Evidence that audit queries raised in the Strengthen Pillars 1 and New (was (2 points) external audit report have been acted accountability 3 monitored only) upon by the city: Minimum 80 percent of the queries have to be cleared: 2 points. 3.5 Internal audit (3 points) • Internal audit procedures adherence Strengthen Pillars 1 and New 147 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative with good practices reflected in: (a) accountability 3 quarterly reports, (b) reporting to mayor, (c), and evidence of follow up on audit findings). (3 points, one point for compliance with each of a, b, c). 4 Procurement 64 (Maximum 15 points) 4.1 Annual procurement plans for ULGDP II • The procurement plan implementation Strengthen efficiency Pillar 2 Existing prepared and its implementation is is monitored and procurement process and competition in (modified) monitored and updated as required. milestones are achieved: 1 point. implementation of (Maximum 3 points) • Procurement plan is up-dated, as infrastructure (urban required at the point of time for productivity and assessment: 2 points. competiveness) 4.2 Adherence to procurement procedures and Based on the review of a sample of procured • Strengthen Pillar 2 Existing effectiveness of contracts contracts, the following are assessed as efficiency and (modified) (Maximum 12 points) procurement performance indicators (the competition in contract sampling size for review should not be implementation less than 20 percent in each city): of infrastructure • Availability of adequate relevant auditable (urban Existing records on the procurement process; (1 productivity and point) competiveness) • All ICB and NCB contracts award (the first two Existing (partly published as necessary and compliance with years, the APA and modified) procurement process and decisions made in will conduct this accordance with the legal requirements: (11 assessment, and points) divided on: (a) Procured Goods, in the following 64 Annual Independent procurement audit (IPA), including contracts effectiveness is to be conducted and reported along with management response of issues raised. The IPA will have an agreed terms of reference and conducted by regional public procurement agencies or an independent consultant. At the moment, since the RPPAs do not have the capacity, the first two years independent procurement audit will be conducted together with APA and the terms of reference of the APA will be modified to address the IPA need. The RPPAs capacity will be enhanced during the first two years and the RPPAs will take over the IPA responsibility from the APA consultant (Procurement audit is their legal mandate). The adequacy of the regional public procurement and asset management agencies to carry out IPA will be assessed and confirmed by joint review of Federal Public Procurement and Asset Management Agency and the World Bank. 148 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative works and services contracts are in the year (3) and approved PP (1 point); (b) proper advert is onwards, the made (1 point); (c) correct SBDs are used (1 procurement point); (d) bid floating periods are audit will fit into acceptable (1 point); (e) BER are conducted the results of the consistent with requirements of the issued APA, using the BD (1 point); (f) evaluation results are regional PPA. announced to bidders and to the general public (1 point) (g) contracts are awarded to the lowest evaluated bidder within bid validity periods (1 point); (h) procurement complaints, if any, are properly addressed (1 point); (i) contract documents contents are complete (1 point); (j) timeliness of the procurement/contracting process and decisions are consistent with the procurement plan (1 point); (k) contracts implemented are according to planned timing and budgets. (1 point). 5. Own source revenue enhancement Note as 5.4 is (Maximum 10 points) only relevant from year 2 and 3, other indicators are increased in the first APA proportionally. 5.1 Revenue enhancement plan updated for the Proper planning and Pillars 1 and most recent year • The up-dated revenue enhancement analysis is a condition 3 (Maximum points: 2) plan will include: (a) city analysis of for effective targeting Existing (partly) previous year’s revenue performance of initiatives (Maximum 3 points in the first APA) with detailed analyses of each main source of revenue including discussion of its revenue potential: 1 point. (2 points in the first APA) 149 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative • And (b) city strategies for revenue enhancement: 1 point. Existing (partly) 5.2 Municipal Revenues increase Percentage increase of in total Promote Pillars 1 and New (Maximum 3 points) (Maximum 4 points in municipal revenues from business sustainability, 3 the first APA) taxes, municipal rent and charges and ownership and fees over previous year: 5-10 percent accountability increase: 1 point; 11-20 percent: 2 points; above 20 percent: 3 points (4 points in the first APA). (nominal increase) 5.3 Revenue planning capacity • Percentage of municipal revenue on Promote realism in Pillars 1 and Existing (but (Maximum 2 points) (Maximum 3 points in business taxes, municipal rent and revenue planning and 3 now focus on the first APA) charges and fees collected against efficiency in municipal planned target for the previous EFY. collection revenues) (variation less than 5 percent: 2 points (3 points in the first APA), less than 10 percent: 1 point. 5.4 Funding from ULGs • ULG contribution level for capital Promote Pillars 1 and New investments above a certain level sustainability, 3 (Maximum 3 points) o More than 10 percent for new ownership and ULGDP cities in new (DRS) accountability regions, calibrated with 11–20 percent: 2 points and above 20 percent: 3 points; o More than 20 percent for new ULGs in non-DRS regions calibrated with 21–30 percent: 2 points, and above 30 percent 3 points. o More than 30 percent for cities participating in ULGDP cities 150 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative calibrated with 30-40 percent: 2 points and above 40 percent: 3 points. o More than 50 percent for Dire Dawa and Harar calibrated with 51–60 percent: 2 points and above 60 percent 3 points. Transitional arrangement: Only from second assessment (September 2014) (budget allocated), and from the third Assessment in September 2015 (both budget and account figures are checked). In the first assessment, the other indicators (5.1- 5.3) will be increased to 5.1: 3 points, 5.2: 4 points and 5.3: 3 points) 6 Accountability and transparency (Maximum 15 points) 6.1 Accountability and transparency in city’ • City has identified the top three basic Strengthen Pillar 3 Existing (but operations and service delivery municipal services, and prepared a accountability and strengthen (Maximum points: 15) standard for delivery along with citizen good governance availability of charter and published this ( Yes/NO information on ==6 points) This indicator will be used service only for the first year of the program. information) • Is municipal service delivery as per the Existing standard and citizen charter? (Yes/No 6= points). This will be as of the second year of the program. • Dissemination of summary of annual budgets, approved projects, expenditures, audited accounts and 151 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative results of the procurement decisions in city offices and other public places, or web-pages, newspapers etc.: 6 points. • Timely submission of quarterly physical progress reports: 3 points. 7 Environment and social Safeguards (Maximum 10 points) 7.1 Eligible investments for potential • All capital projects in the previous FY Avoid adverse Pillar 6 Existing environmental and social safeguard screened against the set of environment environmental and impacts screened and social criteria in the planning stage: social impact 3 points. (Maximum points: 6 points) • Environmental and social impact Promote Existing assessments, Environmental environmental and Management Plans (EMP) and social sustainability Resettlement Action Plans (RAP) prepared and approved by the Regional Environmental Protection Agency as required (based on a sample review of projects): 3 points. 7.2 ESMPs and Resettlement Action Plans • ESMPs and Resettlement action plans Avoid adverse Pillar 6 Existing implemented timely implemented prior to commencement of environmental and civil works: 4 points. social impact (Maximum points: 4 points) Promote environmental and social sustainability 8 Land management and urban planning (Maximum 15 points) 8.1 Statutory structure plan Promote efficient Pillar 4 New (Maximum 5 points) • Existence of up-to-date approved urban planning statutory city-wide (structure) plans (yes/no): If Yes =3 points. 152 Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Existing or new Ethiopian indicator Cities Prosperity Initiative • CIP is in accordance with the statutory plan (structure plan) (sample 5-6 investments): Yes/No. If Yes= 2 points. 8.2 Land management • Land released is serviced as per Promote efficient Pillar 4 New (Maximum 10 points) standards and city plan (sample 3-4 land management projects) Yes/No. If Yes: 5 points (all have to be fulfilled) • City has an up to date inventory of land use (Yes/No): Yes= 5 points. 153 DLI 3: Achievements of Infrastructure and Maintenance Targets, Planning on Job Creation and Value for Money in Investments Note as some of the indicators will only kick in from the second and the third assessment, the scores of the other indicators will be adjusted pro-rate to ensure that the scoring is always between 0-100 points Assessment of Infrastructure Investment Performance 65 Ser. No. Performance Areas Performance measure/Indicator Objective Links to Existing Ethiopian indicator Cities Prosperity Initiative 1 Job creation (35 percent weight Promote growth and Pillar 7 New (maximum 35 points) on this in the first development two assessments and from the third assessment: 30 percent weight (maximum 30 points) for this theme) 1.1 Job creation Cities’ achievement of jobs created New (disaggregated by gender) under the CIP (Maximum 35 points in first against their targets (percentage of assessments) achievement). Note: a condition for this, and for provision of points on this, is that cities have registered/planned targets and started implementation. Score: achievement rate at weight, for example, 100 percent achieved = 35 points, 60 percent = 21 points. As of second year, the job created will be measured (possibly person days of employment) based on standard to be developed by MUDHCo. 2 Achievement of Urban infrastructure Pillar 5 Existing targets Maximum 35 points (35 percent weight) on this in the first two assessments, and from the third assessment: Max 30 point) 65 For the first assessment in 2014: reviewing all investments implemented in FY 2012/13 (EFY 2005). Note that this DLI is only applied for the current ULGDP ULGs in the first assessment. The assessment will review all investments, not only the ones funded by ULGDP PB grants. 154 Ser. No. Performance Areas Performance measure/Indicator Objective Links to Existing Ethiopian indicator Cities Prosperity Initiative or 30 percent weight on this DLI. 2.1 Urban infrastructure targets achieved • Physical targets as included in the capital Ensure effective Pillar 5 Yes investment plan and annual work plan implementation of (modified) (Maximum 35 points in the first implemented. infrastructure and assessments) O The percentage of implementation service delivery against plans will be reflected directly in the score multiplied by 35 percent (weight of this indicator), that is 100 percent implemented = 35 points, 60 percent = 21 points. The score on this indicator will be between 0- 35. 66 Achievement under this indicator will be measured on the basis of actual delivery of infrastructure against targets laid out in the CIP and annual work plan for the previous year. The means for verification are: • Review all planned projects and the degree to which they have been implemented by the end of the FY. • Review annual and quarterly work plans and reports • Check minimum sample of 5 projects from the field-work (on-the-spot of implementation rates) • Check the contract implementation progress and contract completions through the review of bills of quantities, see the description below. Implementation rate of each project will be 66 See means of verification below in the notes. 155 Ser. No. Performance Areas Performance measure/Indicator Objective Links to Existing Ethiopian indicator Cities Prosperity Initiative assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects (see the table below the APA table). Assessed by the performance assessment teams. No transitional arrangements. However, DLI 2 will only kick in for the new ULGDP ULGs from the second assessment. 3. Maintenance Performance Pillar 5 Existing but 30 percent weight of this in the first adjusted. assessment (maximum 30 points) and 20 percent of the weight (maximum 20 points) on this DLI from the 3rd assessment when value for money kicks in). 3.1 Maintenance budget and implementation • Maintenance plan derived from the Ensure sustainability Pillar 5 Existing, but rate (Maximum points: 15 points in first assets management plan in the investments adjusted assessments) • ULGs have developed a clear through up-keep of maintenance budget and actual infrastructure (10 points in the 3rd and following implementation rate is minimum 80 assessments) percent of the planned. Note: both conditions have to be complied with to get the 15 points. Review Overall budget and utilization rate in final accounts. Sample of projects to review actual maintenance. 3.2 Actual maintenance (Maximum points • Maintenance is catered for (reward if Ensure sustainability Pillar 5 New 15 in first assessments) all projects, which need maintenance, in the investments 156 Ser. No. Performance Areas Performance measure/Indicator Objective Links to Existing Ethiopian indicator Cities Prosperity Initiative have actually been catered for). This through up-keep of (10 points in the 3rd and the following will be based on a sample of 3–5 infrastructure assessments) projects from the Assets management plan. Note: All projects have to be catered for to achieve the points. 4 Quality of infrastructure (20 percent weight from the third assessment) 4.1 Value for the money in the infrastructure Percentage of projects implemented with a Ensure efficient and Pillars 2 New investments funded by the Program 67. satisfactory level of value for the money, high quality and 5 calibrated in the value for the money infrastructure and (Maximum points 20 from 3rd. assessment tool. service delivery assessment and onwards) The percentage of projects with a satisfactory level of value for the money will be reflected in the score multiplied by 0.20 (20 percent which is the weight of this indicator), that is 80 percent satisfactory projects=16 points, 60 percent = 12 points. The score on this indicator will be rated between 0–20 points. The value for the money of each project (level of satisfactory value for the money) will be assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects. The input from this will be provided by the 67 The value for money will be conducted from the 3rd assessment starting in September 2015. In case they are not completed by the time needed to be incorporated in the regular assessment, the firm, which will carry out the assessment will revise the assessment results by taking the VFM audit results into account in due course. 157 Ser. No. Performance Areas Performance measure/Indicator Objective Links to Existing Ethiopian indicator Cities Prosperity Initiative value for the money audits to the assessment teams to be included in the calibration and in the final calculation of the size of the allocations. Transitional arrangement: The results of the value for money will be assessed first time at the APA in September 2015 of the performance in FY 2014/15. Maximum points 1, 2,3,4 = 100 Note: The “execution rate” will be determined by a review of the bills of quantities, and verified by the physical progress against planned targets. Hence, for projects not yet fully completed, for example, for a roads project, the team will review the progress on the major items in the bills of quantities, both in the regular reports from the engineer, as well as through field trip verification of the actual implementation rate. The completion rate of each project (in percent) measured by the bills of quantifies and physical progress against planned annual target will be determined for each project as the status was in the situation at the end of each fiscal year. The completion rate of each project, when determined, will then be weighted with the relative contracted size of the projects to get an aggregate result, see the example below. Weighting Completion Rates Implementation rate against Projects Contract amount planned completion * Weighted Result (percentage) Project 1 100,000 70 70,000 Project 2 500,000 80 400,000 Project 3 50,000 90 45,000 Total plan 650,000 100 515,000 Weighted implementation rate for this city 0.79 79 percent *Progress of projects monitored through bills of quantities and field verification. 158