March 3, 2005
ETHIOPIA
Decentralized Fiscal Support for Local Infrastructure Grants (DFS-LIG)
Aide Memoire
February 24 - March 1, 2005
1.
The first preparation mission for the proposed new program, Decentralized Fiscal
Support for Local Infrastructure Grants (DFS-LIG) was conducted from February 24 March 1, 2005. The mission consisted of Larry Hannah (Lead Economist and Task Team
Leader), Dave DeGroot and Rumana Huque (Senior Urban Specialists), Abebaw
Alemayehu (Senior Operations Officer-Urban Development), John Riverson (Lead
Transport Engineer), Yitbarek Tessema (Senior Operations Officer-Water and
Sanitation), and Eshetu Yimer (Senior Financial Management Specialist). The mission
met with H.E. Ato Mekonen Manyazewal, State Minister of Finance and Economic
Development (MOFED), members of the DFS Task Force, regional and local officials,
and donors (a list of people met is provided in Annex 1). This Aide Memoire summarizes
discussions and reflects agreements reached with the government during the mission. The
mission would like to thank the government and other officials met for their hospitality
and assistance.
Program Development Objectives
2.
The development objectives of DFS-LIG (hereafter referred to as DFS) are fully
aligned with GOE’s decentralization objectives, and were confirmed as the following:
a. to increase capital investment at the local government level (woreda and
municipality) in order to deliver better services to the population, and
b. to deepen the decentralization process at the local level.
3.
From the perspective of local governments, DFS is designed to simplify the
process of making capital investments by reserving funding for them, packaging a wide
range of investments with appropriate design and implementation assistance and letting
local choices guide investment decisions within national and regional frameworks.
Program Framework and Principles
4.
To support GOE’s decentralization objectives, local governments require
additional financing because current revenue sources (from block grants and other
revenue sources) are insufficient to fund local service delivery mandates. The DFS grant
aims to provide additional resources for capital investment. The design of DFS will also
allow local governments and their constituents to determine priorities for these
investments within national and regional frameworks.
5.
DFS funding will support the fiscal decentralization system by flowing through
the normal GOE budgeting and public financial management systems, and will be
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additional to current transfers to the region/local levels. It will operate as a specific
purpose grant in order to support GOE’s objective of delivering better services to the
population. A specific purpose grant is deemed necessary at this time in order to
introduce an efficient system of financing local infrastructure, even while spending
pressure on recurrent budgets remains high.
6.
This specific purpose grant differs from the block grant to local government in
two ways:
a. DFS grant allocations from regions to local governments will be performance
based. Allocation of funds from the federal government to regions will follow the
equity-based formula. Regions will follow similar, suitably adapted, allocation
procedures. Regions will assess in-year and year-on-year performance of local
governments and may periodically reallocate unutilized funds to maximize
delivery of services to the population.
b. A minimum statutory capacity to implement the program will clearly be
necessary. PSCAP and CBDSD funds are already available to local governments
to start building up this capacity before DFS funds start flowing.
7.
DFS grants, with performance incentives and well-packaged technical assistance
to local governments, will facilitate this process until such time as the overall
intergovernmental fiscal system is brought to a stable balance.
8.
Like all capital investments, any infrastructure funded through DFS will have
recurrent cost implications. It is expected that the incremental recurrent expenditure
requirements attendant upon these capital investments will be funded through the block
grant system, the formula for which includes incentives to optimize own resources.
Appropriate budgeting and accounting for recurrent costs will be a mandatory feature of
all DFS grants.
Institutional Arrangements
9.
Institutional arrangements for implementation of DFS-LIG grant will follow
existing GOE systems:
a. MOFED will make allocations to regions following the existing block grant
formula.
b. Regional Bureaus of Finance and Economic Development (BOFED) will allocate
grant funds to local governments on the basis of appropriate formulae and
procedures to be agreed with MOFED as a precondition to regional participation
in DFS.
c. Technical reviews/appraisal of medium term and annual DFS investments will be
carried out by woreda/municipal level offices of finance and economic
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development and regional BOFEDs, in conjunction with sectoral bureaus.
BOFEDs will be responsible for progress and monitoring reporting to MOFED.
d. MOFED, as the implementing agency, will establish suitable capacity to manage
the DFS grant.
e. Capacity building requirements associated with DFS implementation at all levels
of government can and should be funded through PSCAP. Government through
the PSCAP program, will assist local governments in the development of
appropriate capital program management capacity, typically achieved through the
establishment of planning and project management units within woreda and
municipal finance and economic development offices.
Eligible Investments
10.
The scope of eligible investments for funding under DFS-LIG will be as specified
in regional legislation that defines the full range of local government delivery
responsibilities. This scope may be further refined as required. The scale of the program
to each local government will be determined through consultations between GOE,
donors, and IDA.
11.
Based on a number of field visits to local governments—including during this
mission, Meta Robi Woreda in Oromia and Yem Woreda in SNNPR—the team has
gained a good appreciation of the scope of projects being undertaken by local
governments. Planning processes are clear, public consultation is carried out, standard
designs are simple and adaptable, government procurement procedures are being
followed, all leading to good results on the ground. Both of the woredas visited during
the mission have implemented local level infrastructure investments worth in excess of
Birr 1.5 million over the last year. This is indicative of the type of capital investment
programs that local governments might be capable of implementing under DFS.
Bank Lending Instrument
12.
The most appropriate World Bank lending instrument available for the objectives
of DFS appears to be the Adaptable Program Loan (APL). The APL is suitable for
programs with development objectives that will take more than the normal period of one
IDA credit to achieve. In addition, the APL instrument allows the provision of donor
resources to be better timed to the government’s ability to utilize them thus not tying-up
donor funds today which can not be used for some years. The APL structure also gives
both the GOE and the World Bank better benchmarks with which to gauge progress
toward long-term goals.
Donor Coordination
13.
Consultations with donors were initiated during the mission. GOE is clear that
simplification of capital funding mechanisms for local government is a key objective in
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the near term, and a gradual transition to pooled funding for all local delivery
responsibilities a medium term objective. To support this directive, and following from
the PSCAP model, the establishment of a DFS Donor Working Group could be
considered.
Project Preparation
14.
The project preparation timetable will conform with GOE’s budget cycle. For
DFS funding to be included in the GOE 06/07 budget (commencing July 06), certainty of
DFS funding availability must be achieved by January 2006. DFS preparation activities
need to be aligned accordingly.
15.
A PHRD grant to support preparation has been requested and, if approved, will
require MOFED to quickly mobilize to use it (details of the PHRD grant application are
provided in Annex 2). The PHRD grant provides funding for the employment of a grant
manager and procurement specialist. The dedicated staff could be either seconded from
MOFED for this purpose or hired as contractual staff under the PHRD grant. The staff
should have some experience in project management and selection of consultants. The
mission suggested that the two PHRD staff be in place by May 2005 in order to prepare
the project for approval by January 2006. Any prolonged delay in using the PHRD grant
may jeopardize the availability of funds for use in the GOE 06/07 budget.
16.
Project preparation timetable:
PHRD grant agreement signed
PHRD grant mngr & proc spec on board
May 2005
May 2005 (preparation of TORs,
identification of CVs need to be
completed before signing)
PHRD consultants on board
June 2005
Next Bank mission (inclu regional visits) June 2005
Consultants reports available
September 2005
Appraisal
October 2005
Negotiations
November 2005
Submission of board docs
December 2005
Board presentation
January 2006
Credit effectiveness
on or before July 2006
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Annex 1
List of People Met
Ministry of Finance and Economic Development (MOFED)
H.E.Ato Mekonen Manyazewal
State Minister
Shiferaw Alemu
Department Head
Berhanu Legesse
Department Head
Dejene Demissie
Team Leader
Gulte Metaferia
Team Leader, RAD
Tizita Taddesse
Expert, RAD
Addisu Ayalew
Expert, RAD
Ethiopia Social Rehabilitation and Development Fund
Tesfaye Desta
Deputy General Manager
Wondewossen Teffera
Team Leader, Infrastructure
Ethiopia Roads Authority
Mulugeta Demissie
ERTTP Coordinator
Ministry of Education
Tenaye Assefa
Expert
Oromia Region
Berhanu Jebesse
Tafesse Adugne
Officials representing:
SNNP Region
Ato Gezahgne
Woldemariam Wari
Berafe Bosen
Sisay Yami
Moges Balcha
Deputy Planning Head, BOFED
Administrator, Meta Robi Woreda
Rural Development, Meta Robi Woreda
Water Supply & Sanitation, Meta Robi Woreda
OFED, Meta Robi Woreda
Health Office, Meta Robi Woreda
Capacity Building, Meta Robi Woreda
Mass mobilization, Meta Robi Woreda
Rural roads, Meta Robi Woreda
Office of Information, Meta Robi Woreda
Womens Affairs Office, Meta Robi Woreda
Vice Administrator, Yem Woreda
Rural Development, Yem Woreda
Rural Development, Yem Woreda
Health Office, Yem Woreda
OFED, Yem Woreda
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Annex 2
Application for PHRD Project Preparation Grant
Breakdown of Grant Components
(1)
Local Infrastructure Assessment: A study to: (i) analyze infrastructure needs in
typical woredas/municipalities (this would involve using existing studies, updating them,
and perhaps looking specifically at a "typical" municipality since less work has been
done on municipalities than on woredas); (ii) establish unit costs for different types of
infrastructure likely to be funded under the project; (iii) quantify recurrent cost
implications for typical types of infrastructure; and (iv) determine the type of technical
standards that would be necessary to screen sub-project proposals at the local level. This
work would be carried out on a cross-sectoral basis in collaboration with line ministries
in each sector.
(2)
Prioritization Methodology for Investment at the Woreda/Municipal Level: A
study of the types of the existing plans, review of the mechanisms for preparing these
plans, and recommend improvements--so that the project builds on existing methods of
prioritizing investments at the local level rather than creating new ones. An expected
result would be the criteria for project investment under the project. The consultant will
also assess harmonization with other donor projects at the local level.
(3)
Policy Analysis and Development: A study to help develop: (i) a policy matrix for
the APL which describes the triggers to be used to move from one APL loan to the next;
and (ii) performance measures to be used in this operation to redirect resources to those
making most effective use of them. The consultant will also recommend implementation
measures for the above. This component also includes a regional and a national workshop
for stakeholder consultations.
(4)
Environmental and Social Management Framework (ESMF):The preparation of
an ESMF for addressing Bank safeguards requirements (environmental assessment,
cultural property and possibly natural habitats and safety of dams) on subproject
investments. The ESMF will establish a unified process for addressing these sub-project
requirements from preparation, through review and approval, to implementation.
Attention will be paid to additional capacity building requirements at the local level; to
enable appropriate integration with national EA processes. The ESMF will be
incorporated into the project Operational Manual.
(5)
Resettlement Policy Framework (RPF): The preparation a RPF, together with
guidelines for Resettlement Action Plans, for use in addressing any issues related to land
acquisition or access to resources due to subproject investments. The RPF will address
requirements of the Bank's policy on involuntary resettlement, as well as of national
policies and practice. The RPF will be incorporated into the project Operational Manual.
(6)
Project Operational/Implementation Manuals: The development of operational
manuals and guidelines for implementation of relevant sub-projects as well as an overall
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program implementation manual for DFS-LIG which will include detailed information
and guidelines on: (I) implementation arrangements; (ii) procurement and disbursement
arrangements, financial management and detailed implementation plan, including a timebound detailed implementation plan for each program component, including assistance
and training, schedule of procurement actions, including target dates, schedule of
disbursements, specific actions required to achieve the program's development impact
objectives, information on setting up and utilization of project accounting and financial
management systems, and timetable and procedures for auditing the implementing
agencies' financial statements, project accounts, fund accounts, statements of expenditure,
etc.; and (iii) monitoring and evaluation arrangements covering key input, process, output
and outcome/impact indicators. The output will be operational manuals and guidelines for
relevant sub-projects as well as an overall program implementation manual for DFS-LIG.
The monitoring and evaluation framework and the MIS for the project will also be
outputs of this component.
(7)
Financial Management System: Technical assistance to establish a financial
management system for the project, which will be capable of producing accurate, timely
and relevant information. The system should be able to record and report the financial
transactions of the project in a timely manner and ensure that the proceeds of the credit
are used for the intended purpose. The focus will be on regional and local level systems
to complement federal reporting requirements
(8)
Grant Audit: This component will finance a consultancy to carry out an audit of
this PHRD Grant.
(9)
PHRD grant management: This component will finance two full time consultants
to the MOFED to (a) oversea the preparation and clearance of terms of reference for all
components and (b) to manage the procurement under the grant. These are additional
specialized skills required by MOFED only for the duration of the PHRD grant. Funding
for limited equipment and internal travel is also included.
(10)
Unallocated:
Total grant amount requested:
US$495,000
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