Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 28191-ET

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 66.9 MILLION (US$ 100 MILLION EQUIVALENT)

TO THE

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

FOR A

PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT

March 25,2004

Public Sector Reform and Capacity Building Unit Country Department 2 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents mav not be otherwise disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as March 25,2004)

AfDB BCB BOFED CAS C A D CFU CIDA CPR COMESA CSRP D C I D C A DLDP DfID EA EC ECuA EMCP FIRA I C B ICT IDA IEC IMF IT JSRP KfW GOE LIG GTZ MAB MDG M&E MFA MOFED MOJ MOR NCB

Currency Unit: = Ethiopian Birr ETB 1.0 = US$0.11696 US$ 1.0 = ETB 8.63

FISCAL YEAR July 8 - July 7

ABBREVIATIONS AND ACRONYMS

African Development Bank Regional Bureau o f Capacity Building Regional Bureau o f Finance and Economic Development Country Assistance Strategy Central Accounts Department Counterpart Funds Unit Canadian International Development Agency Council o f Peoples’ Representatives Community o f Eastern and South Africa Civi l Service Reform Program Development Corporation o f Ireland Development Credit Agreement District Level Decentralization Program Department for International Development Executing Agency European Commission Ethiopian Customs Authority Expenditure Management and Control Activities Federal Inland Revenue Authority International Competitive Bidding Information and Communication Technologies International Development Association Information, Education and Communication International Monetary Fund Information Technology Justice System Reform Program Kreditanstalt fuer Wiederaufbau Government o f Ethiopia Proposed Local Investment Grant Program German Technical Cooperation Ministries, Agencies, and Bureaus Millennium Development Goals Monitoring and Evaluation Ministry o f Federal Affairs Ministry o f Finance and Economic Development Ministry o f Justice Ministry o f Revenue National Competitive Bidding

NCBP OFAG PPD PRSC PSCAP PIP SDP SIDA S I L SDPRP TA TD TSRP UMCBP UNDP USAID WTO

National Capacity Building Program Office of the Federal Auditor General Planning and Programming Directorate Poverty Reduction Support Credit Public Sector Capacity Building Program Program Implementation Plan Sector Development Program Swedish International Development Agency Sector Investment Loan Ethiopia’s Sustainable Development and Poverty R Technical Assistance

FOR OFFICIAL USE ONLY

n Program

Treasury Department Tax Systems Reform Program Urban Management Capacity Building Program United Nations Development Program United States Agency for International Development World Trade Organization

ducti

Vice President : Callisto Madavo Country Director : Ishac Diwan

Acting Sector Manager : Guenter Heidenhof Task Team Leader : Navin Girishankar

The core World Bank team involved in the preparation o f the operation was led by Navin Girishankar (Sr. Public Sector Specialist) and included Shenaz Ahmed (Program Assistant), Elsa Araya (Operations Analyst), Deepak Bhatia (Manager), Reynaldo Castro (Consultant), David DeGroot (Sr. Local Government Specialist), Steve Gaginis (Financial Officer), Prasad C. Mohan (Sr. Communications Specialist), Brighton Musungwa (Sr. Financial Management Specialist), Edith Ruguru Mwenda (Sr. Counsel), Samuel Haile Selassie (Sr. Procurement Specialist), David Savage (Sr. Municipal Development Specialist), Vivek Srivastava (Sr. Public Sector Specialist), Eshetu Yimer (Sr. Financial Management Specialist). In addition, a larger World Bank and multi-donor team contributed during the preparation o f this multi-sector operation. A complete l i s t o f these team members i s provided in Annex 7. The Quality Assurancepeer Review Team for the operation (including participants in the Quality Enhancement Review) included Herbert Acquay, Arvil Van Adams, Vidoje Brajovic, Michael Engelshalk, Larry Hannah, Jim Hicks, Rogati Kayani, Junaid Ahmad, Ali Hashim, and Anand Rajaram.

The team would like to dedicate its efforts to the memory of J i t Bahadur Gill, Sector Manager (AFTPR), who passed suddenly during project preparation. Mr . G i l l s guidance, support, and appreciation of the client’s needs proved invaluable to preparation. His presence as a colleague andfriend w i l l be

sorely missed by the Bank and Government teams.

I

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

ETHIOPIA PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT

CONTENTS

A . Project Development Objective ................................................................................................. 2 Project development objective ............................................................................................ 2 1 .

2 . * . Key performance indicators ................................................................................................ 2

B . Strategic Context ........................................................................................................................ 3 1 . 2 . 3 .

Sector-related Country Assistance Strategy (CAS) goal supported by the project ............ 3 Ma in sector issues and Government strategy ..................................................................... 5 Sector issues to be addressed by the project and strategic choices ................................... 12

C . Project Description Summary .................................................................................................. 15

Key policy and institutional reforms supported by the project ......................................... 19

Institutional and implementation arrangements ................................................................ 21

1 . 2 . 3 . 4 .

Project components .......................................................................................................... 15

Benefits and target population .......................................................................................... 20

D . Project Rationale ...................................................................................................................... 28 1 . 2 . 3 . 4 . 5 .

Project alternatives considered and reasons for rejection ................................................. 28 Major related projects financed by the Bank and/or other development agencies ........... 29 Lessons learned and reflected in the project design ......................................................... 30 Indications o f borrower commitment and ownership ....................................................... 32 Value added of Bank support in this project .................................................................... 35

E . Summary Project Analysis ....................................................................................................... 35 1 . Economic .......................................................................................................................... 35 2 . Financial ........................................................................................................................... 36 3 . Technical .......................................................................................................................... 36 4 . Institutional ....................................................................................................................... 36 5 . Environmental .................................................................................................................. 40 6 . Social ................................................................................................................................ 41 7 . Safeguard Policies ............................................................................................................ 42

F . Sustainability and Risks ........................................................................................................... 43 1 . Sustainability .................................................................................................................... 43

Critical risks ...................................................................................................................... 44 Possible controversial aspects .......................................................................................... 47

2 . 3 .

G . Main Credit Conditions ........................................................................................................... 47 Effectiveness conditions ................................................................................................... 47 Financial and other covenants .......................................................................................... 48

1 . 2 .

H . Readiness o f Implementation .................................................................................................. 49

I . Compliance with Bank Policies .............................................................................................. 49

ANNEXES 1 . 2 . 3 . 4 . 5 . 5a . 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 .

MAP:

Project Design Summary .................................................................................................. 50 Detailed Project Description ............................................................................................. 55 Estimated Project Costs .................................................................................................... 62 Cost Benefit Analysis Summary ....................................................................................... 63 Financial Summary ........................................................................................................... 64 Financial Management Assessment Technical Annex ..................................................... 65 Procurement and Disbursement Arrangements ................................................................ 73 Project Processing Schedule ............................................................................................. 81 Documents in the Project File .......................................................................................... 83 Key Features o f Resource Allocation and Management under PSCAP ........................... 86 “Harmonization Issues for Bilateral Donors” ................................................. : ................. 98 Statement o f Loans and Credits ........................................................................................ 98 Country at a Glance ........................................................................................................ 100 Letter of Sectoral Policy ................................................................................................. 102

IBRD NO . 31 158

ETHIOPIA PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT

Project Appraisal Document Africa Regional Office

AFTPR

Financing Plan (US$m): Source BORROWER IDA CIDA SIDA Other Donors Total:

Date: March 25,2004 Country Director: Ishac Diwan Project ID: PO74020

Lending Instrument: Theme(s): Public Sector Specific hvestment Loan (SIL)

Program Financing Data

Team Leader: Navin Girishankar Acting Sector Managermirector: Guenter Heidenhof Sector(s): BA-Civil Service Reform, BD-Decentralization, BF-Public Financial Management, BI-Institutional Development, B J-Judicial Reform

Poverty Targeted Intervention: N

Local Foreign Total 137.5 137.5 65.4 34.6 100.0 25.3 13.4 38.8

5.6 3 .O 8.6 73.2 39.8 113.0

307.0 90.8 397.8

[ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Project Cost (US$m): $397.8 Total Bank Financing (US$m): $100.00 Proposed Terms (IDA): Standard Credit Commitment Fee: 0.00-0.50% Grace Period (years): 10 years Years To Maturity: 40 years Commitment Fee: 0.50% Service Charge: 0.75%

Co-financing: None

FY2005 FY2006 FY2007 Annual 9.9 22.2 30.0

Cumulative 9.9 32.1 62.1 Disbursement profile 10% 22% 3 0%

FY2008 FY2009 21.4 16.5 83.5 100.0

21% 17%

Project implementation period: FY2005-2010

Expected effectiveness date: July 8,2004 Expected closing date: July 7,2009

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Expected impact on “institutional quality” 1. Increased predictability and adequacy of financial resources flows (in-year and across years) . Reduced budget variance . 2. Greater inclusiveness and transparency of planning

Reduced federal-regional and regional-local fiscal gaps

A. Project Development Objective

Contributing PSCAP Subprograms . Civil Service Reform Tax Systems Reform

1. Project development objective

and prioritization processes . . Established practice o f participatory budgeting and public reporting on budgets and performance at all levels Regular involvement o f civil society in planning and policymaking, budgeting, and review processes

The objective o f the Public Sector Capacity Building Program (PSCAP) Support Project i s to improve the scale, efficiency, and responsiveness o f public service delivery at the federal, regional, and local level; to empower citizens to participate more effectively in shaping their own development; and to promote good governance and accountability. This objective will be achieved by scaling up Ethiopia’s ongoing capacity building and institutional transformation efforts in six priority areas under PSCAP-(i) Civil Service Reform; (ii) District-Level Decentralization; (iii) Urban Management Capacity Building; (iv) Tax Systems Reform; (v) Justice System Reform; (vi) Information and Communications Technology.

. . w .

2. Key performance indicators

. Wage decompression ratios 5. Improved quality and efficiency o f operations . Improved service levels in terms o f access,

responsiveness and cost efficiency in priority sectors . Reduced unit costs and processing time for essential rural, urban, social, and legal services in priority sectors

6. Improved transparency and accountability Reduced incidence o f corruption and arbitrariness in rule enforcement (as judged by economic agents) . Increased access to justice, recourse and redress . Enhanced independence o f the judiciary Increased access to government information

Whi le specific output indicators across contributing subprograms are provided in the logical framework, the key performance indicators for PSCAP overall (and therefore, the Bank’s Support Project) are provided below:

. All Subprograms

. All Subprograms

Civil Service Reform District-Level Decentralization Urban Management Capacity Building Tax Systems Reform

3. Enhanced revenue performance and fiscal autonomy Increased own revenues and unconditional transfers as a share o f total expenditures at sub-national levels Increased tax effort at all levels

4. Enhanced incentive environment for public servants

District-Level Decentralization Urban Management Capacity Building Tax Systems Reform ICT

(gender disaggregated) . Private-public wage comparison

Civil Service Reform . District-Level Decentralization . Urban Management Capacity Building

Increased average civil service salary as percentage o f living wage

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B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project Document number: n>A/R2003-0050 Date of latest CAS discussion: April 17,2003

Capacity building across the public, private, civil society, and higher education sectors constitutes a key pillar o f Ethiopia’s poverty reduction strategy, the Sustainable Development and Poverty Reduction Program (SDPRP). In supporting Ethiopia’s SDPRP, the Bank’s 2003-2005 Country Assistance Strategy has designated public sector capacity building a “critical underpinning” to the achievement of three high-level objectives:

pro-poor growth through improved provision o f productivity-enhancing services including rural and urban land development and management, agricultural extension, and infrastructure;

improved human development outcomes through improved decentralized delivery o f social services such as health, education, and water;

good governance through strengthening of public financial management systems, deepening democratic decentralization in woredas and municipalities, and implementing comprehensive legal and judicial reform.

Accordingly, the Bank’s support for PSCAP serves as one o f three multi-sectoral programmatic instruments within the CAS (figure 1). The second instrument i s the Poverty Reduction Support Credit (PRSC) series, which provides annual balance o f payments support for the Government’s budget as a whole, including the general purpose transfers or subsidies that finance service delivery in regions. The third i s a Local Investment Grant (LIG) Program intended to help finance the capital requirements o f decentralized delivery across key sectors.

Figure 1. The role o f PSCAP and other multi-sectoral instruments in the 2003-2005 CAS

Poverty Reduction Support Credits * Provides predictable budget S U Q Q O ~ ~ through serial credits

Finances inter ol io the federal-regional revenue shares including the recurrent service delivery needs o f regional and sub-regional authorities

Loca l Investment G r a n t Program Provides performance oriented transfers for multiscctaral service

Based on successful PSCAP impiementation delivery investment needs a1 the l o c a l level

a & a m n

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The Bank’s PSCAP Support Project complements the budget and decentralized fiscal support operations in three ways. First, the capacity building support under PSCAP i s acknowledged as a key requirement for effective implementation of the PRSCs and LIG inter alia by capacitating the federal, regional, and local levels to better utilize additional fiscal resources provided to meet their recurrent and capital needs. For the LIG in particular, access to investment support for woredas and municipalities should be conditioned in part on satisfactory completion of basic local level capacity building activities under PSCAP. Second, as noted in the CAS document, support for PSCAP i s based on IDA’S strategic decision to help the Government clarify the “rules of the game” for large scale capacity building support, and thereby strengthen Ethiopia’s intergovernmental fiscal system by introducing a performance-oriented capacity building transfer alongside the equity-oriented federal-regional general purpose subsidy (enhanced year-to-year through PRSCs). Third, the bottom-up PSCAP planning process-by which federal and regional institutions make formal commitments to institutional reform and capacity building targets- provides a robust mechanism to ensure that refinements to the SDPRP matrix constitute a realistic aggregation o f regional and local commitments. In so doing, the PSCAP planning and budgeting processes helps provide the Government-Donor dialogue around PRSCs with an increasingly sub- national perspective on public sector reform issues critical to poverty reduction (for example, fiscal decentralization or urban land management).

Other operations in the CAS that are intended to complement the PSCAP Support Project are the proposed Information and Communications Technologies Assisted Development Project (ICTAD), which wi l l inter alia help develop the regulatory and coordination framework for IT- based applications, as well as the proposed Rural Capacity Building Project, which i s intended to help develop vocational and technical ski l ls for the agricultural sector, improve the delivery o f agricultural services, and strengthen agricultural research systems.

Analytical underpinnings of PSCAP. A rich body of analytical work in the Bank’s country program underpins support for PSCAP. These include a series o f annual Public Expenditure Reviews dating back to the mid-1990s that reviewed progress of expenditure management reforms (especially the 2000,2001, and 2002 reports); the 1999 Regionalization Study; the 2000 review of the Civil Service Reform Program (CSRP); a 2001 Rapid Assessment of Municipalities; the 2001 Woreda Studies series. More recently, the Bank and several other donors jointly supported the preparation o f the 2003 Country Financial Accountability Assessment, and the 2003 Country Procurement Assessment Report along with action plans. Regional visits during the FY2001-2002 contributed to three Regional PSCAP Technical Notes on civil service reform, municipal development, and decentralization in Amhara, Oromiya, and Tigray. Background papers have also been prepared on monitoring and evaluation methodology as well as options for the design o f intergovernmental fiscal transfers as inputs to PSCAP preparation. In addition to ongoing analyses o f performance management and information technology initiatives in Ethiopia, the Bank’s forward looking analytical agenda includes a Legal and Judicial Assessment and a flagship, multi-donor financed Institutional Governance Review on public sector transformation, both of which are under preparation and should contribute to Government’s thinking on how best to utilize PSCAP resources over the medium-run. Joint Budget and Aid Management Reviews as well as Intergovernmental Fiduciary Assessments are also envisaged as part o f the annual SDPRP review cycle, and are designed to foster robust Government-donor and intergovernmental dialogue on public expenditure analysis and fiscal management. Documentation on these reviews are included in the project f i les and are posted, where appropriate, on the following website: http://www. worldbank.ordethiouia/uscau.htm.

2. Main sector issues and Government strategy

Following the fall o f the Derg regime in the early 1990s, the EPRDF-coalition Government embarked on a long term strategy of “state transformation” characterized by bold attempts to implement multiple reforms in parallel; the massive scale-up o f institutional development efforts across tiers o f government; and the deliberate expansion o f the scope o f public sector capacity building initiatives. Spanning nearly a decade, Ethiopia’s transformation agenda has evolved over three phases in response to growing awareness that pervasive deficits in capacity have hampered the ability o f the state to secure the fundamentals o f poverty reduction and democratic development such as responsive service delivery, citizen empowerment, and good governance.

2.1 Regionalization and public sector modernization in the mid- to late-1990s

During the 1990s, Ethiopia embarked on a series o f unprecedented institutional reforms designed to establish a durable federal state system and further i t s democratic transition. The first phase of the Government’s state transformation strategy, launched in 1995, involved the creation o f a federal state structure based on ethnically delineated regional states responsible for a broad range of the country’s political, economic, and social objectives including the delivery of essential public services. In accordance with the 1994 Constitution, the Government formally established an intergovernmental fiscal system and initiated the annual transfer o f a formula-driven general purpose grant or subsidy to regions, consistent with i t s policy o f “balanced regional progress.” It also undertook a significant redeployment o f civil service staff to newly empowered regional executives. As a result, by the late 1990s, staffing levels in regional administrations reached over 320,000, while the size o f the federal civil service reached 43,000.

Even as it established a radically new decentralized political and state system, the Government acknowledged the deep institutional constraints on basic functions such as policymaking, service delivery, and regulation. Core public management systems at the federal and regional levels were hampered by outdated civil service legislation and working systems; the absence o f a medium- term planning and budgeting framework; ineffective financial and personnel management controls; inadequate civil service wages and inappropriate grading systems; poor capacity for strategic and cabinet-level decision-making; and insufficient focus on modern managerial approaches to service delivery. In recognition of these constraints, the Government embarked on a comprehensive Civil Service Reform Program (CSRP) in 1996. Indicative of Ethiopia’s “first generation’’ capacity building efforts, the CSRP sought to build a fair, transparent, efficient, effective, and ethical civil service primarily by creating enabling legislation, developing operating systems, and training staff in five areas: (i) Expenditure Control and Management, (ii) Human Resource Management, (iii) Service Delivery, (iv) Top Management Systems, and (v) Ethics. Successful efforts (for example, budgeting, planning, and accounting reforms) at the federal level were intended to provide prototypes for regional authorities.

The first phase CSRP was implemented over the 1996-2000 period, albeit with intermittent lags due to poor coordination, particularly during the Ethio-Eritrean border conflict. The results o f these efforts were mixed. Notable achievements included the development of new legislation (for example, a financial management proclamation, a civil service law, a code o f ethics, complaints- handling procedures, and a service delivery policy) as well as operating systems for budgeting, procurement, and some aspects o f personnel management such as salary surveys and records management. Development of prototypes for expenditure management including a new budget

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classification system, a macro-economic fiscal framework and medium-term planning system, a double entry modified cash accounting system, and procurement reforms were also important achievements. Diagnostic work in these areas also progressed. While commendable, these initiatives have had only modest impact in relieving the institutional and capacity constraints within the Ethiopian civi l service. There was l i t t l e evidence o f sustained improvement in output performance at the federal or regional levels. Core functions such as medium-term planning, accounting and auditing, and personnel management remain weak. Attempts to develop an affordable, medium-term public sector pay policy were also delayed, and civi l servants-despite an across-the-board salary increase in 200 1-continued to receive low salaries. Operational efficiency across federal ministries and regional bureaus remained poor. Furthermore, lags in the prototyping phase at the federal level forestalled CSRP implementation in regions and woredas. The considerable opportunity costs in terms o f foregone improvements in institutional and service delivery performance at the regional and local levels were widely acknowledged.

Complementary tax policy and administration reforms were also undertaken in line with the Government’s objectives o f improving revenue performance to reduce aid dependency and adequately finance the expanding development agenda. The passage and implementation o f a Value-Added Tax, as well as the implementation o f a Taxpayer Identification Number (TIN) system proceeded. Early efforts in the justice system including the strengthening o f court administration and the reform o f the penal code and family law sought to deepen implementation o f the 1994 Constitution.

Weaknesses in the design o f reform initiatives such as an overly top-down approach, inexperience with managing national and international consultants, and funding gaps limited the impact o f this f i rst phase o f transformation. Implementation delays resulted from the inordinate demands that the border conflict placed on the time o f senior officials. Nevertheless, the Government’s generally pragmatic approach to implementing an ambitious regionalization and civil service reform agenda established Ethiopia as a serious state reformer by the late 1990s

2.2 National capacity building during the post-conflict years

By late 1999, Ethiopia’s early public sector reform experience had significantly deepened i t s leadership’s appreciation o f the role o f institutional capacity building in securing the economic and political fundamentals o f sustainable poverty reduction. During the conflict period and i t s immediate aftermath, the Government undertook-in many cases, with the support o f donors-a range o f in-depth diagnostics and reviews to systematically identify the factors that hindered public sector efficiency, grassroots empowerment, and accountability. These factors, described below, spanned all branches and tiers o f government, and helped shaped the scope and scale o f the second phase o f state transformation.

Ineficiencies resulted from unpredictable Jinancial management, poor incentives, lack of a strategic or performance orientation. Unpredictable resource flows have undermined the allocative and operational efficiency the public sector at the federal, regional, and local levels in Ethiopia. The 2003 CFAA identified many o f the critical challenges in public financial management that remain at al l levels. At the federal level, there i s a widely acknowledged need to ensure compliance with the financial calendar; strengthen political ownership o f the macroeconomic fiscal framework and i t s indicative planning figures as a basis for integrated, medium term planning; revitalize federal level efforts to develop a Public Expenditure Program or Medium Term Expenditure Framework (including the proper integration o f planning and finance functions in the newly merged MOFED); strengthen internal and external audit systems; improve budget monitoring and fiscal reporting; reconcile fiscal and monetary accounts; and

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reducing the federal accounts and audit backlogs. Continued leadership o f MOFED and coordination with the M C B on these issues will be a key factor in the success o f Ethiopia’s overall public sector transformation program. Within regions, fiscal decentralization has placed additional pressures on bureaus and woredas to bring their accounts up-to-date, ro l l out o f the new chart o f accounts and accounting procedures, develop planning modalities, and strengthen other critical functions such as procurement and auditing. Similar efforts in urban jurisdictions remain part o f the unfinished business o f municipal reform across four major reforming regions as well as Addis Ababa and Dire Dawa City Administrations. Revenue performance remained weak across tiers o f government in part due to insufficient tax autonomy and poor administration.

The incentive framework for personnel also needs to be reformed, given the current needs o f the civi l service. In terms o f modernizing personnel management, the Government has sought to introduce a performance management system through the development o f a Results-Oriented Performance Evaluation or ROPE system that seeks to link individual performance with outputs laid out in institution-wide strategic plans. However, the underlying problems o f poor incentives across levels o f government remain. Attempts to develop an affordable, medium-term public sector pay policy were also delayed, and civil servants at al l levels-despite an across-the-board salary increase in 2001-continue to receive low salaries. Personnel rules for woredas including procedures for hiring, firing, transfer, and promotion remain unclear. In municipalities, which s i t outside the core civi l service system, the Government has identified the need to develop a distinct set o f rules for setting wages, hiring and firing municipal workers. O f particular concern i s the sustainability o f capacity building investments particularly in urban management and ICT, without complementary efforts to retain workers through adequate pay. Anecdotal evidence indicates increasing incidence o f migrating talent to the private and NGO sectors, or abroad.

The functions, systems, structures, and work practices o f ministries, agencies, and bureaus (MABs) at the federal and regional levels were generally not aligned with Government’s medium-term development priorities and resource constraints. The efficiency and quality o f government operations-particularly in strategically important areas such as business licensing, investment promotion, customs, public procurement, and land management-were widely acknowledged to be poor, with the exception o f a few islands o f performance. In many cases, business processes and work organization were not appropriately automated to enable civi l servants to function in a client-oriented, efficient, or transparent manner.

Empowerment required greater fiscal and administrative autonomy for woredas and municipalities. Despite the success o f regionalization in the mid-1 990s, woredas or districts enjoyed l i t t le fiscal or administrative autonomy to respond to the local needs o f their constituencies. For instance, local level planning and prioritization processes-while consultative-were typically short-circuited by zonal officials, who would vet woreda levels plans in line with regional priorities. Project and program implementation were also burdened by overly centralized procedures for procurement o f goods and services, and management o f frontline personnel. The resulting inefficiencies were further exacerbated by endemic staffing and ski l ls shortages, unclear accountability relationships, and inadequate organizational structures. By 2001, woredas were st i l l deconcentrated units o f regions rather than genuine, democratically elected executives in their own right.

In addition, municipal governments were not adequately integrated into the larger legal and accountability framework o f regional governance, and therefore, have been limited-in providing essential services to their residents-by their ability to raise own-source revenues. Personnel shortages have also hampered municipal performance. Ethiopia’s woredas share jurisdictions

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with municipalities, and require further harmonization o f intergovernmental fiscal arrangements to effectively meet service delivery needs o f local communities.

Weak checks and balances on the executive limited accountability, recourse and redress. The SDPRP emphasizes the centrality o f the judiciary and legislative oversight institutions in ensuring the effective implementation o f the constitution including expanding the writ o f democratic and human rights, as well as the establishment o f the legal and regulatory framework for private sector development. Significant institutional weaknesses and capacity deficits are acknowledged across Ethiopia’s justice system including in areas such as lawmaking, law execution and enforcement, the functioning o f courts, and the development o f the legal professional. Specifically, while progress has been made in reforming laws such as the family, penal, and commercial codes, preparation o f the federal administrative procedure, the stock market, the notary public, and the vital events registration laws constitute elements o f Ethiopia’s unfinished law reform agenda in 2001. Institutional constraints continued to hinder the Ministry o f Justice and regional justice bureaus from carrying out their basic tasks as they relate to providing legal advice and contributing to law execution and enforcement; ensuring the necessary incentives and training for staff (lawyers and administrative staff); modernizing efficient filing and case management systems; and establishing expectations in terms o f operational performance.

Weaknesses in the vertical and horizontal independence o f the judiciary resulted from lack o f transparency in the selection o f judges, unclear organizational structures in the courts, outdated systems and procedures, shortages in trained judges and support staff, and lack o f basic infrastructure and facilities. A lack o f adequate budgetary resources have also hindered the emergence o f a well-functioning judiciary, particularly in f i rst instance courts in the federal system and woreda courts in the regions. Access to justice continues to be limited by supply-side constraints (for example, increasing representation and legal aid, reducing the costs o f access, simplifying court documents, establishing alternative dispute resolution mechanisms), and demand-side constraints (for example, increased awareness o f constitutional and legal rights, education o f the poor about options for recourse and redress). The legal profession remains weak with few qualified lawyers and judges across tiers o f government.

Ethiopia’s homegrown response of national capacity building. Following political reforms in 2001, the Government responded with the launch o f a comprehensive homegrown National Capacity Building Program (NCBP) as a multi-sectoral, intergovernmental program response to the capacity building demands o f rapid transformation. The national capacity building framework envisages as capacity building system that (i) ensures efficiency and sustainability; (ii) supports the comprehensive development o f human resources, organizations, systems and processes as a means o f achieving the country’s development goals; (iii) affords flexible implementation modalities in order to accommodate the dynamics o f institutional change. A super-ministry, the Ministry o f Capacity Building, was established in 2001 to provide policy direction, coordination amongst other partner institutions (for example, the Ministries o f Finance and Economic Development, Revenue, and Federal Affairs), as well as monitoring and oversight o f capacity building efforts. The Ministry, along with i t s counterpart regional bureaus and woreda offices, i s tasked with programming and financing fourteen capacity building subprograms that support the dual SDPRP goals o f state and structural transformation (Box 1).

Six o f these fourteen subprograms directly involve the public sector and comprise (i) a woreda (district level) decentralization program that rapidly transferred delivery responsibilities with substantial fiscal and administrative authority to rural jurisdictions; (ii) municipal reform efforts designed to restructure and empower urban centers; (iii) reformulated c iv i l service reforms focused increasingly on strengthening the public sector fiduciary framework and service delivery

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Box 1: Ethiopia’s National Capacity Building Program (NCBP)

1. Civil service reform 2. Justice reform 3. Tax reform 4. District-level decentralization 5. Urban management 6. Information and communication technology 7. Cooperatives 8. Private sector 9. Textiles and garments 10. Construction sector 1 1. Agricultural training o f vocational and technical levels 12. Industrial training o f vocational and technical levels 13. Higher education 14. Civil Society

results on the ground; (iv) bold nation-wide initiatives to enhance connectivity and develop e- government applications such as the woreda- and school-net projects; (v) efforts to strengthen formal checks and balances and accountability mechanisms through reform o f the justice system including the courts, law making and law enforcement institutions, and the legislative process; and (vi) an ongoing tax systems reform program that continues to align tax policy and administration at the federal and regional level with the demands o f Ethiopia’s evolving macro- fiscal policies. FY2002-03 and FY2003-04, the Government-through i t s Ministry o f Capacity Building, Bureaus o f Capacity Building, and other lead institutions-advanced the implementation o f all six subprograms. Considerable domestic resources-ETB 108.4 mill ion in FY2002-03 alone-were mobilized through the federal budget to carry out public sector capacity building activities. Progress-to-date i s detailed in the f i rst Annual Progress Report on the SDPRP and summarized below along with the Government’s forward looking strategy in each area.

In

Civil service reform. Since September 2001, a reorganization o f Government and the launch o f i t s NCBP has given new impetus to the CSRP. The Government has moved quickly to prepare the CSRP for i t s “full implementation” across regions and levels o f government. Noteworthy initial steps include the establishment o f focal points responsible for implementation o f reforms across tiers o f government; a series o f workshops undertaken to sensitize the political leadership and civi l servants across the country; and the launch o f a “special program” o f Performance and Service Delivery Improvement in priority Ministries, Agencies, and Bureaus (MABs) designed to deepen the implementation o f performance management. In addition, the CSRP CO i s strengthening coordination and change management (from line ministries, regional bureaus, woredas and municipalities); completing prototyping in human resource and expenditure management, and preparing the CSRP for nation-wide scale-up. This approach should promote c iv i l service performance in terms o f financial and human resource management, responsiveness to citizens’ needs, strategic prioritization o f public resources, efficiency o f program implementation, and enhanced accountability.

Woreda or district level decentralization. Within the past year, the Government has moved quickly to remedy these constraints at the woreda level. A radical fiscal and administrative district level decentralization agenda-based on far-reaching constitutional reforms in four regions-has been pursued since the start o f FY200 1-2002. Decentralization has involved the transfer o f a significant portion o f the regional subsidies (in some cases, between 60 and

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75 percent) to woredas in the form o f formula-driven block grants. By implication, the devolution o f fiscal management responsibilities requires a massive redeployment o f skilled staff, typically from regional bureaus and zonal sections, to woredas to effectively carry out basic public management functions such as budgeting, planning, accounting, and service delivery implementation. Some regions have already taken bold steps towards rationalizing and restructuring what were top-heavy administrative structures. The District-Level Decentralization Program has sought to scale up these efforts through the systematic assignment o f revenue and expenditure responsibilities within regions, role restructuring o f regional bureaus, transfer o f sector-specific functions to woredas, roll-out o f basic financial and personnel management systems at the regional and woreda levels, development o f fiscal transfer mechanisms and monitoring systems within regions, demarcation and harmonization o f woreda and municipal structures, implementation o f institutional structures for woredas, and bulk training o f local officials, electorates, public servants, and other stakeholders, all o f whom are critical to the success o f this current wave o f “democratic decentralization.” . Urban management and development. Since 2001 , Government has become increasingly concerned with the economic and social needs o f Ethiopia’s rapidly growing urban population, as well as the role i t s cities and towns play in promoting rural development and growth more generally. Historically, municipal governments were not adequately integrated into the larger legal and accountability framework o f regional governance, and therefore, have been limited-in providing essential services to their residents-by their ability to raise own-source revenues. Personnel shortages have also hampered municipal performance. Furthermore, the majority o f Ethiopia’s woredas share jurisdictions with municipalities, and therefore require a more systematic approach to coordination and harmonization between these two forms o f local government. In addressing the needs o f municipal government, the Government has prepared an Urban Management Program in the context o f the NCBP to establish an appropriate framework for urban government through the development o f enabling legislation for municipalities within regions, restructuring and staffing o f municipalities, strengthening o f planning and management capacity, mobilization o f fiscal support from own and other sources to meet investment and recurrent needs, and improvements in land management and basic service delivery. Such efforts in four reforming regions o f Amhara, Oromiya, Tigray, and SNNP have been undertaken with assistance from the IDA-financed Capacity Building for Decentralized Service Delivery (CBDSD) Project. . Tax systems reform. Following the Government reorganization in mid-2001 , a separate Ministry o f Revenues was created and the Tax Reform Taskforce strengthened to ramp up Government’s revenue performance. Efforts that followed under the Tax Systems Reform Program (TSRP) included strengthening o f tax policy capacity o f the Ministry o f Finance and Economic Development (MOFED), overhaul and codification o f the income tax law; introduction o f presumptive and value-added taxes; adoption o f a tax payers identification system; reorganization o f the Federal Inland Revenue Authority (FIRA) and i t s various branches; development and implementation o f operational manuals for tax officials and training manuals for taxpayers; and computerization o f tax administration at the federal, regional, and local levels. Strengthening o f customs administration i s also envisaged in the future. Revenue performance since the end o f the war (excluding grants) has increased to approximately 14% o f GDP and i s expected to increase following the recovery after the 2003 drought year.

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Justice system reform. While the comprehensive Justice Systems Reform Program i s st i l l under development, the Government continued to pursue reform efforts over the 2001-2003 period including a nation-wide baseline assessment of the full range of justice systems institutions, law revision and law reform activities; a second phase of court administration reform including records and case management; the establishment o f a judicial in-service training institution; and the roll-out o f training for judges.

Information technology solutions for e-government. Several PSCAP subprograms including CSRP, DLDP, UMCBP, and TSRP sought to implement IT-based applications as part o f Ethiopia’s broader public sector modernization efforts. While these early applications development efforts continued during the 200 1-2003 period, the major initiative of the Government in 2002-2003 was the design and implementation of large scale woreda- and school-based V-SAT networks to provide the backbone for a range of educational and public sector applications. As follow-up to these efforts, the Government has also continued with work on strategic and policy development; training o f senior and technical personnel; and upgrading and improvement of facilities.

Despite their rapidly expanding scope and scale, Ethiopia’s public sector capacity building efforts through 2003 have been largely supported by fragmented donor projects and financed in an ad hoc manner. In many cases, direct capacity building support provided to regions has been offset in the general purpose transfers. In addition, concerns related to the degree o f transparency in the implementation of capacity building, problems in effectively leveraging global knowledge, as well as the bias towards intensive off-site training activities need to be addressed. Finally, the financing requirements o f scaling up each o f these above-mentioned subprograms indicated that Treasury resources alone would not suffice; significant external assistance would be required. The 2001 -2003 experience with multiple reform efforts undertaken in parallel demonstrated the importance of exploiting the synergies between subprograms described above; using a flexible mechanism o f support that could respond to the rapidly evolving needs o f various subprograms; empowering regions and local authorities in setting priorities and achieving results; harmonizing donor support around a single design; and improving coordination across branches and tiers o f government.

2.3 Scaling up “state transformation” in 2003 and beyond

In May 2003, the Government responded to above-mentioned challenges by launching the third and most ambitious phase of i ts state transformation agenda. Specifically, the MCB announced i t s intention to rapidly scale up support for the six core public sector reform programs as subprograms under a consolidated five-year federal program called the Public Sector Capacity Building Program or PSCAP. The Government’s vision, reflected in its national program document for the PSCAP, was based on three pillars+) simultaneous, nation-wide implementation of six subprograms, sequenced in l ine with regional and local priorities, (ii) alignment of program support with Ethiopia’s public financial management and intergovernmental system, and (iii) harmonization o f the fiscal, fiduciary, and reporting requirements of various donors around a Sector-Wide Approach (SWAP).

In the months that followed, several bilateral donors, in close collaboration with IDA, have responded favorably with commitments to support the SWAP approach and the pooling of funds around a single design solution including CIDA, SIDA, and EC along with anticipated support from DCI, DfID, KfW, and the Netherlands. Non-pooling donors that have committed to leverage support to the SWAP include AfDB, France, Germany, Italy, UNDP, and USAID. The bilateral perspective on the Program was conveyed to the Government through an issues note on

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harmonization, which was prepared by representatives o f donor agencies that participated in the joint donor appraisal o f the Government’s program (Annex 10).

3. Sector issues to be addressed by the project and strategic choices

Sector-Wide Approach. In accordance with the requirements o f a Sector-Wide Approach, Bank support to the Government’s PSCAP wil l address the full range o f “sector” issues across the six public sector capacity building subprograms o f PSCAP in a holistic and integrated manner. The main exception involves activities precluded under the Bank’s Articles, such as police, prosecutions, and prisons, which other participating bilateral donors wil l seek to support.

Salient Design Features. In l ine with i t s vision for PSCAP, Government has defined the following features o f program design:

Designation of PSCAP as a federal specific purpose transfer program, appropriated at the federal level and therefore not subject to offsets in regional subsidies; Incorporation of donor commitments under PSCAP within the Government’s overall macroeconomic fiscal framework and therefore, the overall vertical division of revenues between federal and regional levels; Alignment o f donor procedures with Government’s rolling medium-term planning, annual budgeting, and monthly SOE-based disbursement procedures; Explicit identification of rules o f the game governing access, allocation, and execution including an established vertical division of resources between federal and regional levels, and a simple formula to horizontal division of time-bound drawing rights to PSCAP resources across regional states, followed by performance-based disbursements as well as mid- and end-year reallocation o f a share o f drawing rights to performers (Box 2 and Annex 9); Regular bottom-up regional, and eventually woreda and municipal planning o f capacity building activities within assigned medium-term and annualized resource envelopes; Pooling o f donor resources around a single design in line with SWAP guidelines; Development o f “matrix management” structure, in which federal subprograms provide the prototypes, technical advice, quality assurance, and technical recommendations on approvals of plans, and regions set prioritize resources and implementation activities based on a menu of subprogram activities through medium term and annual plans.

Implications for intergovernmental fiscal relations. Two broad intergovernmental issues related to PSCAP design are worthy o f special mention. First, the establishment o f this program marks an important step forward in the evolution of Ethiopia’s intergovernmental fiscal system. As a federal specific-purpose program, it provides the legal basis for PSCAP transfers to be appropriated federally, and therefore, enables regions to draw down external assistance without being subject to “offsets’’ in their general purpose transfers. PSCAP also complements the largely equity-oriented general purpose (or the “subsidy”) and food security transfers to regions with a performance-oriented capacity building transfer to help sub-national authorities achieve their institutional transformation goals.

Second, support provided under PSCAP is intended to rapidly build up the basic regional and local capacities needed to effectively manage the fiscal additionality generated (i) at the regional level, through the 22% p.a. average increase in subsidy transfers over the past three years, and at the local level, through the regional-to-woreda block grants and lump sum, agency fee, and project-based capital transfers to municipalities, instituted in the four largest regions over the past

two years. In the current fiscal year, the woreda block grant constituted 45% o f total regional expenditures in Tigray, 5 1% in Amhara, 47% in Oromiya, and 81% in S N ” regions.

Even as capacity building “catches up” to Ethiopia’s fast moving fiscal decentralization agenda, Government i s planning to further develop capital funding mechanisms for local jurisdictions to meet their investment service delivery needs. In order to provide additional incentives for effective demand at the local government level for capacity building under PSCAP and to ensure the sustainability o f intergovernmental fiscal arrangements, Government should condition access to fiscal support for investment on the completion of a specified sequence o f capacity building activities under PSCAP subprograms. Such an approach i s under implementation in municipalities on a pilot basis under IDA’S ongoing Capaciq Building for Decentralized Service Delivery (CBDSD) Project and is planned for scale-up under the proposed LIG in the future.

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Box 2: “Drawing rights” and how they apply to Ethiopia’s PSCAP

To ensure that sub-national authorities participating in a specific purpose federal program are sufficiently motivated to perform, access to program resources must be a fair and transparent, predictable, and performance-oriented. An established approach to designing programs in this manner i s to provide regions with drawing rights. Elements o f the approach are described below.

Understanding drawing rights. Drawing rights are typically assigned-on the basis of a formula-to access a defined quantity o f finance over a fixed period o f time upon meeting key eligibility criteria such as the submission and approval o f relevant medium-term strategies and plans. Once assigned, an initial disbursement against the plan i s made, and then additional disbursements are made periodically as each implementing agency submits progress reports. Such an approach provides implementing agencies with assurance that predictable funding i s available, but does not unnecessarily tie up funding or cash balances with those agencies and sub-national authorities or regions that are not performing per plan. Periodic redistribution o f unutilized drawing rights provides further performance incentives.

Why drawing rights-additional to general purpose transfers-should be assigned within the macro-fiscal envelope. Specific-purpose transfers that provide fiscal additionality to sub-national authorities need to be placed within the context of macro-fiscal fundamentals. Planned expenditures under such transfers should be reflected within the Government’s overall macroeconomic fiscal framework, medium term expenditure plans, and proposed vertical division of revenues. For example, in Ethiopia, this would require incorporation of external and Treasury commitments to PSCAP within the Macro-Economic Fiscal Framework (MEFF), and alignment of PSCAP planning with the Government’s financial calendar, budget classification system, and other financial regulations.

How funds flows can be effectively designed. The flow o f funds under large federal specific purpose programs should be simple. Based on the agreed allocation formula, the federal government releases funding to regions (as a significant portion of the annual rights allocated), which in turn release funds to local authorities (a portion upfront, and the balance as periodic reimbursement). Periodically the regions should review local government implementation and expenditure performance, and the federal government should similarly review state performance. In the event that any implementing agencies are not performing, their unutilized rights should be subject to reallocation into a performance pool and then to better performers in need o f additional funding. Reallocation should be limited to a maximum percentage-for example, 50% o f the unutilized drawing rights-in order to provide a significant incentive for good performance, but not unduly penalizing under-performers that may, due to circumstances beyond their immediate control, encounter implementation hurdles.

How funds should be released against allocated rights. Once rights are allocated and eligibility criteria met, periodic releases are made to regions by the federal government. Al l initial releases are made against approved plans. Subsequent releases are made against documented performance and satisfactory expenditures from two periods prior to disbursement. For example, disbursement in Period 4 will depend on meeting output targets in Period 2.

How a mandatory minimum level of capacity building should be defined for eligible institutions. All sub-national authorities receiving such transfers should commit to and complete the minimum required capacity building activities-or the first in a sequence of basic human resource, systemic, and logistical activities such as the establishment of local government structures or hiring of a core staff complement-necessary to utilize these transfers in a responsible manner. For those regions or local governments that do not have this minimum requirement in place at the outset, the first application of transfers should be to acquire and implant that capacity. The minimum requirements will vary among implementing agencies. For example, in decentralizing settings, most woredas in Ethiopia will probably require less staff and systems than most urban centers, but these minimum mandatory requirements need to be defined and met as a condition for resource utilization.

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C. Project Description Summary

1. Project components

1.1 How PSCAP’s two components work

The Bank’s Support Project i s fully aligned with the basic design of the Government’s PSCAP. As such, it supports the scale-up of ongoing institutional transformation and capacity building activities through two components-one federal, and the other regional. Activities planned under these two components wil l be drawn from a menu o f eligible expenditures consisting of PSCAP’s six subprograms and mandatory “program support” (Figure 2). Drawing on this menu, each component i s (i) planned based on annualized five-year drawing rights; (ii) adjusted semi- annually and annually; and (iii) reflected in participation and performance agreements with commitments to deliver on specific capacity building outputs. . Component 1-Federal PSCAP: This component supports federal level activities across

each o f the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component i s required to include basic program support activities to ensure effective implementation. . Component 2-Regional PSCAP: This component constitutes the bulk o f the Program and i s designed to empower regions to adapt and implement national reform and capacity building priorities envisaged under PSCAP’s six subprograms in a manner that i s efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms wi l l be fully leveraged through this component. Regions wi l l also shift resources year-to-year and in-year from poor performing to higher performing subprogram activities. This component i s also required to include basic program support activities to ensure effective implementation.

During the preparation process, a 20%-80% vertical division o f PSCAP resources (including Treasury and anticipated donor resources) was established between federal and regional components over the five-year l i f e o f the program. Resources assigned for the regional component were further divided horizontally across regional states on the basis of the equity- oriented regional subsidy formula. Financing provided under the Bank’s Support Project shall be fully aligned with this approach to allocating PSCAP resources in order to ensure predictability and transparency o f the drawing rights ceilings within which PSCAP component plans are articulated. It i s envisaged that refinement o f this allocation methodology may be required-on the basis of periodic reviews-over the course o f program implementation.

1.2 Building PSCAF’ components from activity menus

The objectives and specific menus o f activities that fal l within each subprogram of PSCAP are explained below. Selected and planned on an annual basis, these activity menus of capacity building activities (comprising combinations of technical assistance and consultancy services, goods and equipment, and training) are building blocks for the two components described above. . Subprogram 1-Civil service reform. The objective o f this subprogram i s to promote the

development o f an efficieht, effective, transparent, accountable, ethical, and performance- oriented civil service. Support under the subprogram includes (i) the strengthening o f the Civil Service Reform Program coordinating structures; (ii) improving expenditure management and control through drafting of financial regulations and directives, roll-out o f

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budgeting and accounts reforms, implementation o f procurement reforms, development o f medium-term planning systems, strengthening o f internal and external audit, modernization o f cash management, and the roll-out o f financial management information systems; (iii) improving the governance o f human resource management including the development of prototype policies on human resource development, time management, and remuneration, the implementation o f the results-oriented appraisal system, the development of payroll and human resource information systems, and support for subsidiary regulations such as the code of ethics; (iv) improving performance and public service delivery through the roll-out of the Performance and Service Delivery Improvement Program (PSIP) in ministries, agencies, and bureaus; (v) improving accountability and transparency through a parliamentary oversight, anti-corruption, the strengthening o f systems and development o f innovative techniques for monitoring fiscal and output performance including expenditure tracking surveys, cost efficiency studies, service delivery report cards; (vi) strengthening of top management systems through training o f senior managers and officials in strategic planning, performance measurement, top management development, and value for money management; and finally (vii) building the policy and institutional capacities of emerging regions through the development of basic civil service structures and systems. Linkages with the district-level decentralization, urban management, ICT, and tax systems reform subprograms wil l be reflected in federal and regional plans and coordinated during implementation.

Subprogram 2-District-level decentralization.. The objective o f the subprogram i s to deepen the devolution of power to the lower tiers of regional government, to institutionalize decision-making processes at the grassroots level with a view to enhance local participation, to promote good governance, and to improve decentralized service delivery. Subprogram activities include support for (i) woreda manning and training including human resource policies, procedures, and plans as well as bulk training in areas critical to local government;

Figure 2. Building PSCAP Components from Activity Menus

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(ii) technical assistance and training for grassroots participation including the development o f guidelines and monitoring mechanisms, and the strengthening o f c iv i l society involvement at the local level; (iii) woreda institutional and organization development including assessment of functional assignments and enabling legislation, assistance in establishing structures and restructuring existing arrangements including local level accountability relationships; (iv) capacity building for policy and program development including technical assistance for woreda decentralization strategy and policy development, benchmarking and review o f plans; (v) development o f woreda fiscal transfer mechanisms and revenue mobilization capacities through the review and design o f various intergovernmental fiscal instruments; (vi) strengthening o f the planning system & financial management at the woreda level; and (vii) the development o f minimum service standards in priority sectors. Linkages with the civil service reform, urban management, and tax systems reform subprograms will be reflected in federal and regional plans and coordinated during implementation. . Subprogram 3-Justice system reform. This subprogram, currently a work-in-progress, i s designed to promote the rule o f law as well as the efficient and effective functions o f the justice system as part o f Ethiopia’s broader democratization and private sector development processes. Subprogram activities include (i) strengthening the Justice Systems Reform Program Office and regional equivalents; (ii) strengthening the courts by providing in-service training o f judges and court clerks, court administration reform, development o f records and case load management systems, and identification o f measures to enhance access to justice; (iii) support for law reform including the development o f systems and procedures for declaring income and property, identification o f new areas for law development, compiling and preparation o f laws and regulations, and drafting o f stock exchange and other laws; and (iv) strengthening o f legislative process including training, technical advisory services, and acquisition o f equipment for staff o f federal and regional standing committees on legislative drafting and analysis o f legislative process and management, as well as training for members o f standing committees on principles o f federal grant and intergovernmental fiscal framework, monitoring and impact assessment, HIV/AIDS and gender issues, accountability and participation. Linkages with the civil service reform, urban management, ICT, and tax systems reform subprograms wil l be reflected in federal and regional plans and coordinated during implementation. I t should be noted that IDA wil l not finance activities outside the remit of its Articles such as strengthening ofpolice, prosecutions, and prisons. . Subprogram &Urban management capacity building. This subprogram aims to enhance the capacity o f municipalities in the delivery o f services and enable urban centers to play a more effective role in social and economic development. The major activities envisaged under this subprogram include (i) technical assistance for the development o f federal and regional policies related to urban development, housing, urban land, municipal structures, the formation o f municipal associations; (ii) technical assistance for the deepening o f municipal decentralization through the preparation o f manuals governing resource management, review and organization o f training and human resource needs, establishment o f regional planning units, and development o f fiscal transfer and revenue mobilization mechanisms; (iii) support for local government restructuring and capacity building including restructuring o f water and sanitation, urban land, and other services, development and roll-out o f financial, human resource, and land systems, and organizational and related reviews, as well as bulk training for municipal officials and staff. Linkages with the civil service reform, district-level decentralization, ICT, and tax systems reform subprograms wil l be reflected in federal and regional plans and coordinated during implementation.

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Subprogram %Tax systems reform. The subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency o f collection), and ensure equity and fairness in the tax system through a comprehensive overall o f the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities: (i) continued development o f tax policy and legislation including amending the current income tax legislation to reflect the current business and investment environment, implementing presumptive and value-added taxes, strengthening enforcement powers o f tax collection bodies, and sensitization o f taxpayers inter alia through establishment o f a Taxpayer office; (ii) roll-out o f the computerized Tax Payers’ Identification Number (TIN) system in 74 regional centers, improving information sharing between the Federal Inland Revenue Authority (FIRA), Ethiopia Customs Authority (ECuA), as well as regional and city administrations; (iii) customs reform and modernization including the review o f legal framework, review and implementation o f customs procedures in line with COMESA, deepening o f ongoing implementation o f performance improvement in ECuA, establishment o f a customs laboratory and training center, roll-out o f management and core staff training in areas such as human resource development, IT management, WTO valuation system, commodity classification, and application o f international conventions on simplification o f customs procedures. Linkages with the civil service reform for examples, performance activities in ECuA), justice, ICT, and tax systems reform subprograms will be reflected in federal and regional plans, and coordinated during implementation. Over time, the tax systems reform program will be coordinated with plans to develop sub-national taxes as envisaged under the district level decentralization and urban management subprograms. . Subprogram &Information & communications technologies (ICTs). The objective o f this subprogram is to harness ICTs for the development o f human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seeking to use ICTs in this manner. Successful implementation o f ICT-based solutions across government wil l require support for (i) human resource development through the development o f an I C T human resource strategy, ICT curricula for schools, vocational training centers, and universities, as well as the training o f trainers, the establishment o f distance learning centers, and the financing o f research on the use o f ICTs; (ii) I C T use for public service and good governance through the development o f information systems strategies, development o f service delivery applications, establishment o f data centers and government portals, W A N and LANs, as well as the procurement o f required hardware and software; and (iii) I C T for sector development including the installation o f applications in the social and infrastructure sectors; and (iv) community-based ICT systems and services through the development o f strategies, applications, and local content for community information centers to facilitate specific developmental activities. While the development of public sector applications such as financial, human resource, and land management systems wil l be procured under respective reform programs for example, CSRP, UMCBP, TSRP), sector-speciJc applicationsfor example, agriculture) will be financed under the ICT subprogram. Plans for these applications will be coordinated between subprograms, regions, and ICTDA.

Mandatory activity-Program support. As a required activity at both the federal and regional level, program support i s designed to ensure speedy implementation o f the six subprograms in a holistic manner. It wil l finance incremental costs associated with operating requirements o f Planning and Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, related subprogram offices that serve members o f the federal and

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Component Sector

regional Technical Teams, and relevant offices in the Ministry and Bureaus o f Finance and Economic Development. Specific support activities w i l l include the costs o f progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, basic training, auditing, office supplies, equipment operation, transport, travel, and per diems.

YO o f Bank- financing

Indicative Bank- YO o f Total financing

(US%M) (US%M) costs

Program (and suuuort project) comuonents

1. Federal PSCAP 2. Regional PSCAP

Multi-sectoral 80.0 20% 20.0 25% Multi-sectoral 317.8 80% 80.0 25%

Total Program Cost

2. Key policy and institutional reforms supported by the program

397.8 100% 100.0 25%

The Bank's Support Project will contribute-through the six public sector capacity building subprograms o f PSCAP-to a wide range o f policy and institutional reforms at federal, regional, and local levels. These can be categorized as follows: . Development o f expenditure, revenue, and civil service management systems. A variety

o f legal, institutional, and procedural changes related to expenditure, revenue, and human resource management envisaged under the CSRP and TSRP. These include proclamations, directives, regulations, and circulars governing the Government's financial calendar; medium-term forward planning; strategic planning and performance improvement; budget classification; double entry, modified cash accounting; cash or liquidity management; modern

' internal and external audit (and legislative oversight); and professional standards for public sector accounting and auditing cadres. Revenue sector reforms include directives and guidelines related to various federal, regional, and local taxes such as the VAT, the presumptive tax, as well as local land and user fees. Procedural improvements are envisaged for the Tax Payer's Identification Number as well as the administration o f the various new federal and regional taxes and customs. Similarly, the legal and institutional reforms governing the civi l service w i l l be sought including a new code o f conduct for civi l servants; the establishment o f institutional charters for public bodies; a remuneration policy inclusive o f revised job grades; and a human resource policy. . Strengthening the intergovernmental fiscal system and administrative structures. The DLDP and UMCBP subprograms w i l l support the adoption o f enabling legislation for woredas and municipalities within regions including the assignment o f revenue and expenditure responsibilities and the corresponding transfer o f functional responsibilities from regional bureaus (for example, o f health and education) to local authorities. They wil l also support the development o f new instruments for fiscal and administrative decentralization such as the design o f capital funding mechanisms for local jurisdictions and the establishment o f new structures for woredas and municipalities. Guidelines for ensuring vertical accountability (for example, service delivery standards) and horizontal accountability (for example, procedures for participatory budgeting) will also be supported.

In addition to the above-mentioned reforms envisaged under the program, the creation o f PSCAP as a federal specific purpose transfer i t se l f represents an important step forward in the evolution o f Ethiopia's heretofore equity-oriented intergovernmental fiscal system. The

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program’s design-based on equity-oriented allocations, followed by performance-based disbursements and reallocations-accommodates other proposed fiscal transfers such as the proposed Local Investment Grant (LIG) Program to meet the investment needs o f local service delivery.

Role restructuring and performance improvement. Across all the subprograms, the Program wil l support restructuring o f the role, functions, and work organizations o f ministries, agencies, bureaus, local governments, courts, and other institutions. These organization-specific efforts are also intended to establish the accountability framework, standard operating procedures, review mechanisms, and esprit de corps appropriate to performance- or results-oriented management.

Completion of law reform and revision. In addition to the legal framework for various aspects o f woreda and municipal decentralization, urban land, and public administration, the Program wil l support a broad agenda related to law reform and revision including revisions o f the family, administrative, and commercial codes.

Strengthening of courts and parliamentary oversight bodies: The JSRP wil l also support procedural reforms and new institutional arrangements design to improve the functioning o f the judiciary and legislative oversight bodies such as budget and public accounts committees.

Development of information systems and IT architecture: The ICT elements o f PSCAP w i l l support the development o f information systems strategies and applications roadmaps to guide the roll-out o f Government systems in areas such as financial, human resource, land management, as well as service delivery.

3. Benefits and target population

The benefits o f PSCAP in terms o f improving the overall quality o f federal, regional, and local institutions are expected to be as follows:

Improved delivery of rural, urban, social, and legal services: Ultimately, the Program wil l enhance the scale, efficiency, and quality o f service delivery across priority sectors including agricultural extension, health, education, urban land supply and management, a range o f municipal services, business registration and licensing, and legal services.

Increased predictability of resource flows: The ro l l out o f planning, budgeting, and related financial management reforms under the CSRP wil l not only encourage adherence to the financial calendar but also improve the quality o f fiscal data and the predictability o f resource flows. The establishment o f robust intergovernmental fiscal transfer systems within regions wil l also contribute to predictable and transparent flows o f financial resources to regions, their bureaus, and local governments.

Improved inclusiveness of planning and budgeting: By promoting open and transparent systems o f planning and budgeting, particularly at the woreda and municipal levels, the Program wi l l improve the efficiency o f allocative decisions. More inclusive budgeting and planning processes tend to produce more demand-responsive spending patterns, particularly at the local level.

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Enhanced motivation and incentives for staff: The ro l l out o f the human resource reforms under the CSRP will include streamlined and less hierarchical grading systems that promote initiative and career advancement. In addition, the development o f medium-term, affordable wage policies and improve staff performance evaluation systems wil l motivate staff and provide better incentives for them to perform at all levels o f government.

Increased fiscal autonomy of local governments: The assignment o f expenditure and revenue responsibilities will enhance the fiscal autonomy o f woredas and municipalities, i.e., the inflow o f unearmarked resources that can be allocated according to local priorities. Restructuring and capacity building for woredas and municipalities will also enhance their tax autonomy and revenue performance.

Enhanced operational and cost efficiency: Through restructuring and performance improvement activities across sectors, the Program wil l improve the operational efficiency o f sectoral MABs, other regional institutions, woredas and municipalities, as well as the courts. Specifically, the cost efficiency and demand-responsiveness urban, rural, social, and legal services would improve, as well as associated sectoral outcomes.

Improved transparency of government institutions: Strengthening o f evaluation capacity, anti-corruption bodies, statutory and legislative oversight institutions (such as the Human Rights Commission and the Public Accounts Committee) will increase the availability o f information on the performance o f state institutions to the public.

Expanded opportunities for public sector in-service training: The Program wil l rapidly expand opportunities for civi l servants at the federal, regional, and local levels to receive in- service training in critical areas such as planning, budgeting, tax administration, procurement, personnel management, monitoring and evaluation, economic management, the law, as well as computer literacy and IT maintenance. Public and private suppliers wil l in turn receive several opportunities to deliver training to a vast and diverse clientele.

Utilization of new technologies: PSCAP wi l l facilitate the transfer o f appropriate information technologies to public institutions involved in service delivery. From basic computerization o f manual processes to the implementation o f complex integrated financial management systems, ICT-related benefits under the Program are expected to include efficiency gains in Government procedures and processes, and improved the quality and availability o f information on government performance.

Ultimately, the Program wil l benefit citizens and their communities (particularly the poor) as well as economic agents such as farmers and the urban private sector through improved service delivery, empowerment, and greater transparency and accountability o f government institutions. Intermediate beneficiaries wil l include civi l servants at the federal, regional, and local levels; woreda and municipal officials; the judiciary and their staff; staff involved in basic legislative processes; revenue and tax authorities; public, private, and non-profit training institutions; the media; and service providers.

4. Institutional and implementation arrangements

As Ethiopia’s multi-sectoral capacity building platform, PSCAP represents an important innovation and challenge in terms o f inter-ministerial and intergovernmental coordination. Overall, the Government i s adopting a “risk aware” approach by building on established

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implementation modalities (for example, for planning and budgeting, funds flow and disbursement, as well as procurement) developed under the Education and Health Sector Development Programs. The following distinguishing features o f PSCAP are worth noting in terms of their implications for i ts underlying institutional and implementation framework:

PSCAP i s inherently multi-sectoral, comprising six cross-cutting subprograms. Successful implementation of these subprograms necessarily requires the active participation o f several lead institutions at the federal and regional levels (for example, the Urban Development Capacity Building Office in the Ministry of Federal Affairs and i t s lead role in carrying out federal activities o f the Urban Management Capacity Building Program and supporting regions on sub-national level activities).

Unlike financing provided under the Education and Health Sector Development Programs, federal specific-purpose transfers under PSCAP are additional to the regional subsidy. Formula-driven “drawing rights” are not entitlements but commitments that may be reallocated-within parameters-if not properly and efficiently utilized. In other words, regions that access PSCAP are therefore subject to performance-oriented conditionality. Such an arrangement places a premium on timely financial and activity-based monitoring within year, and output-based monitoring across years.

Third, several multilateral and bilateral donors have responded to the Government’s desire to pool resources around a Sector-Wide Approach to PSCAP in order to ensure that all regions and subprograms under the Program have access to predictable and adequate financing. These SWAP arrangements necessitate a transparent process o f joint review, appropriately aligned with the overall SDPRP monitoring and annual budgeting cycles.

In response to these new challenges, the Government has developed a governance and institutional framework that places a premium on four governance principles+) intensive coordination across tiers and branches o f government, (ii) compliance with clearly defined ru les o f the game (for example, for allocation and reallocation); (iii) transparency and information sharing (for example, on matters of performance) within the public sector and with the public at large; and (iv) extensive support to implementing agencies in the design, execution, and quality assurance o f reform activities. These are described below and depicted in figure 3.

4.1 Governance and cabinet level accountability

A unique feature of Ethiopia’s capacity building system i s the role of the Minister of Capacity Building-as head o f the “super-ministry”-within the framework of cabinet decision-making. Specifically, (s)he i s accountable to the Council o f Ministers for the overall achievement of agreed upon semi-annual and annual outputs and results for PSCAP. In order to deliver on these results, the Minister-in coordination with other cabinet ministers for lead PSCAP institutions including the Ministr ies o f Federal Affairs, Finance and Economic Development, and Revenues-will approve regional and federal plans, allocate federal and regional budgets for PSCAP, and oversee program implementation. In addition, the Minister wi l l ensure that the PSCAP system o f planning, resource allocation, execution, and re-allocation operates in a fair and transparent manner on the basis o f clearly defined rules. In supporting hidher final proposals to cabinet (and eventually parliament) on resource (re)allocation within PSCAP, the Minister of Capacity Building wil l rely on the recommendations o f federal and regional Technical Teams (see below) as well as technical experts in the Ministry o f Finance and Economic Development.

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Similarly, at the regional level, the heads of bureaus of capacity building wi l l be responsible for endorsing PSCAP plans in coordination with bureau heads of other lead institutions; seeking appropriation o f regional contributions for infrastructure and recurrent costs o f PSCAP activities from regional parliaments; and achieving the agreed upon outputs and results o f regional PSCAP, as reflected in annual summary performance and participation agreements.

It i s important to note that the JSRP i s managed by a steering committee comprising a wide array of stakeholders across branches of government at the federal and regional levels. At the federal level, the steering committee consists o f members from the Supreme Court and House o f Peoples’ Representatives along with the Ministry o f Justice and Ministry o f Capacity Building. Similar steering committee arrangements for JSRP exist at the regional level. These bodies wil l continue to function, as established, within the overall governance framework for PSCAP.

4.2 Federal level implementation arrangements

Ministry of Capacity Building. The Ministry o f Capacity Building (MCB) i s responsible for macro-level management o f Ethiopia’s national capacity building efforts such as PSCAP including establishing policies, designing national strategies, ensuring their integration with sectoral strategies, developing guidelines for programming capacity building, providing technical support to regions, and evaluating ongoing program implementation. The Ministry, and specifically, the State Minister of Capacity Building i s responsible for the overall coordination of PSCAP; serves as co-chair o f the Joint Government-Donor PSCAP Working Group; and coordinates Government participation in regular formal reviews of implementation progress.

For purposes o f day-to-day management of PSCAP, the Ministry coordinates an inter-ministerial Federal Technical Team (FTT), and houses a Planning and Program Directorate (PPD) as well as a Budget and Finance Directorate (BFD). Roles and responsibilities of each are described below. . Federal technical team. The FTT comprises inter alia the director o f MCB’s Planning and

Programming Directorate as well as PSCAP’s six subprogram directors, as well as representatives from MOFED and MFA is a critical quality assurance and coordination body. As such, the FTT is responsible for reviewing, appraising, and recommending approval o f annual plans submitted by federal lead institutions and regions in line with technical criteria delineated in the PIP (for example, completion o f the “mandatory minimum’’ capacity building activities, sequencing of reform activities, provision of regional financing for upfront civil works and ongoing recurrent costs o f I T investments). I t i s also responsible for reviewing in-year and annual performance and recommending re-allocations o f five-year drawing rights between non-performing and performing regions. During implementation, the FTT-with the support o f the PPD and BFD-supports the development o f content o f reform programs, provides quality control and review o f outputs produced by consultants prior to approving payment; defines equipment specification and undertake acceptance tests o f equipment procured; develops communication and change management strategies; and ensures the quality and consistency o f reform efforts. If needed, additional technical expertise wi l l be recruited on a temporary basis to assist FTT in appraising applications of a specialized nature (for example, those under the ICT component).

Planning and programming directorate. A planning and programming directorate (PPD), housed in MCB, serves as the secretariat for the Program, and specifically for the State Minister responsible for PSCAP and the federal technical team. The PPD issues and enforces operating guidelines; assists the FTT in the vetting of annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates

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coordination between members o f the federal and regional technical teams; assists in consolidating, managing, and organizing the supply o f training across six subprograms; helps the FTT provide detail follow-up and quality assurance during implementation; implements communication and change management strategies; and consolidates quarterly, semi-annual, and annual progress reports. The PPD also serves as the counterpart institution to the Joint Government-Donor PSCAP Working Group and shall therefore facilitate review and supervision missions, as well as information sharing such as disclosure o f annual and other related reports, survey data, and other occasional papers.

Budget and finance directorate. The budget and finance directorate (BFD) o f the M C B i s responsible for overall monitoring o f procurement under the Program. It i s also tasked with procurement and financial management o f the three federal level subprograms that fal l within the Ministry’s mandate-namely CSRP (except “expenditure management and control” activities), DLDP, and JSRP (except “strengthening the judiciary’ activities). The directorate i s also responsible for carrying out international competitive procurement o f goods under the Program. Supported by a full complement o f local procurement specialists and international advisers, the directorate w i l l work closely with subprogram directors and staff in the CSRP, DLDP and JSRP Offices in the M C B to vet and finalize TORS, undertake equipment specification, technical evaluation, drafting and negotiation o f contracts, and contract management. I t w i l l work with regions and other lead institutions for international competitive procurement o f goods. The directorate wil l commit to service standards in terms of efficiency and timeliness o f financial management and procurement activities.

Ministry of Finance and Economic Development. The Ministry o f Finance and Economic Development (MOFED) i s responsible for enforcing the rules o f allocation and access for this flagship intergovernmental transfer program. The Ministry (and specifically, the Regional Affairs Department), in collaboration with the MCB, i s responsible for effecting vertical and horizontal divisions o f PSCAP resources; issuing formula-based medium-term drawing rights or notional envelopes to govern medium-term planning and annual budgeting; and recommending mid-year and annual reallocations o f five-year drawing rights. Both the Central Accounts Department (CAD) and Counterpart Funds Unit (CFU) are responsible for the overall financial management under the Program including recording for budgetary support grants and loans. While the CFU manages the various special accounts (including requesting replenishments), the C A D w i l l focus on closing o f local currency accounts and the consolidation o f financial reports. Opening and closing the special account, transfer o f funds to the local currency accounts, and the replenishment o f funds are the responsibility o f the Treasury Department (TD).

Subprogram offices in lead institutions. The mandate for supporting the implementation o f the six subprograms o f PSCAP rests with subprogram offices in lead institutions. Overall, the role of lead institutions responsible for subprograms at the federal level i s to ensure that this large constituency o f eligible institutions are informed and consulted in the preparation o f medium- term and annual plans. Specifically, the M C B houses the subprogram offices responsible for the Civi l Service Reform, District-Level Decentralization, and Justice Systems Reform Subprograms. The newly created ICT Development Authority holds the mandate for the ICT Subprogram. For purposes o f day-to-day management, the Expenditure Management and Control Program (EMCP) Coordinating Office within MOFED i s responsible for “expenditure management and control” activities under the CSRP. The Ministry o f Revenue manages the Tax Systems Reform Program, and the Ministry o f Federal Affairs has the responsibility for the Urban Management Capacity Building Program. The Supreme Court i s responsible for day-to-day management o f federal PSCAP activities related to “strengthening the judiciary.” As lead institutions, these ministries

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and authorities with subprogram offices are delegated the financial management and procurement autonomy to carry out activities relevant to their reform mandates. In addition, the Ministry o f Federal Affairs has established a taskforce to provide additional technical support to emerging regions such as Afar, Benishangul-Gumuz, Gambella, and Somali to carry out PSCAP-related activities.

Other eligible institutions at the federal level. Several other federal institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and its six subprograms. These include sector ministries (for example, for health, education, and infrastructure), authorities and agencies (for example, the Environmental Protection Agency), and other offices within the executive branch; public sector training institutions such as the Ethiopian Civil Service College; the judiciary or the courts; as well as supreme audit and oversight bodies such as the Office o f the Federal Auditor General and the public accounts committee.

4.3 Regional level arrangements

Bureaus of Capacity Building. In each o f Ethiopia’s eleven regions (including Addis Ababa and Dire Dawa), the Bureaus o f Capacity Building (BCBs) are responsible for program coordination. For purposes of day-to-day management o f PSCAP, the BCBs coordinate Regional Technical Teams (RTTs), and house Planning and Program Directorates (PPDs) or equivalents including Procurement Desks. Roles and responsibilities for each are described below.

Regional technical teams. In each region, an RTT comprising inter alia the director o f the regional Planning and Programming Directorate as well as subprogram directors from lead institutions such as the Bureau o f Finance and Economic Development, the Bureau of Trade, Industry, and Urban Development, the Bureau of Capacity Building, and the Bureau of Justice serves as the quality assurance and coordination body for PSCAP. As such, the RTTs are tasked with ensuring the consolidated regional plans meet eligibility, appraisal, and other criteriaprior to their endorsement by regional cabinets and submission to the FTT. If needed, additional technical expertise wil l be recruited on a temporary basis to assist RTTs in appraising applications o f a specialized nature (for example, those under the ICT component). During implementation, regional technical teams-with the support o f PPDs-support the development of content o f reform programs, provide quality control and review of outputs produced by consultants prior to approving payment; define equipment specification and undertake acceptance tests o f equipment procured; develop communication and change management strategies; and ensure the quality and consistency o f reform efforts.

Planning and programming directorates o r equivalents. Planning and programming directorates (PPDs) or equivalents, housed in BCBs, serve as secretariats for PSCAP in regions and wil l maintain close links with the federal PPD. Each regional PPD enforces nation-wide PSCAP operating guidelines and relevant regional guidelines; assists the RTT in the vetting o f annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates coordination between members o f the RTT; assists in consolidating, managing, and organizing the supply o f training across six subprograms; supports regional PSCAP procurement activities (see below); helps the RTT provide detail follow-up and quality assurance during implementation; implementation o f communication and change management strategies; consolidates quarterly, semi-annual, and annual progress reports; and facilitates regional involvement in supervision and review missions.

Procurement desks. Procurement desks, established within regional BCBs, are tasked with carrying out all relevant regional procurement activities for PSCAP. The desks are supported

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by at least two local procurement specialists and work closely with the beneficiary institutions to vet and finalize TORS, undertake technical specification and evaluation, drafting and negotiation of contracts, and contract management. In addition, Desks are expected to commit to service standards to ensure the timeliness o f procurement activities within respective regions.

Bureaus of Finance and Economic Development. In each region, the Bureau o f Finance and Economic Development (BOFED) i s responsible for a l l relevant financial management activities required under the Program including managing funds flows through Channel 1, ensuring monthly consolidation of Statement o f Expenses, ensuring the accuracy and timeliness o f financial reporting, and effecting payments on local and foreign contracts in line with the recommendations o f the regional PPD.

Other eligible institutions at regional and local levels including woredas and municipalities. Several regional institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and i t s six subprograms. These include sector bureaus (for example, for health, education, and infrastructure) as well as authorities and agencies within the executive branch; public sector training institutions such as Regional Management Institutes; the regional and localjudiciary or the courts; audit and oversight bodies; and woredas and municipalities.

Even though the actual transfer o f PSCAP resources from regions to woredas and municipalities i s not currently envisaged at this stage, the bulk o f PSCAP support i s expected to be delivered in- kind at the local level. In order to ensure a close match between regionally managed activities and woreda and municipal level needs, the PSCAP planning process i s expected to incorporate a sample o f woreda and municipal development plans. Woredas and municipalities are expected to be informed about eligible expenditures under PSCAP so that capacity building activities (for example, accounts and budget reform roll out or bulk and hands-on training) are appropriately reflected in development plans. The introduction of PSCAP transfers from regions to woredas and municipalities wi l l be considered at a more advanced stage o f program implementation.

4.4 Joint Government-Donor institutional review processes

A Joint Government-Donor PSCAP Working Group has been established to support information sharing on capacity building, as well as joint preparation, appraisal, and supervision activities. On the Government’s side, the MCB and MOFED are primarily involved in supporting this harmonization agenda. From the donors’ side, members to date include AfDB, CIDA, DCI, DBD, EC, Finland, France, Germany, IDA, Italy, Japan, KfW, Netherlands, SIDA, UNDP, and USAID. The active involvement o f these members in regular, institutionalized joint Government- Donor review of implementation i s critical to the success of a Sector-Wide Approach to PSCAP.

Specifically, formal quarterly review meetings o f the Addis-based Joint Government-Donor PSCAP Working Group are held to review implementation progress reports. In addition, a semi- annual multi-donor supervision mission and an Annual Joint Government-Donor Review Mission (ARM) are held prior to and/or during the mid-year reallocation and annual allocation exercises. Both the supervision mission and ARM contribute to the ongoing due diligence requirements o f IDA and other donors; findings feed into the various allocative decisions undertaken by Government, as well as the Annual Progress Report on the SDPRP. General Terms o f Reference for these arrangements are contained within the PSCAP Harmonization Agreement.

Y

IA

1

A

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D. Project Rationale

1, Project alternatives considered and reasons for rejection

The Government, IDA, and other donor partners considered and rejected the following four project alternatives in favor o f a fifth alternative, described below.

Alternative 1: Other bilateral donors take the lead. The f i rst alternative considered was to encourage bilateral donors take the lead in financing the nation-wide, integrated program with marginal involvement from IDA. The Government considered this unviable since no other donors had the ability to help scale up PSCAP in terms o f their ability ta commit the required financial resources or their ability to convene global knowledge resources across a variety o f reform areas (for example, civil service reform, urban management). The Government therefore sought IDA’S lead role among PSCAP donors.

Alternative 2: Support provided through six separate, stove-piped IDA projects. A second alternative was to support six separate operations for each subprogram. Neither the Government nor the Bank considered this “stove-piped” approach robust in terms o f exploiting the inter- linkages and synergies across the subprograms, or ensuring a flexible, bottom-up approach to planning and implementation. Furthermore, the administrative costs to the Bank of supporting numerous different capacity building operations was deemed excessive. Finally, the likely coordination problems for Government and donors that would result from a “stove-piped” approach were precisely what the creation of the National Capacity Building Program was designed to address. The scale and network economies that derive from integrating the six subprograms under the umbrella o f an omnibus national program were recognized early by the Government, IDA, and other donor partners.

Alternative 3: Support leveraged purely through balance of payments support. A third alternative considered by the Bank and donors such as DfID was to provide additional financial assistance to the Government’s capacity building programs-financing primarily through Government’s own treasury resources in FY2002 and FY2003 -through “direct budget supportyy or DBS operations such as the Poverty Reduction Support Credits (PRSC). The weaknesses o f this alternative are three-fold. First, DBS commitments as a share o f overall development assistance in Ethiopia-while considerable-would not be sufficient to cover the financing gap for the full range o f SDPRP priorities such as food security, health, and education and capacity building. Second, the lack of clarity on and institutionalization o f key aspects of PSCAP design such as rules o f access, allocation, reallocation, and disbursement meant the DBS would constitute undue fiduciary and operational risks. Finally, the advisory support and peer review required for a variety o f capacity building activities-for example, the design and implementation of financial management or land management systems, necessitate intensive day-to-day interaction and disbursement approvals at the level o f specific plans rather than annual budgets.

Alternative 4: Replicate and enlarge the CBDSD design. Another alternative was to design a larger version o f the Capacity Building for Decentralized Service Delivery Project. This existing operation inter alia seeks to provide support on a first-come, first-served basis-through a series o f demand-driven financing windows within the Urban Management Capacity Building Subprogram-to beneficiaries that successfully apply for capacity building support from a menu o f eligible expenditures. It also provides a combination o f flexible or demand-driven and projectized support for the Civil Service Reform. While this approach to design sought to

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provide greater flexibility, the early experience with CBDSD revealed three weaknesses that contributed to less than satisfactory physical and financial performance. First, the project originally intended to provide short-term, opportunistic financing for certain advanced capacity building subprograms, and therefore was stove-piped with separate components for UMCBP and CSRP. This type o f design was neither intended to nor amenable to nation-wide scale up of the other four subprograms (DLDP, JSRP, TSRP, and ICT) in a flexible manner. Second, the project does not delegate financial and procurement responsibilities to regions, and only partially delegates these responsibilities to the MFA. Third, the project provided financing through Channel 2 (through sector ministries) rather than through Channel 1 (through the finance ministries and bureaus), even though the latter i s more amenable to larger scale implementation. The Borrower therefore sought an alternative design, which was aligned to Ethiopia’s intergovernmental system and amenable to a larger volume o f disbursements to regions.

Alternative 5. IDA leveraging donor assistance for Sector-Wide Approach for PSCAP. Having considered these alternative support modalities, the Bank has sought to support the Government’s PSCAP with a five-year, US$lOO million Support Project, using a Sector Investment Loan or SIL. The Support Project aims to leverage considerable bilateral assistance, which wil l be provided under a Sector-Wide Approach through (i) pooling of funds through Channel 1 , which i s Government’s preferred modality for leveraging assistance under PSCAP, and (ii) third party or Channel 3 arrangements. Transitional arrangements for donors with existing projects are being identified to further encourage harmonization around the SWAP.

Options for using various IDA lending instruments were reviewed at length with the Borrower in order to ensure that the Support Project could be effectively aligned in terms of design with the Government’s program. The longer term time horizon o f the APL with specific multi-year performance targets were considered insufficiently flexible for the Government’s proposed system o f generating semiannual and annual output commitments from beneficiaries, and re- allocating resources on a mid-year and annual basis. In addition, the transaction costs of processing multiple phases of an APL would be ill-suited to the significant short-term financing needs o f PSCAP overall. The SECAL was deemed redundant to the ongoing serial balance o f payment support operations (or the Poverty Reduction Support Credits) and also inappropriate to the requirements o f implementation support.

2. Major related project financed by the Bank and/or other development agencies

HIV/AIDS I Multi-Sectoral HIV/AIDS Proiect-ESMAP I S I S I I Pastoral Development I Pastoral Community Development Project I S I S I

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Sector Issue

Civil Service Reform

District-Level Decentralization

Justice Sector Reform

Tax System Reform Urban Management and Development Information and Communication Technologies

Donor Involvement

Decentralization Support Activity for Expenditure Management and Control (USAID, DCI); Internal and External Audit Subprogram (DCI); Auditor General Capacity Enhancement (CIDA); Expenditure Management, Support for Freedom of Information Act, Top Management Capacity Building (Dff D); Overall Support (UNDP) District-Level Decentralization (DfID); Various “Area-based Programs” including for regional administration (CIDA, DCI, Netherlands, SIDA) Parliament Capacity Building (CIDA, DCI); Court Administration Reform (CIDA); Justice Sector Reform Program (CIDA. SIDA, UNDP) Tax System Reform Program (DfI D, EC, IMF, Netherlands, SIDA, UNDP) Municipal Management and Development Program (GTZ); Municipal Leadership Program (EC)

Support for ICT development and School-Net (UNDP)

3. Lessons learned and reflected in the project design

The design o f the Government’s program, and therefore by the Bank’s Support Project, builds directly on lessons learned from Ethiopia’s recent experience with public sector capacity building as well as the international experience in discrete areas o f public sector reform including civi l service and expenditure management reforms, decentralization, legal and judicial reform, tax administration, and ICT. The design also seeks to build on examples o f successful program design in countries undergoing rapid institutional transformation.

3.1 Lessons learned from Ethiopia

Lesson 1. Projectized capacity building efforts supported by various donors in Ethiopia over the 1990s tended to be fragmented and poorly coordinated. They lacked the flexibility necessary to meet the fluid demands o f institutional change. Multiple projects imposed significant transaction costs on beneficiaries through distinct financial management and reporting requirements. Scattered geographically based on the interests o f various donors, these area-based or projectized initiatives did not, in most cases, provide nation-wide coverage.

In deliberate attempt to break with the past, the Government has created a Ministry o f Capacity Building to coordinate a Sector-Wide Approach that pools donors resources around a single design solution to PSCAP with common fiduciary requirements. The design allows the Government to more thoroughly exploit economies o f scope across capacity building programs (for example, civi l service reform and decentralization) by using the Government’s own planning and budgeting system to encourage beneficiary institutions to prioritize across the full range o f eligible PSCAP expenditures on a yearly basis. I t would also follow a system o f performance- based disbursement and reallocation to reward performers.

Lesson 2. Ethiopia’s tried and tested implementation strategy for managing rapid institutional change relies on a combination of top-down prototyping, and to a lesser extent, bottom-up implementation planning. This approach to rapid implementation was evident, for example, during the creation of the federation, the woreda and municipal decentralization process, and the re-launching of the CSRP. Increasingly, the Government has encouraged

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learning by doing initiatives at the regional and local levels; these initiatives help identify “good practices” that are subsequently then scaled up (for example, municipal and urban land reforms).

The PSCAP planning and budgeting system enables regions and their local governments to prioritize the rol l out o f prototypes and other prescribed activities within a resource envelope and in line with their sub-national priorities. The traditional practice of federal authorities providing informal guidance and direction, as well as the increasing tendency o f regions to innovate approaches to public sector management (for example, strategic planning) have been formalized through the creation of a “matrix management” structure with subprogram directors providing quality assurance or technical advice, and regions determining implementation priorities between subprograms in any given year.

Lesson 3. The generally satisfactory record of other large scale operations such as the Education Sector Development Program (ESDP) can be attributed to their alignment with the intergovernmental fiscal system; delegation of financial management and implementation responsibilities to regions; and a strong effort on donor coordination. Other successful operations such as ESRDF benefited from a nation-wide network of implementation hubs that support planning, project management, and supervision. By the same token, the CBDSD project faced significant implementation delays in part because the project did not sufficiently delegate financial and procurement management responsibility (for example, for locally procured goods and services) to regions. Nor did it explicitly align planning and prioritization o f procurement activities with the Government’s planning and budget cycle. Finally, the key executing agency was not sufficiently equipped to coordinate project activities.

Overall, PSCAP’s institutional architecture wil l follow and build on arrangements employed under the SDPs and ESRDF. Specifically, the program wi l l delegate financial and procurement responsibilities to lead ministries at the federal level and lead bureaus at the regional level. Planning o f PSCAP activities wil l be undertaken in l ine with the established Government procedures and in accordance with the financial calendar. The funds flow from federal to regional levels wil l follow ‘Channel 1” (Le., from MOFED through the BOFEDs). A network of secretariats at the federal and regional levels wi l l be used to ensure proper coordination of this nation-wide effort.

Lesson 4. I n Ethiopia’s resource-scarce public sector, behavioral change has resulted from extrinsic and intrinsic incentive measures. Anecdotal evidence suggests that civil servants in Ethiopia respond favorably to both formal extrinsic incentives such as increased pay and formal performance targets, as well as intrinsic motivational measures such as participatory self-scrutiny, positive reinforcement by the leadership, and sensitization campaigns. These efforts to strengthen intrinsic motivational factors have resonated with actors within Ethiopia’s prevailing bureaucratic and political culture. Such measures, employed in the Civil Service Reform Program, have resulted in tangible improvements in service delivery performance including greater client orientation on the part o f public servants (for example, in the Ministry o f Trade and Industry and the Addis Ababa City Administration).

The reliance on intrinsic incentive mechanisms such as self-scrutiny has two implications for PSCAP. First, in the short term, such measures in conjunction with significant capacity building support are viewed as effective means of motivating performance and institutional change. In subsequent phases o f capacity building, the Government i s intending to rely more heavily extrinsic incentives. Second, intrinsic incentive measures including a nation-wide mobilization and planning process, which relied heavily on peer review, have also been employed by the

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Government to communicate the objectives and expected outcomes o f PSCAP, and elicit formal commitments from regions and federal institutions to performance targets under the Program.

3.2 Lessons learned from international experience

Lesson 5. Sustaining rapid institutional change i s often difficult, but feasible when political and technocratic ownership are closely aligned. In a few African countries such Uganda and South Africa where the learning by doing process has been (i) supported by high level political commitment and clearly defined strategic framework, (ii) enriched through the involvement o f competent technocrats, and (ii) opened up to regular review by experts, stakeholders, and the public at large. In such settings, the roles of the legislature, media, public at large in regularly reviewing change processes have been institutionalized as well.

The program’s matrix management structure-built around subprograms and regions-as well as regular joint reviews by donor teams i s intended to provide timely technocratic support to the ongoing process of change. At the same time, the participatory planning and review processes as well as regular monitoring and evaluation including through client surveys are anticipated. In addition, reviews of public sector reform processes such as the multi-donor financed Institutional Governance Review, CFAA and CPAR updates, and ultimately, the Government’s Annual Progress Reports on the SDPRP should provide the basis for more intensive scrutiny of implementation progress.

Lesson 6. Based on its extensive experience across a wide range of institutional settings, the Bank has identified several elements of good practice that should be incorporated in the design of public sector reform programs. The Bank’s corporate strategy paper, “Reforming Public Institutions and Strengthening Governance,” identifies the following corporate priorities which should inform the design o f specific public sector reform operations-(i) a shift in focus from the content o f public policy to the way policy i s made and implemented, (ii) support for a broad range o f mechanisms that promote public sector reform; (iii) emphasis on good fit over best practice; (iv) enhanced support for institutional development through multi-sectoral programmatic lending; and (v) a focus on organizing Bank teams to do better institutional work.

IDA support during PSCAP preparation and implementation reflects these broad corporate priorities in the following ways. Program beneficiaries use the Government’s own planning, budgeting, and execution processes as a way o f prioritizing and sequencing their implementation o f capacity building activities across the six PSCAP subprograms, and ensuring “good fit” with the specific institutional transformation needs o f individual regions. The six subprograms of PSCAP address a gamut o f issues related to the fundamental reform o f the state including the creation o f a local government sphere, establishment o f formal checks and balances, and the introduction o f performance oriented public management systems. PSCAP also is inherently multi-sectoral and seeks to avoid “stove-piping” through the involvement o f sectoral institutions at each level o f the planning and implementation process. Finally, PSCAP i s supervised with the help o f a sizeable Addis-based, multi-donor team, organized to leverage the core competencies of different members o f Ethiopia’s aid consortia in supporting institutional development.

4. Indications of borrower commitment and ownership

Since the mid-l990s, Ethiopia’s leadership has demonstrated a unique level o f commitment to the PSCAP agenda and i t s precursors. Described below are six indicators of borrower ownership of the Program and i ts likely sustainability.

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1. Program management

Track-record of rapid institutional change. The Government’s track-record in supporting rapid institutional change over the past decade i s arguably one of the most compelling indicators of i ts ownership o f PSCAP and the state transformation agenda. Watershed moments in the evolution of this agenda include the creation of the federal state system, the establishment of regional subsidies and woreda block grants, and the re-launch of the CSRP.

2.0 I 1 .o

Establishment of institutional framework. Following political reforms in 2001, the Government established a “super-ministry” for capacity building to coordinate and monitor institutional transformation processes. Capacity building focal points such as the CSRP liaison offices have also been designated within each of the key economic management and sectoral ministry. Capacity building bureaus were also established in the regions to ensure progress in rolling out key NCBP activities to the sub-national level. Put simply, capacity building was institutionalized as government-wide concern-a development that would profoundly affect public spending in Ethiopia. Using its new institutional framework for capacity building (including the numerous federal and regional officials newly redeployed to capacity building offices across the country), the Government re-launched the nation-wide roll-out o f established subprograms such as Civil Service Reform, Tax Systems Reform, and to a lesser extent, Justice Systems Reform, and launched for the f i rst time several new subprograms such as District-Level Decentralization, Urban Management Capacity Building, and ICT.

2. Justice svstem reform program

Allocation of Treasury resources. As a clear indication of high level political commitment to public sector transformation, the federal government committed and efficiently disbursed significant Treasury resources to PSCAP related subprograms over the FY2002-03 period (see table 2). Senior officials at the regional and city levels followed suit by increasing expenditure allocations to certain subprograms such as civil service reform and urban management, as well as encouraging bottom-up innovations among public sector leaders (for example, the strategic planning initiatives o f the Tigray health bureau and the far-reaching restructuring the Addis Ababa City Administration).

21.4 I 16.1

Table 2. Expenditures of Treasury resources in PSCAP-related subprograms, FY2002-2003 (in millions of Ethiopian Birr)

Budget Items Capital expenditures

Budgeted I Actuals

3. ICT 51.8 I 48.9 4. DLDP 6.7 I 5.2 5 . csm

Total I 123.0 I 108.4 I

6.8 I 6.6

Development of Government plans and strategies. In early 1999, the Government took the initiative to develop a National Capacity Building Strategy and Framework under the direct supervision of the Prime Minister and other senior Ethiopian leaders. By mid-2001, it had developed a National Capacity Building Program Document, a Capacity Building White Paper, and several subprogram documents with detailed strategies and plans. The PSCAP planning process i tsel f has been unprecedented with the preparation of five-year medium term plans by all eleven regions and federal subprograms.

6. UMCBP 3.9 I 2.0

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In March 2003, the MCB prepared an initial program document proposing the omnibus Public Sector Capacity Building Program or PSCAP and a held a series o f consultations within regional and sectoral institutions starting in May 2003. These consultations revealed a broad and diverse nation-wide constituency determined (i) to help develop the proposed omnibus program comprising various reform initiatives; (ii) to play by explicit rules o f the game for accessing much-needed capacity building resources; and (iii) to utilize PSCAP to achieve broader goals such as improved service delivery.

Participatory program identification at technical and political levels. Under the leadership of the Ministry o f Capacity Building, the Government initiated an unprecedented nation-wide mobilization and strategic planning campaign around PSCAP and specifically, the notion of “scaling up state transformation.” Teams from all the regions o f Ethiopia participated in a medium-term planning exercise that was carried out through a series o f bi-weekly peer review meetings over the June-September 2003 period. Regions set up steering committees to oversee the preparation o f consolidated regional PSCAP plans. Regional technical teams joined a federal technical team to define the eligible expenditures for the program (based on the content o f each subprogram), prepared five-year plans that prioritized activities across subprograms, and developed a narrative around the transformation process. Consolidated PSCAP plans for each region were prepared and rigorously peer reviewed over this period of intensive preparation. A federal plan was also prepared. IEC activities sought to raise awareness at the grassroots level o f the objectives o f PSCAP through various media including television, radio, newsletters, and oral or word of mouth traditions (for example, community-based Afari and Somali traditions). The already impressive preparation process helped confirm the leadership role for MOFED in ensuring transparent and fair resource allocation across regions and the lead role o f other technical ministries in ensuring quality in relevant reform areas (for example, MOR in tax reform or MFA in urban management).

Over the 2003-2004 period, ownership of the objectives and priorities underlying PSCAP has been confirmed on numerous occasions by senior members o f Ethiopia’s leadership in the press, public meetings, and through other media. By mid-September 2003, a wide range of political leaders, bureaucrats, citizens, and training institutions at federal, regional, and local levels were mobilized and organized around PSCAP as the Government’s primary instrument for state transformation.

Engagement with international donor community. Notwithstanding its own contributions, the Government acknowledged the considerable financial and technical assistance gap that remained in rolling out i t s various reform programs. As the immediate-post war period came to a close, it actively sought assistance and engagement from the international community. A high-level seminar involving the Council o f Ministers and members o f the Bank’s team was a held in Sodere in October 2001, followed by a range o f CAS Workshops on capacity building, decentralized service delivery, and private sector development in 2002. A Consultative Group meeting later that year also provided an opportunity for Government to articulate the objectives and document the progress made across i t s public sector reform subprograms. Donors in turn committed and delivered short- to medium-term assistance to the Government. Notably, the Bank’s CBDSD Project was approved and declared effective by early 2003. Short-term assistance from other donors such as the EC, CIDA, DCI, DfID, GTZ, Italy, Netherlands, and SIDA was also committed.

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5. Value added of Bank support in this project

The substantial and complex requirements of Ethiopia’s state transformation agenda necessitates IDA’s intensive involvement for three reasons-i) managing the demands of rapid nation-wide scale up, (ii) leveraging the comparative advantage of IDA and other interested partners, and (iii) mitigating risk factors associated with serial direct budget support.

Managing the demands of rapid, nation-wide scale up. The scale and scope of the Government’s public sector capacity building program are unique in Africa (with the notable exceptions o f Uganda and South Africa), as i s Ethiopia’s political commitment to overcoming the fiscal and operational challenges to successfully implementing “state transformation.” O f the various donor partners involved in capacity building, IDA i s best positioned to help the Government bring to scale this nation-wide, multi-sectoral program o f institutional overhaul within acceptable levels of risk. In addition, IDA financing in the context o f Sector-Wide Approach to public sector capacity building also enables the Government to “smooth” out fluctuations in the provision o f bilateral aid resources across regional states within the federal system, across subprograms o f PSCAP, and across time.

Leveraging the Bank’s comparative advantage and that of other partners around a “single design solution” to PSCAP. IDA brings to bear considerable cross-country experience in several o f the reform areas under implementation as part o f PSCAP including urban management, district-level decentralization, civil service reform, and ICT. I t i s also leveraging i t s experience as a lead or strategic partner in supporting large scale capacity building programs in the few African countries that embarked on complex and rapid transformation strategies (for example, IDA’s provided critical programmatic support to Uganda’s multi-pronged effort to deepen democratic decentralization, civil service reform, expenditure management, and legal-judicial reforms over the mid-late 1990s). Overall, in Ethiopia, the Bank i s also playing a catalytic role in encouraging donors-particularly those with intensive experience at the sub-national level and in areas such as justice systems and tax reform-to pool their support and harmonize around the Government’s “single design solution” for PSCAP.

Mitigating risk factors associated with serial direct budget support. A final set o f rationale of Bank involvement relates to mitigating the fiduciary and implementation risks associated with IDA’s as well as bilateral direct budget support programs designed to help Government achieve poverty reduction objectives in the SDPRP. Specifically, assistance to be provided under PSCAP-for example, for the modernization of expenditure management systems, or restructuring and sk i l ls development in woredas and municipalities-are expected to significantly strengthen the confidence o f Ethiopia’s aid consortia that budgetary resources are being effectively utilized to deliver essential services with a decentralized framework.

E. Summary Program Analysis

1. Economic

For this “framework”-type project and the larger federal program that it seeks to support, the Government wi l l rely on its medium-planning and annual ,budgeting systems to generate federal and regional applications with time-bound capacity building proposals. These applications and proposals wil l be comprised o f costed plans that are screened within indicative formula-driven resource envelopes or drawing rights. Eligibility criteria wi l l include inter alia the establishment o f agreed institutional arrangements (including regional planning and programming departments

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or equivalent, responsible for PSCAP); completion o f relevant capacity assessments or inclusion o f assessments in first year plans; submission o f medium-term action plans and annual. procurement plans using standard unit costs within established resource envelopes; and submission o f endorsed (either by regional cabinet or federal ministry head) participation and performance agreements. Generic appraisal criteria include inter alia the relevance o f planned activities against assessed constraints; provision for completion o f “the minimum mandatory” capacity building (defined across subprograms); provision for program support (for example, financial and procurement management and M&E); and evidence o f participatory planning including sample plans for local jurisdictions. Subprogram-specific appraisal criteria are also envisaged and wil l include appropriateness o f sequencing strategies recommended by federal program director; sector-specific technical analysis; the previous year’s performance; and submission o f relevant TORS. Mid- and end-year reallocations o f drawing rights are intended to provide an incentive and in the process ensure the economic viability o f project activities.

2. Financial

Three sets o f financial issues are relevant to the Support Project. First, it i s important to note that fiscal additionality provided by PSCAP to regions wil l be explicitly reflected within the Government’s Macroeconomic Fiscal Framework (MEFF), medium-term Public Investment Program (PIP), and the annual vertical division o f revenues. While the additionality w i l l likely be marginal to these macro-fiscal targets, the Program will be designed in a manner that continues to secure the macroeconomic management fundamentals. Second, the ex ante civi l works (facilities) and ex post recurrent expenditure implications o f capacity building activities are not included in the l i s t o f eligible expenditures under PSCAP. In the case o f regions, these costs w i l l need to be identified as well as their fiscal sources prior to drawing down on PSCAP resources. Third, implementation o f PSCAP activities are expected to result in improvements in expenditure and revenue management, stronger cash or liquidity management, streamlined government operations, and enhanced fiduciary accountability at al l levels o f government. While the direct financial benefits o f project activities may not be realized in the short term, increased receipts and better value for money at al l levels are expected over the medium-term.

3. Technical

Several aspects o f the content o f various reform subprograms under PSCAP wil l require ongoing review and scrutiny. As a “framework”-type project, the nature and sequencing o f this content w i l l need to be developed and managed flexibly through the annual planning and implementation review processes within standards prescribed by subprogram directors. A central feature o f the PSCAP system i s the “matrix management structure” in which Technical Teams comprised o f subprogram directors and supported by PPDs ensure the quality o f regional plans, priorities, and implementation processes.

4. Institutional

4.1 Executing agencies

At the federal level, responsibility for execution has been delegated across lead institutions that house each o f the six PSCAP subprograms or key elements o f these subprograms. Specifically, the executing agencies tasked with overseeing implementation o f the federal PSCAP component are: (i) MCB, which houses offices for the Civ i l Service Reform, District-Level Decentralization and Justice Systems Reform Subprograms; (ii) MOFED, which i s responsible for the overall funds flow to federal and regional institutions, and also undertakes day-to-day management o f

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CSRP activities related to expenditure management and control; (iii) MOR, responsible for the Tax Systems Reform Subprogram; (iv) the ICTDA, which houses an implementation unit for execution of the ICT Subprogram; (v) MFA, which houses an office for the Urban Management Capacity Building Subprogram; and (vi) the Federal Supreme Court, which houses an office for day-to-day management of JSRP activities related to the strengthening o f the courts. This approach to delegating management across lead ministries is appropriate to the Program’s multi- sectoral focus. It wi l l also encourage accountability for subprogram implementation in exchange for greater autonomy for lead ministries to oversee and satisfactorily meet their day-to-day implementation responsibilities. As noted earlier, the MCB’s Planning and Programming Directorate (PPD) wil l serve as the body responsible for overall coordination across the various executing agencies noted above.

Under the Program, the Bureaus of Finance and Economic Development as well as the Bureaus of Capacity Building are also designated as executing agencies, responsible for the regional PSCAP component, upon approval o f signed participation and performance agreements. Specifically, BCBs and their PPDs undertake day-to-day management (including planning and programming, procurement, and M&E) and BOFEDs carry out all financial management activities on behalf o f lead regional institutions with technical mandates for each of the six PSCAP subprograms (for example, BCB for Civil Service Reform) or the Bureau of Trade, Industry, and Urban Development for Urban Management Capacity Building).

4.2 Program management

As reflected in its Program Implementation Plan (PIP), the Government has strengthened program management framework for the federal level implementation of PSCAP. Specifically, program management wi l l be supported by (i) the Planning and Programming and the Budget and Finance Directorates (PPD and BFD) o f MCB, both o f which wil l be appropriately strengthened with international and local experts to carry out the full range of program management activities; (ii) offices to support day-to-day management o f each subprogram or, where designated, elements o f subprograms at the federal level; and (iii) a Federal Technical Team, comprising subprogram directors, tasked with quality assurance during planning and implementation for the Program as a whole. Similar arrangements in regions comprise (i) PPDs along with Procurement Desks, housed in BCBs, responsible for program management of the regional component; (ii) inter- bureau regional technical teams, who wi l l fulfill the quality assurance function at the regional level; and (iii) BOFEDs wi l l be responsible for payment based on the approval o f BCBs.

In addition to the generally robust framework for program management described above, the Government i s taking steps to rapidly embed necessary expertise in the PPD and BFD at the federal level, PPDs at the regional level, and relevant staff in MOFED and BOFEDs prior to effectiveness inter alia through the recruitment o f experienced consultants with expertise in financial management, procurement, and program management. Where necessary, resident advisors are intended to support subprogram directors as members of the Federal Technical Team (and their counterparts in regions).

4.3 Procurement

In i t s PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD in the MCB shall serve as the lead agency responsible for monitoring a l l procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In

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addition, the Ministry’s BFD i s responsible for handling all ICB procurement o f goods. National procurement o f goods and selection of consultants would be handled as follows:

Procurement for the three subprograms under MCB (CSRP, JSRP, and DLDP) wil l be handled by MCB procurement unit from preparation of bidding documents and RFPs, until award o f contract. The contracts for procurement o f goods would be signed by MCB. The contracts for the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specifications and Terms o f References and technical evaluation of bids and proposal.

Responsibility for procurement (expect for ICB o f goods) for the TSRP, UMCBP, ICT, “expenditure management and control” activities under CSRP, and “strengthening of the judiciary” activities at federal level wi l l be carried by the Ministry o f Revenue, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), and the EMCP Coordinating Office in MOFED and a designated office in the Federal Supreme Court respectively.

BCBs are responsible for handling all procurement activities, except ICB procurement o f goods, for the respective regions and city administrations (Le., Addis Ababa and Dire Dawa). Relevant lead institutions in each region would participate in the preparation o f procurement plans, specifications, terms o f reference, technical evaluation of bids and proposals.

MFA i s tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-Gumuz and Gambella) in the management o f procurement as required.

It i s anticipated that procurement arrangements wil l evolve as capacity increases. Regional proposals for building up their procurement capability and for changes in procurement arrangements wi l l be regularly reviewed and assessed by the BFD, and semi-annually by IDA and donors. A more thorough analysis o f procurement arrangements is provided in Annex 6.

4.4 Financial management (see Program Implementation Plan and Annex 6A)

PSCAP i s legally constituted as a specific federal grant to be executed by multiple institutions at the federal level, as well as regional BOFEDs and BCBs at the regional level. Four features o f PSCAP’s institutional framework have been identified as pertinent to the overall fiduciary risk of the Government’s program: (i) alignment o f PSCAP’s planning, budgeting, and execution arrangements with the public finance system, (ii) provisions for embedding financial management capacity across executing agencies, (iii) the utilization o f the “Channel 1” modality for funds flow, and (iv) the planned pooling o f donor and Treasury funds. These are described in detail below including the rationale and implications for managing financial management risks.

9 As prescribed under a Sector-Wide Approach, the program (and therefore the Bank’s Support Project) wil l align resource allocation, planning, budgeting, and execution practices and procedures-where they are deemed to be robust-with those established under Ethiopia’s public financial management regulations. Specifically, federal and regional institutions participating in the Program shall use Government’s chart o f accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term and annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government’s financial system i s designed to ensure that the planning and execution of capacity building activities i s undertaken in a flexible manner in line with

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the changing demands on the ground. It i s also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financed and implemented.

The major financial management risks to PSCAP (and therefore the Bank’s Support Project) involve coordination and capacity constraints across numerous planning and programming departments (PPDs), BOFEDs, and federal subprogram offices involved in implementation. In order to mitigate these risks, all PPDs wil l recruit additional staff to strengthen their capacities and MOFED wil l provide regional staff with extensive training in the financial management requirements of the Program. In addition, the preparation and issuance of short and concise guidelines, as part o f the PIP, on recording and reporting of the financial transactions of the Program i s a crucial step in accelerating the implementation of the Program. The guidelines wil l be used by the staff o f the executing agencies such as federal subprogram institutions and regional BOFEDs after MOFED conducts the necessary training. MCB wi l l take the responsibility in the overall coordination of the Program’s implementation. After receiving the required financial reports from MOFED, MCB wil l prepare and submit regular financial monitoring reports to IDA.

As described in the PIP, funds flow arrangements under PSCAP eventually involve the pooling of external resources (for example, from IDA and other bilateral donors) with Treasury resources. These pooled resources are then channeled from MOFED to designated federal and regional beneficiaries through “Channel 1” in line with assigned drawing rights and against monthly SOE-based disbursement procedures. Under the Channel 1 procedure, as practiced under the Education and Health Sector Development Programs, the specialized finance bodies at each administrative level control the release o f funds and report upwards on their utilization. The same principles apply to both recurrent and capital budgets. Although MCB and Regional Bureaus of Capacity Building have a special role in approving and supervising the capital budget, the disbursement and accounting functions remain with

Figure 5. Funds Flow and Reporting Arrangements under PSCAP

I 1 IDA Credit Account I I Washington, DC I

r----------’

I !

f---- at NBE (MOFED)

IDA Special Account in USD I at NBE (MOFED)

I - + Reporting on expenditures

+ Flow offunds

I i Government of Ethiopia I I Contribution I

r - - - - - - - - - -q

I !

PSCAP Pooled Local Currency Account

at NBE/CB (MOFED)

Local Currency Accounts Local Current Accounts (Regional BOFEDs) (Lead federal institutions)

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MOFED and the Regional BOFEDs. At the federal level, designated lead institutions wil l serve as executing agencies that receive funds directly from MOFED to carry out capacity building activities. Other federal bodies such as sector institutions implementing the CSRP or other subprograms do not receive funds; rather lead institutions procure goods, training, and services on their behalf. At the regional level, BOFEDs wi l l receive funds through Channel 1 based on approved annual plans in the same way as they currently receive Treasury resources.

As noted above and depicted in Figure 5, PSCAP i s intended to pool resources from domestic and external sources in the context o f a SWAP. Accordingly, for each donor, including IDA, MOFED intends to open a Special Account (SA) in US Dollars at the National Bank of Ethiopia. In addition, MOFED wil l open one Birr account-the “pooled account”-for which money from the SAs and the government contribution wil l be deposited. The Birr account wi l l serve as a consolidated fund for a l l donors and the government. MOFED wi l l be responsible for the day-to-day management o f the SAs and the pooled Birr account. Funds wi l l be moved from the Foreign Exchange Special Accounts in the National Bank o f Ethiopia to the Pooled PSCAP Account, and forwarded to the beneficiaries, based on the approved budget and agreed disbursement plan. Thus, released funds o f one donor can be replenished from another donor on the basis of claims made. Although donor funds wil l be allowed to be kept in SAs in foreign currency, they wi l l be transferred into Birr as soon as they are to be used and sent to the regions to cover anticipated expenditures. Part o f the donor funds, however, wi l l be kept in foreign exchange to be disbursed at the request o f MCB and the regional capacity building bureaus through their regional finance bureaus. These funds wi l l be drawn from the particular region’s allocation and be used to cover the costs o f imported goods. The SAs established in the National Bank o f Ethiopia by MOFED to receive donor contributions (including those from the Bank) are revolving funds. Once funds are transferred to the pooled account, or direct expenditures against approved contracts are undertaken for earmarked funds, replenishments can only be made when the necessary expenditure reports are received from the federal and regional beneficiaries (through their BOFEDs). I t i s absolutely crucial that these reports and other necessary documents are submitted monthly to the CAD. Otherwise, part o f the program may be stalled due to lack of donor funds. A single financial reporting format i s to be prepared by executing agencies, that is, federal lead institutions and regional BOFEDs. These forms wil l deal with both Government and donor funds used in the implementation of PSCAP. In addition donors such as IDA wi l l need to receive at least monthly replenishment requests.

The overall conclusion from the financial management assessment i s that the existing Government system-where deemed sufficiently robust-can be used for the implementation o f PSCAP (and therefore the Bank’s Support Project), provided that additional staff are recruited at all levels and the required trainings are provided by MOFED on recording and reporting o f the financial transactions. A more detailed analysis o f financial management arrangements and associated risks i s provided Annex 5A.

5. Environmental

Not applicable.

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6. Social

As noted earlier, it i s anticipated that PSCAP will affect a wide range o f stakeholders with myriad-at times competing-interests. Primary participants in public sector reform activities that will be affected by PSCAP include federal, regional, and local level public servants (both general administrators and frontline workers in sectors); officials and interest groups involved in the management o f control and sectoral agencies at the regional and local level; officials and staff within supreme audit institutions; the judiciary and legislative oversight institutions such as the public accounts committee; as well as the indigenous suppliers o f training, equipment, and knowledge services required for PSCAP including public and private training institutions, various local f irms, and NGOs or not for profit institutions. Indirect clients o f public sector capacity building include ordinary citizens in urban and rural areas, who could potentially take advantage o f the greater opportunities for democratic decision-making under woreda or municipal decentralization. Citizens and local communities are also expected to benefit from service delivery improvements resulting from various PSCAP subprograms. The private sector i s also poised to benefit from anticipated improvements in public sector governance (for example, greater improvements in commercial justice or reduction in the processing time for business licensing or customs clearance).

Overall, the social development impact o f PSCAP w i l l depend on the degree to which institutional reform and capacity building efforts improve three critical aspects o f state-society relations-inclusion, accountability, and cohesion. These are discussed below along with the prospects that specific subprograms in PSCAP would provide key “entry points’’ for deepening social development impact.

Inclusion. Under PSCAP subprograms, public officials are expected to undergo the attitudinal and behavioral changes necessary to foster the participation, free expression, and genuine inclusion o f citizens, communities, and marginalized groups in public processes, such as planning and budgeting. Particularly worth o f note are the CSRP, UMCP, and DLDP programs, which support the development o f more predictable and participatory planning and prioritization processes. Efforts to foster grassroots participation both in woredas and municipalities are also envisaged. Risks that such consultation “prototypes” and capacity methodologies wil l be excessively top-down and formulaic should be noted and monitored in the future. Greater focus on improving and monitoring the quality-not simply the quantity- o f local representation in public decision-making should be maintained.

Accountability. The Program intends to support performance management and other related efforts to improve the accountability o f public servants for efficient, effective, and client- oriented service delivery. In addition, capacity building activities are intended to result in unbiased and judicious exercise o f regulatory authority (for example, in case o f business licensing or customs clearance) in order to improve governance. Several subprograms including CSRP, JSRP, TSRP, and ICT (as well as those subprograms focusing on local government) serve as “entry points” through which service delivery operations, as well as citizen monitoring o f frontline delivery performance can be strengthened. Key success factors are the Government’s continued commitment to involving citizens and the private sector in the monitoring o f public sector performance (for example, through client score cards and surveys), and also its track-record in disseminating the findings o f such efforts.

Cohesion. The Program seeks to improve the capacity o f public officials to carry out resource allocation, service delivery, regulatory, and related activities in a fair, transparent, and non- arbitrary manner-that is, increasingly in compliance with explicit and established rules o f

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game. Scope for speedy recourse and redress wil l also be critical for economic agents in commercial and other disputes. Such an approach to public management i s critical to balancing the diverse interests o f stakeholders and encouraging cohesion (or the accumulation o f social capital) across diverse stakeholder groups such as regions, local communities, and other such groupings. The JSRP, CSRP, TSRP, and ICT al l support strengthening o f executive, judicial, and legislative oversight functions that delineate and enforce the legal and regulatory framework within which public officials and economic agents such as farmers as well as private sector firms function. The credible commitment o f both state and non-state actors to new rules and regulations i s an important indicator o f success. To further encourage cohesion across a diverse stakeholder group under PSCAP, it w i l l also be important to monitor the success o f the federal government in encouraging emerging regions to jo in the mainstream o f Ethiopian public administration practice, while meeting their specific cultural and institutional needs. Similarly, regions w i l l need to rapidly build capacity in poorer and more remote woredas, and ensure appropriate targeting o f capacity building efforts towards historically marginalized groups such as women.

Finally, the performance-based features o f the PSCAP system itself-that is, the proposed mid-year and annual reallocation o f drawing rights based on performance-poses an important resource management challenge for the Government. If managed transparently and fairly, the system could help deepen the implementation o f fiscal federalism including healthy competition for federal resources within and across regional states. However, arbitrariness in the application o f PSCAP’s rules or poor dissemination o f the rationale for (re)allocative decisions could undermine credibility o f the system.

Overall, the Government i s well-positioned to leverage the social development impact o f the Program provided that (i) increasingly bottom-up approaches to consultation and local level capacity building are employed; (ii) citizens, firms, and public officials are involved in the monitoring and publicly reviewing service delivery performance; and (iii) state institutions (including those involved in allocating and managing PSCAP resources) operate in a fair and transparent manner to balance the interests o f diverse stakeholders, specifically the poor and historically marginalized groups. These and related issues are further detailed in a social appraisal report, archived in the project fi les. The report recommends that future review missions focus on the above-mentioned social development and related risks over the course o f implementation. Suggestions on specific monitoring indicators are also included.

7. Safeguard Policies

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F. Sustainability and Risks

1. Sustainability

The sustainability o f institutional reforms and capacity building activities under PSCAP depend on the following six factors, which have been addressed in the context for program design.

As a “framework” rather than “blueprint” -type operation, the Bank’s Support Project wil l depend on the Government’s system o f program formulation and execution, and specifically, how effectively it articulates and enforces the rules o f game governing access, allocation, and re-allocation. O f particular importance in institutionalizing PSCAP i s the degree to which these rules are formally locked into the intergovernmental fiscal system (for example, through PSCAP’s designation as a specific purpose federal program additional to the regional subsidy, or the use o f formula-based drawing rights and performance-based disbursements) as well as Government’s reliance on established planning and budget procedures to guide year- to-year prioritization processes. Alignment with the fiscal system i s a key design principle underlying PSCAP; this bodes well for the program’s viability.

The reform content of plans and the quality o f implementation within this “framework”-type project wi l l be a second factor affecting value for money and sustainability. Given the complexity o f capacity building and institutional reform activities, the credibility o f PSCAP as a whole wil l depend heavily on the review and quality assurance mechanisms the support planning, appraisal, and implementation at the federal and regional levels. Particularly noteworthy are the benefits that wi l l likely derive from institutionalizing regular coordinated feedback from donor partners on the implementation of various subprogram activities within the overall federal and regional PSCAP components.

Third, the program’s multi-sectoral scope places a premium on effective coordination within and across tiers o f government. The Government’s network o f capacity building offices and liaison .units at the federal, regional, and local levels provides the basic institutional framework for this type o f coordination. However, the efficacy o f these arrangements wi l l depend in large part on the clarity o f roles and responsibilities between capacity building, finance, and sectoral offices at each tier o f government. The role of institutions outside the executive including the legislatures and courts wil l also need to be appropriately defined. Recent efforts by the Government to clarify the roles and responsibilities as well as the accountability framework for the Program overall are highly encouraging. Specifically, delegation of program management responsibilities to federal subprogram offices and regions, as well as delineation o f financial management and procurement arrangements across t iers o f government bode well for coordination efforts during program implementation.

Coordination among donors i s a fourth factor necessary to ensure the continuity o f Government’s institutional reform efforts. Organized in the form of a Sector-Wide Approach, the multi-donor support for PSCAP wi l l reduce transaction costs and maximize consolidated external funding around a “single design solution.” The establishment o f a Joint Government-Donor Working Group to support quarterly reviews, semi-annual supervision missions, and Joint Annual Review Missions wil l likely enhance transparency and credibility of Government efforts under PSCAP.

Fifth, the credibility and viability o f the PSCAP system wi l l require that Government showcase tangible improvements in service delivery performance early on. Notable successes

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such as dramatic reductions in processing time for business licensing, increased convenience and client orientation of one-stop shops in Addis Ababa, or rapid improvements in land management in cities such as Mekele and Bahir Dar are all indications that capacity building makes a difference for the “bottom-line” o f ensuring value for the taxpayer’s money.

A sixth and final concern i s the need to ensure a regular participatory review (preferably involving Government, private sector, civil society, and external actors) o f change processes to encourage learning-by-doing as well as effective demand for institutional change. The Government’s plans to use a variety o f monitoring and feedback mechanisms such as surveys, client report cards, and workshops, as well as i t s commitment to require disclosure or public reporting of the findings o f M&E activities under the program is highly encouraging. Equally important is the MCB’s commitment to regular disclosure of the findings o f these various assessments as well as two-way IEC activities at the federal, regional, and local levels. Over time, it wi l l be critical to foster a safe, yet accountable environment within which public servants and their clients can experiment with and develop more effective ways o f undertaking planning, service delivery, and regulatory activities.

2. Critical r isks

Implementation of this ambitious and complex program poses an array o f technical, managerial, and coordination-related challenges for Ethiopia’s federal, regional, and local governments. Three risks in particular (and associated risk mitigation measures) are worth highlighting. . First and foremost, weak institutional capacity at all levels-and especially in emerging

regions-poses significant financial, procurement, and program management risks to this ambitious project. Timely and accurate reporting on financial flows and physical implementation performance wil l be critical if the results-oriented reallocations envisaged under the Program i s to function effectively. The major financial management risk for the Program i s that MOFED may not receive timely reports to process replenishments of the special account and closing of the annual accounts of the Program due to limited institutional capacity across tiers o f government, and specifically within BOFEDs and BCBs. Also, PSCAP wi l l stretch the already weak capacity o f federal and regional institutions to undertake procurement and contract management activities. In light o f the implementation challenge that PSCAP poses, the Government’s plans to strengthen federal and regional PPDs, the BFD, and subprogram offices inter alia through the recruitment of skilled local and international consultants, intensive training in the operational guidelines, and early preparation and approval o f Terms o f Reference and procurement documents i s encouraging. The role o f MFA in providing technical support for plan preparation and implementation in emerging regions i s also noteworthy. The adequacy o f such efforts should be monitored, particularly in the f i rst year o f implementation, and remedial actions identified early.

Second, while the PSCAP design places a premium on flexibility, the Government wil l likely face difficulties in adjusting the program semi-annually and annually, and reallocating drawing rights to meet changing circumstances and needs. At this stage, notwithstanding progress made on aligning PSCAP process with the new financial calendar and overall public finance system, the capacity currently available to make such rapid allocative adjustments, remains weak and probably inadequate. Strengthening o f PPDs, as noted above, should help mitigate this risk, although major efforts to improve financial and physical reporting across tiers o f government should continue in the run up to implementation. Also worthy o f note i s the Government’s commitment to joint quarterly, semi-annual, and annual reviews with all

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stakeholders including donors. These budgeting cycle to ensure that adjustments are reflected in the annual budget (Annex 9).

reviews are to be aligned with the planning and

Third, in-service training on a massive scale i s envisaged under PSCAP requires. The importance o f moving beyond a purely public sector supply response to in-service training demand-given i t s limitations in terms of scale, cost, innovation, and efficiency-is widely acknowledged by Government and other key stakeholders. Recently, the Government has taken noteworthy steps towards clarifying a three-pronged approach for deepening the involvement o f public, private sector, NGO, and university sectors in the delivery o f training under PSCAP. First, the Government has confirmed the critical role of public sector suppliers such as the Civil Service College and Regional Management Institutes in the provision o f “in-house” ski l ls development (for example, related to implementation with Government procedures) as well as sensitization with Government policies. These types of activities are to be financed under the IDA program on a unit cost basis, i.e., covering the actual cost o f the training sessions rather than the overhead or salaries of personnel in these public institutions. Second, the role o f local and international private providers was acknowledged as key for highly specialized forms of training (for example, development of ski l ls for the maintenance of IS/IT networks or best practice land management systems) and would be financed on the basis of competitive tendering under the IDA program. Third, for bulk “generic” training in areas such as general management, strategic management, finance, leadership development, public speaking, and computing, the Government intends to pre- qualify public autonomous, private, university, and non-profit suppliers to compete on a financial or cost basis for bulk training contracts bundled under the Program. As a basis for pre-qualifying suppliers, the Government intends to move forward with an assessment o f the supply-side of the training sector.

Figure 6. A three-pronged approach to deepening the indigenous supply response

In-house Generic Specialized

The above-mentioned risk factors and others are described and rated in the table on the following page. Despite several risk mitigation measures undertaken by the Government in the preparation for program launch, the overall risk rating for the operation i s considered high. Over the course o f implementation, further analysis and assessment wi l l be required to assess the overall risk- reward ratio (inclusive o f fiduciary, institutional, and social development factors) by subprogram, region, and the program as a whole.

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Risk

From Outputs to Objective Insufficient expressed demand on the part o f citizens, civil society, and the private sector for improved public sector performance in terms o f service delivery, empowerment, and good governance Absence o f or delay in woredas’ and municipalities’ access to fiscal support for investment and recurrent service delivery needs, after receiving capacity building support Overemphasis on process rather than the bottom-line o f service delivery and empowerment

Lack o f coordination between subprograms and their outputs, or lack o f consistency public sector reform programs across regions

Political commitment to institutional transformation wavers, or Government i s unable to sustain focus on PSCAP because i ts ambitious development agenda (including food security, human development, rural development, and private sector development) From Components to Outputs Vested interests at regional and federal levels hamper various reforms including restructuring, accountability, and systems modernization efforts Lack o f coordination among donors supporting the Sector Wide Approach

Constraints on the cost, innovation, quality, timeliness, and efficiency o f the supply response o f purely public sector supply o f training and capacity building in Ethiopia

Risk Rating

H

N

S

S

M

S

M

H

Risk Mitigation Measure

:EC campaigns prior to implementation wi l l :ontinue; systematic disclosure o f findings o f ;ervice delivery and related assessment; regular workshops with clients governed by institutional :harters across civil service institutions Both budget and capital investment support wi l l xovide fiscal additionality to capacitated local iurisdictions to meet recurrent and investment service delivery needs PSCAP outcomes are defined in terms o f service ielivery impact rather than simply triggers; over :ime, outcomes rather than outputs provide basis for allocation and reallocation decisions The design empowers regions to prioritize between subprograms, exploiting synergies between them, and at the same time, leveraging the expertise o f federal subprogram directors to ensure complies with national policy directors and standards for content and implementation High level political involvement in consensus building around PSCAP across ministries, among regional leaders; establishment o f a nation-wide structure o f capacity building bureaus and offices with budgetary responsibilities

At the regional level, allow for prioritization and reallocation from subprograms that are stalled towards those proceeding rapidly

Establishment o f a Joint Government-Donor PSCAP Working Group to facilitate joint quarterly review meetings, semi-annual supervision, and annual review missions; increased supervision intensity for Bank and donor team including measures to better meet due diligence requirements in regions, woredas, and municipalities Assessment o f the supply-side o f training and capacity building across Ethiopia’s public, private, and non-profit sectors; pre-qualification o f training suppliers for “generic training” activities; and strengthening o f public sector training institutions to carry out “in house” training activities

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Risk

Severe constraints on absorptive capacity in emerging regions

Weak institutional capacity at the regional and federal levels to carry out core financial, procurement, program management, and M&E activities, particularly in emerging regions

Arbitrariness in resource allocation across federal institutions and to regions, and weak capacity to effect mid-year and annual reallocation o f drawing rights against ulans Overall Risk Rating

Risk Rating H (High Risk); S (Substantial Risk

3. Possible controversial aspects

Risk Rat ing

H

H

S

Risk Mitigation Measure

Strong program support prior to project effectiveness with the assistance o f the Ministry o f Federal Affairs; offering premia on fees for consulting assignments in remote regions; establishment o f “minimum mandatory” amount o f capacity building and a floor on reallocation o f drawing rights from any given region Establishment o f well-staffed Planning and Programming Directorates (PPDs) and subprogram offices or equivalents; contracting in skil ls through o f local consultants to support various aspects o f program management; preparation o f sample Terms o f Reference and procurement materials; intensive training o f Government officials; preparation o f M&E Action Plan as part o f PIP/OM; incorporation o f semi-annual and annual output commitment into participation and performance agreements Formula-driven drawing rights with clear decision rules for performance-based reallocation; strengthening o f the network o f PPDs to suuaort alanning and M&E

H

There are no controversial aspects o f this project.

G. Main Credit Conditions

1. Effectiveness conditions

a. the Borrower has finalized and adopted the Program Implementation Plan, including a Procurement Plan, monitoring and evaluation action plan, financial reporting guidelines, and information, education and communication strategy, in form and substance satisfactory to the Association;

b. the Borrower has recruited to: (i) the executing agencies: (A) at the federal level, Director, four team leaders and four team experts in the Planning and Programming Directorate, and (B) at the regional level, equivalent o f the Director o f Planning and Programming Directorate; and (ii) the MCB, two local procurement consultants, and an international procurement consultant, a l l in accordance with the provisions o f Section I1 o f Schedule 3 t o the Development Credit Agreement;

C. the Borrower has budgeted and approved implementation plans to be carried out by regional and federal institutions during the first year o f PSCAP, and reflected the said

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plans under the appropriate item in the federal budget, in form and substance acceptable to the Association;

d. the Borrower has opened the Project Account and has deposited therein the initial deposit in an amount equivalent to Birr 9,000,000 to finance the counterpart contribution to the Project; and

e. the Borrower has initiated pre-qualification o f in-service training suppliers for “generic training” activities.

2. Financial and other covenants

a. The Borrower (and specifically MOFED) shall submit the audited project accounts to IDA nine months after the end o f each fiscal year. The audited financial statement wi l l include all sources o f pooled funds in the Program, including those from IDA, other pooling donors, and the Treasury.

b. The Borrower (and specifically MCB) shall, after receiving compiled financial reports from MOFED, submit semi-annual consolidated Financial Management Reports (FMRs) to IDA forty-five days after the end o f the FMR period.

c. The Borrower and the pooling donors shall execute a Memorandum o f Understanding as a condition for disbursement o f funds from the pooled funds category.

d. The Borrower shall comply with the following dated covenants, which serve as annual progress actions during implementation.

1. No later than the end o f the f i rst program year, the Borrower shall (i) submit annual procurement plan, including sample development plans for up to 5% o f the woredas and municipalities; (ii) launch the second woreda-municipal benchmarking survey; (iii) complete minimum mandatory requirements in at least four regions; and (iv) publish the PSCAP annual progress report, al l in a form and substance satisfactory to the Association.

2. No later than the end o f the second program year, the Borrower shall (i) submit annual procurement plan, including sample development plans for up to 15% o f woreda and municipalities; (ii) launch third woreda-municipal benchmarking survey; (iii) complete the prequalification o f suppliers for generic training; (iv) review allocation and reallocation procedures and mechanisms, including reviewing alternatives for high performing executing agencies who have fully utilized their allocations; (v) complete minimum mandatory in seven regions; and (vi) publish Program annual progress report, all in a form and substance satisfactory to the Association.

3. No later than the end o f the third program year, the Borrower shall (i) submit annual procurement plan, including development plans for up to 25% o f woredas and municipalities; (ii) launch the fourth woreda-municipal benchmarking survey; (iii) review feasibility o f capacity building transfers to woredas and municipalities; (iv) completion o f minimum mandatory in all regions; and (v) publish the Program annual progress report, all in a form and substance satisfactory to the Association.

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H. Readiness of Implementation

[ 3 1. a)

[XI 1. b) No t applicable.

The engineering design documents for the f i rst year’s activities are complete and ready for the start o f project implementation.

[XI 2. The procurement documents for the first year’s activities are complete and ready for the start o f project implementation.

The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory quality.

[XI 3.

[ ] 4. The following items are lacking and are discussed under loan conditions (Section G).

I. Compliance with Bank Policies

[XI 1. The project complies with all applicable Bank procedures.

[ ] 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

Acting Seetor Manager Country Director

I

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I

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rc

I

N m I

8 W

8 W

I

m In

I

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c) m

I 00 E .e c .Y

3 8 8 B 8 3 s

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* a2 M U 3 s .. v1 Y 1 a fi 3

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ANNEX 2: DETAILED PROJECT DESCRIPTION

ETHIOPIA: Public Sector Capacity Building Program Support Project

1.1 How PSCAP’s two components work

The Bank’s Support Project i s fully aligned with the basic design o f the Government’s PSCAP. As such, it supports the scale-up o f ongoing institutional transformation and capacity building activities through two components-one federal, and the other regional. Activities planned under these two components wil l be drawn from a menu o f eligible expenditures consisting of PSCAP’s six subprograms and a mandatory program support activity. Drawing on this menu, each component i s (i) planned based on annualized five-year drawing rights; (ii) adjusted semi- annually and annually; and (iii) reflected in participation and performance agreements with commitments to deliver on specific capacity building outputs. . Component 1-Federal PSCAP: This component supports federal level activities across

each of the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component i s required to include basic program support activities to ensure effective implementation.

Component 2-Regional PSCAP: This component constitutes the bulk o f the Program and i s designed to empower regions to adapt and implement national reform and capacity building priorities envisaged under PSCAP’s six subprograms in a manner that i s efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms wi l l be fully leveraged through this component. Regions wi l l also shift resources year-to-year and in-year from poor performing to higher performing subprogram activities. This component i s also required to include basic program support activities to ensure effective implementation.

1.2 Drawing down on activity menus within PSCAP Subprograms

The objectives and specific menu o f activities that fall within each subprogram of PSCAP are explained below. Selected and planned on a annual basis, these activities provide the building blocks for the components described above.

Subprogram 1-Civil service reform. The overall objective o f the Civil Service Reform Subprogram i s to promote the development o f an efficient, effective, transparent, accountable, ethical and performance-oriented civil service at the federal, regional, and local levels. Under this subprogram, beneficiaries draw down on support across the following seven areas:

Strengthening the capacity of Civil Service Reform (CSR) Coordinating structures i s designed to enable CSR coordinating structures at federal, regional and local levels to more effectively support target institutions in implementing reforms and performing at levels that citizens require of them. Specifically, the following activities are envisaged: (1) review and redesign of the organizational structures as well as roles and responsibilities o f CSR coordinating structures; (2) assessment and implementation o f jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation of training requirements including preparation of materials, training of trainers, packaging of generic training activities, and coordination o f external training or study tours; (4) design, development, and adoption of appropriate CSR change management

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(including M&E) and coordination systems; and (5) strengthening o f Information, Education, and Communication activities including the provision o f equipment and technical know-how. . Improving expenditure management and control activities seek to deepen implementation o f the Country Financial Accountability Assessment Report and Country Procurement Assessment Report Action Plans, strengthen Ethiopia’s public sector fiduciary framework, and in the process, improve the efficiency and effectiveness o f public expenditure management through the following capacity building activities: (1) development o f a comprehensive legal framework for public sector financial administration; (2) nation-wide adoption o f the new budget classification systems and related budget reforms; (3) roll-out o f the double entry accounting system; (4) development o f medium-term planning systems including the transition from the existing Public Investment Program into a Public Expenditure Program or PEP system and i t s integration with strategic planning and management initiatives; (5) implementation o f procurement reforms; (6) strengthening o f the internal audit function including the introduction o f systems audits; (7) modernization o f cash and asset management; and (8) roll-out o f financial management information systems.

Improving governance of human resources management and control aims to instill ethical, merit- and performance-based personnel management practices in the Ethiopian c iv i l service through the following capacity building activities: (1) development and implementation o f the prototype rules, regulations, and policies for human resource development, time management, promotion and transfer, as well as job grading and remuneration; (2) rollout o f the results- oriented performance evaluation system and related incentive measures; (3) development and installation o f payroll management as well as more comprehensive human resource management information systems; (4) strengthening o f human resources through improved in-service training and sensitization o f civi l servants o f key Government policies.

Improvingperformance andpublic service delivery i s a spearhead o f the overall C iv i l Service Reform Program and aims to install a performance management system across ministries, agencies, and bureaus (MABs) in a phased manner. Specifically, the following activities are envisaged: (1) assessment o f performance barriers through client surveys, business process and functional reviews, and training assessments; (2) preparation o f targeted performance improvement plans and more comprehensive strategic plans; (3) retooling, training, implementation support, and related technical assistance for implementation o f performance improvement initiatives. . Improving accountability and transparency activities include: (1) strengthening o f external audit and parliamentary oversight for economic governance; (2) technical assistance for promotion o f performance monitoring techniques including expenditure or input tracking surveys, cost efficiency studies, and service delivery report cards; (3) development and implementation o f ethics management and anti-corruption policies; and (4) continuing support for the development o f accounting and auditing professions.

Strengthening top management systems through: (1) the development o f new and improved strategic planning and management systems, performance measurement techniques, and decision-making methods to aid civi l service management; (2) training o f top managers in strategic planning, performance measurement, top management decision-making, and value for money management; (3) development and implementation o f top management development systems inter alia through leadership training and preparation o f handbooks.

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Building the policy and institutional capacities of emerging regions such as Afar, Somalia, Benishangul-Gumuz and Gambella, through: (1) assessment o f existing civi l service institutions including identification o f capacity and infrastructure constraints as well as performance barriers; (2) development, on a learning by doing basis, o f alternative techniques for implementing modern civi l service management practices and reforms in emerging regions; (3) development and implementation o f basic or “hybrid” legislation, structures, and systems to support basic governance improvements in emerging regions.

Subprogram 2-District-level decentralization. The District-Level Decentralization Subprogram (DLDP) seeks to deepen the devolution o f power to the lower tiers o f regional government, to institutionalize decision-making processes at the grassroots level with a view to enhancing democratic participation, to promote good governance, and to improve decentralization service delivery. Capacity building support under the subprogram covers the following seven areas:

Capacity building for manning and training activities support the following technical assistance activities: (1) preparation o f human resource plans for woredas including aggregate projections o f staffing requirements; (2) assessment o f short-term training needs for woredas; (3) development o f modules for short-term in-service training for electorates, administrators and c iv i l servants in areas such as decentralization policy and strategy, local governance and capacity building, democratization, grassroots participation, general management, monitoring and evaluation, and local level planning; (4) development o f systems for provision and evaluation o f in-service training; and (5) training o f trainers in facilitation techniques to support training o f woreda level personnel.

Grassroots participation support activities for woredas includes technical assistance and training activities for (1) further development o f local grassroots participation framework manual and related monitoring and reporting mechanisms; (2) promotion o f participatory techniques in woredas including the involvement o f NGOs, civi l society institutions, and other donor agencies in the development process at the local level; (3) measurement o f the impact o f participatory techniques and processes.

Capacity building for woreda institutions and organizations involves: (1) technical assistance for gap analysis o f functional assignments and remedial actions; (2) preparation o f restructuring guidelines based on the legal framework o f the regional governments and sample woredas; (3) implementation support for restructuring and performance improvement.

Capacity Building for Program Development includes technical assistance for the following: (1) assessment and refinement o f decentralization strategies and linkages among programs & sectors; (2) assessment o f the impact o f decentralization policy; (3) conduct o f policy analysis on capacity building and decentralization; (4) development o f benchmarks and monitoring and evaluation system for implementation o f DLDP and strengthen the capacity o f DLDP office; and (5) evaluation o f PSCAP plans o f woredas for nine regional governments and evaluation o f the overall performance o f woredas for nine regional governments.

Capacity building for woreda fiscal transfer and own revenue enhancement comprise the following technical assistance activities: (1) studies, development, and adoption o f model formula and budget allocation system for region-woreda block grant; (2) studies on options for capital investment and sector priority setting at woreda level; (3) identification o f

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institutional constraints on and remedial measures for own revenue collection, utilization, and revenue sharing at the woreda level.

Capacity building for woreda planning and Jinancial control aims to strengthen expenditure management and related fiduciary aspects o f woreda decentralization through: (1) the development and implementation o f a local (Woreda) multi-year planning system and fiscal framework; (2) training and technical assistance for improving reporting and supervision practices; and (3) the development and ro l l out o f budget consultation systems to ensure participatory woreda planning and budgeting. It i s important to note that capacity building activities related to financial management such as the roll-out o f budgets and accounts reforms wil l be undertaken at the woreda level under the “governance o f financial resource management” activities envisaged under the CSW.

Minimum service standards for woredas will help establish minimum basic service levels in priority sectors inter alia through: (1) technical assistance for refinement o f minimum standard service indicators; (2) the development o f general guidelines for rural woredas; and (3) assessment o f the implementation o f minimum service levels including through performance benchmarking at the woreda level.

Subprogram 3-Justice system reform. The Justice System Reform Subprogram aims to promote the rule o f law as well as the efficient and effective functions o f the justice system as part o f Ethiopia’s democratization and private sector development processes. This subprogram, currently a work-in-progress, wil l receive Bank assistance for the following activities:

Strengthening of the Justice Systems Reform OfJice wi l l involve (1) review o f the organizational structures as well as roles and responsibilities o f Justice System Reform Office structures; (2) assessment and implementation o f jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation o f training requirements including preparation o f materials, training o f trainers, packaging o f generic training activities, and coordination o f external training or study tours; (4) design, development, and adoption o f appropriate change management (including M&E) and coordination systems; and (5) strengthening o f Information, Education, and Communication activities including the provision o f equipment and technical know-how.

Strengthening the judiciary comprises the following capacity building activities: (1) training and professional development o f judges and court clerks (with a special focus on the training o f female judges); (2) establishment o f training institutes for the judiciary; (3) court administration reform; (4) implementation o f modern case load management systems within federal and regional courts; and (5) identification o f measures to enhance access to justice.

Law Revision and law reform initiatives include consultancy services for: (1) technical analyses and studies on the establishment o f systems and procedures for declaring income and property; (2) reviews and analyses in new areas o f law; (3) publication and distribution o f legal research materials; (4) compilation, consolidation and distribution o f legislation and regulations; (5) studies on procedural, commercial, and stock exchange draft laws.

Strengthening legislative processes will be achieved through (1) training, technical advisory services, and acquisition o f equipment for staff o f federal and regional standing committees on legislative drafting and analysis o f legislative process and management; and (2) training for members o f standing committees on principles o f federal grant and intergovernmental

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fiscal framework, monitoring and impact assessment, HIVIAIDS and gender issues, accountability and participation.

Subprogram "Urban management capacity building. The objective o f the Urban Management Reform Subprogram i s to enhance the capacity o f municipalities in the delivery o f services and enable urban centers to play a more effective role in social and economic development. Three sets o f activities, financed under PSCAP, are envisaged.

Federal and regional urban management policy involves technical assistance and support for (1) preparation o f a National Urban Development Policy; (2) preparation o f a National Urban Land and Housing Policy and Strategy; (3) preparation o f a Model Municipality Act; (4) establishment o f the Urban Development Fund (UDF); and (5) establishment o f the National Association o f Municipalities.

Deepening the process of decentralization covers support for (1) preparation o f model operating manuals and prototypes on financial management, procurement and contract administration, solid waste management system, operations and maintenance o f infrastructure services, archive management, organizational structure and staffing plan, personnel policies and incentive mechanisms, land information systems, model municipality acts, model c i ty court systems, municipality revenue and inter-governmental fiscal transfer systems (including service charges), and urban planning systems; (2) strengthening o f relevant federal and regional institutions to provide technical support; (3) development o f efficient revenue mobilization and fiscal transfer mechanisms including analyses o f revenue potential o f various urban centers; and (4) establishment o f regional and town planning units.

Local government restructuring and capacity building involves technical assistance and implementation support for the following municipal level activities: (1) the delivery o f sanitation services; (2) the supply o f serviced o f urban land; (3) restructuring o f the municipal financial system; (4) restructuring and preparation o f staffing plans; (5) introduction o f land information systems; (6) restructuring o f services delivery systems in the areas o f procurement and contract administration, operation and management o f infrastructure services, overall municipality service delivery system, revenue mobilization and fiscal transfer; and (7) provision o f "bulk" generic training to regional and municipality staff.

Subprogram %Tax systems reform. The Tax Systems Reform Subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency o f collection), and ensure equity and fairness in the tax system through a comprehensive overall o f the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities:

Tax policy and legislation activities include technical assistance for (1) the amendment o f the current income tax legislation by reflecting the current tax business and investment environment; (2) strengthening o f the enforcement powers o f the tax collection institutions; (3) simplification o f tax administration procedures and practices; (4) issuance and adoption o f proclamations, regulations & operational directives; (5) development and implementation o f regional revenue enhancement programs; (6) development o f agricultural income tax and land use fee proclamations and directives; (7) research and review o f various proclamations that need to be amended; and (8) analyses o f revenue potential across regions.

Taxpayer Identijkation Number (TIN) system rollout activities aim to information sharing between FIRA, ECuA, as well as regional and city administrations in order to control tax

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evasion, create a dependable database on taxpayers, and forge efficient and effective tax collection through inter alia: (1) installation o f equipment at operational TIN sites; (2) deployment o f the TIN system at the national and regional levels; (3) training in the TIN system o f relevant staff and other users; (4) enhancement o f MIS capacity including procurement o f hardware and software; (5) development, printing and publication o f certificates, forms and manuals; (6) public awareness campaigns for tax payer registration; (7) monitoring and evaluation o f the implementation activities; (8) establishment o f links between TIN system o f customs and financial institutions; and (9) TIN implementation for new tax payers.

Presumptive taxation implementation aims broaden the tax base through sensitization o f the hard-to-tax group, particularly the large informal sector and taxpayers who understate their income, through: (1) review o f the profitability rate; (2) surveys o f annual turnover o f businesses; (3) IEC and other consultations with stakeholders prior to making amendments; (4) development and implementation o f profitability rate directive(s); (6) development o f relevant operating manuals and training for staf f and taxpayers; (7) implementation o f standard assessments based on review o f the profitability rate; (8) development and implementation o f accounting systems for revenue transfer payments refund; and (9) review and implementation o f the revised standard assessment scheme.

Value-Added Tax PAT) implementation aims to ensure the appropriate balance between income taxes and commodity/consumption taxes, enhance the competitiveness o f the Ethiopian business community internationally, and promote capital investment and development through technical assistance and capacity building for: (1) migration from VAT system to the main VAT system; (2) development and implementation o f coherent operational programs and procedures; (3) development and implementation o f comprehensive audit and enforcement programs; (4) organization o f sustained staff training, taxpayers education campaigns, registration and revenue collection activities; and (5) regular monitoring and evaluation o f the implementation progress.

Strengthening of organizational structures, operational programs, systems and procedures i s expected to foster voluntary compliance by taxpayers and ensure fairness and equity in tax administration through support for: (1) the development and implementation o f comprehensive and accurate computerized accounting systems and operations; (2) training o f federal, regional and city administration tax officers on the usage o f manuals and adoption o f various systems and procedures (3) review and evaluation o f other relevant strategies, systems and procedures; (4) identification o f training needs and organizing training and study tours; (5) customization & implementation o f the integrated tax system; and (6) adoption o f an effective organizational structure with competent and skilled staff.

4 Reforming and modernizing customs aims to improve the efficiency, efficacy, and transparency o f customs services through (1) supporting the migration to an enhanced IT system; (2) improving the management o f the tariff classification through inter alia establishment o f a customs laboratory; (3) establishing a customs training school to develop the knowledge and ski l ls required by ECuA personnel to successfully implement new programs and procedures; (4) strengthening enforcement to combat contraband trade and international criminal activities; and (5) implementing al l procedures consistent with sub- regional, regional, and international agreements.

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Subprogram /:Information and communications technologies. The objective o f the Information & Communications Technologies (ICT) Subprogram i s to harness ICTs for the development o f human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seeking to use o f ICTs in this manner. Successful implementation o f ICT-based solutions across government wil l require support for the procurement o f hardware and software, establishment o f enabling legislation and regulations on the procurement and utilization o f ICTs, development o f human resources, content, and applications relevant to service delivery; and promotion o f community-based information systems/services. The following areas w i l l be addressed under this subprogram:

ICT human resource development for e-government initiative seeks to generate a critical mass o f ICT literate worker in government through the following activities: (1) provision o f ICT training for civi l servants at al l levels o f profession; (2) establishment o f I C T training centers, where relevant and affordable; (3) development o f ICT training materials in working and local languages; and (4) provision o f technical assistance to review human resource requirements o f rolling out Government systems and applications.

ICT for public service delivery and good governance through technical assistance and capacity building for: (1) development o f information systems strategies, system design studies, and related analyses; (2) establishment o f regional information centers, where feasible and affordable; (3) implementation o f WAN, LAN and other information systems at the federal and regional levels; (4) procurement o f appropriate hardware and software for public service delivery systems; and (5) IEC and other awareness building activities.

ICT applications for sector development in health, education, agriculture, e-government, e- commerce, and other priority sectors through technical assistance, procurement o f equipment, and training to support (1) customization o f common administrative applications to regional context; (2) development and implementation o f sectoral information systems at federal and regional levels; (3) coordination o f different sector-specific information systems.

Community-based information systems and services that allow access to government data and information and enable communities to become centers o f indigenous knowledge and contents. The latter i s an important dimension o f ICTs for development and a strong effort must therefore be made to enable ICTs to operate at grass roots level and in al l walks o f l i fe. The empowerment o f communities with information i s essential to i t s pursuit o f specific developmental activities. These goals are expected to be achieved through: (1) development o f local language content; (2) repackaging o f globally available information to local community needs; (3) establishment o f multi purpose community centers; (4) broadcasting o f information through the local media; (5) procurement and distribution o f appropriate technology for information sharing; and (6) training o f communities in I C T use.

Mandatory activity-Program support. A mandatory activity, program support i s designed to ensure speedy implementation o f the six subprograms under both the federal and regional components. It finances incremental costs associated with operating requirements o f Planning and Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, and related subprogram offices that serve members o f the federal and regional Technical Teams. Support activities also include the costs o f progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, training o f staff in program management, auditing, office supplies, equipment operation, transport, travel, and per diems.

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Program Component

1. Federal PSCAP 2. Regional PSCAP

Total Baseline Cost Contingencies

Total Project Cost

ANNEX 3: ESTIMATED PROJECT COSTS

ETHIOPIA: Public Sector Capacity Building Program Support Project

Local Foreign Total

59.6 16.4 76.0 236.5 65.4 301.9 296.1 81.8 377.9

15.6 4.3 19.9 311.7 86.1 397.8

Disbursement Categories Local Foreign Total

Goods & Equipment Consultant Services Training Operating Costs

Total

41.3 30.7 72.0 116.7 29.1 145.8 133.8 26.3 160.0 20.0 20.0

311.7 86.1 397.8

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ANNEX 4: COST BENEFIT ANALYSIS SUMMARY (Cost-Effectiveness Analysis Summary)

ETHIOPIA: Public Sector Capacity Building Program Support Project

Not applicable.

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Program Costs Investment Costs

ANNEX 5: FINANCIAL SUMMARY

FY04 FY 05 FY06 FY 07 FY 08 Total

22.3 80.5 113.3 109.2 52.4 377.8

ETHIOPIA: Public Sector Capacity Building Program Support Project

Recurrent Costs

Total Financing Sources

1.2 4.3 6.0 5.8 2.8 20.0 23.5 84.8 119.3 114.9 55.2 397.8

42% 26% 25% 19% 30% 5 8% 3 6% 3 5% 26% 41% 0% 9% 10% 13% 7% 0% 2% 2% 3% 2%

(YO of Total) IDA Government CIDA SIDA

25% 3 5% 10% 2%

Other Donors Total

0% 27% 28% 39% 20% 28% 100% 100% 100% 100% 100% 100%

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ANNEX 5A: FINANCIAL MANAGEMENT ASSESSMENT TECHNICAL ANNEX'

ETHIOPIA: Public Sector Capacity Building Program Support Project

Introduction

The financial management assessment was undertaken in line with the guidelines issued by the FM Board on June 30, 2001 and revised on October 1, 2003. The assessment sought to determine whether the Executing Agencies (EAs) identified under PSCAP have acceptable financial management arrangements in order to ensure that (1) Support Project funds are used only for the intended purposes in an efficient and economical way, (2) the preparation o f accurate, reliable and timely periodic financial reports and (3) safeguard the entities' assets. The FM assessment of the Ministr ies o f Finance and Economic Development (MOFED), Capacity Building (MCB), Federal Affairs (MFA), and Revenue (MOR), as well as sample of regional Bureaus o f Finance and Economic Development (BOFEDs) and Capacity Building (BCB) was undertaken in December 2003. The Ethiopia Country Financial Accountability Assessment (CFAA) was carried out jointly by the Government, Bank and donors, issued on June 17,2003.

Country Issues

According to the 2003 CFAA, considerable progress has been made in the budgeting process, yet several aspects of ongoing expenditure management reforms including medium-term planning, budgeting, accounting, reporting, and auditing remain works-in-progress. A CFAA action plan identified key commitments as well as sequenced capacity building activities necessary to adequately address fiduciary risks within Ethiopia's public finance system. Most o f the activities in the action plan wil l be covered under the existing public financial management reform agenda currently under implementation with the assistance from donors.

The Bank i s currently providing significant financial assistance to the Education and Health Sector Development Programs (SDPs) through SWAP modalities (without pooling). PSCAP replicates certain key design features o f these SDPs including formula-based allocations, flow o f funds through the Channel 1 modality, and similar reporting arrangements between the federal and regional levels. PSCAP also involves additional features such as delegation o f financial management and procurement responsibilities across several federal institutions as well as pooling for donor funds. A noteworthy lesson from the SDP experience i s the need for MOFED to address early on possible delays in obtaining regular reports from the regions in order to ensure timely replenishment o f the SA. In addition, MOFED should anticipate potential delays in submission of audit reports as a result o f delay in financial reporting from the regions.

Risk Analysis

PSCAP wi l l be implemented by several EAs with varying degree of implementation capacity. The major financial management risk to the Program i s the likelihood that MOFED would not receive timely reports in order to process replenishments of the SA and close the annual accounts. In order to address this risk, MOFED, MCB, the various federal EAs, as well as regional BOFEDs and BCBs involved in execution of Program wil l recruit and appropriately assign additional civil service staff, and where necessary consultants. In addition, MOFED wil l prepare short and concise guidelines on

A detailed Financial Management Assessment Report that was prepared by financial management specialists from the World Bank (February 4,2004).

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recording and reporting as part o f the PIP, provide extensive training on the guidelines, and take the necessary remedial actions to address potential reporting delays early in the implementation cycle.

SUMMARY RISK ASSESSMENT

Project: Public Sector Capacitv Building Program Support Project Date: Februarv 4.2004

accounting and auditing

not clearly defined, especially the relationship between MOFED and MCB

and federal line ministries

Control Risk

PSCAP executing agencies are many and in some cases the roles and responsibilities o f

Funds flow up to the regional levels 3. Staffing Lack of trained manpower and low salary scale 4. Accounting Policies and Procedures The financial management guidelines has not yet been finalized 5. Internal Audit There i s a duplication of work between the internal audit department o f each executing agency and the inspection department of MOFED and BOFEDs 6. External Audit Low capacity in the auditing profession

7. Reporting and Monitoring Non-regular reporting from lower levels, which are not complete and relevant

Overall Control Risk H = High, S = Substantial, M = Moderate, N = Neglil

c Assessment

)le or Low

Risk Mitigating Measures

In the short-run, contract in skilled personnel in these priority areas. In the long-run, the CSRP intends to develop incentive measures in line with the Results Oriented Performance Evaluation System. Strengthening o f standards and the profession i s one area o f focus of CSRP. The Government has designated MOFED with the financial management responsibilities for PSCAP and have established a “super ministry” coordination structure around MCB to ensure close coordination o f other key cabinet ministries. The PPDs, BFD, and finance institutions such as MOFED and BOFEDs at all levels will recruit adequate and trained staff

I Government has designated the overall financial management responsibility to MOFED and the overall coordination to PPDs in MCB and

market rates.

The guidelines to be designed will be concise and clear to accommodate the needs of the Program The government should take initiatives to consolidate the work o f internal audit and inspection

Government has designated the overall financial management responsibility to MOFED and the overall coordination to PPDs in MCB and BCBs. This i s reflected in the PIP. Regular field visits bv MOFED. MCB and

I W&d Bank mission:

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Significant Weaknesses Lack o f trained manpower in the area o f financial management and high turnover o f staff

The Program i s implemented by various agencies

Auditing the Program financial statements may take time to complete as the executing agencies are various and dispersed all over the country

Regular financial reports may not be received on time from regions

Strengths and Weaknesses

Resolutions Address incentive framework and career paths for financial management personnel in the civil service, and strengthen the accounting and auditing professions, both o f which are supported under the CSRP Strengthen the monitoring capacity at the federal and regional level and regular supervision by the Bank Agree with the selected auditors on the timetable to complete the audit well in advance and the MOFED should close the accounts immediately after the end o f the fiscal year. Design a system o f monitoring to ensure that transfer o f hnds i s based on the receipt o f regular financial reports

The country’s discipline in executing budget and compliance with the existing government regulations i s the major strength in executing this Program. MOFED and BOFEDs have good internal control system, including regular post audit by the inspection departments at both MOFED and BOFEDs. A l l the executing agencies at the federal level and five larger regions are using the new chart o f accounts based on modified cash basis o f accounting. All the executing agencies involved in processing most o f the Program’s financial transactions are strictly following-up the budgetary discipline and regular government reporting mechanism. Despite all the strengths, there are some weaknesses in implementing the Program. These are as follows:

Executing Agencies

PSCAP wi l l follow a Sector-Wide Approach and wi l l be implemented by various sector ministries and regional bureaus. The sector ministries include MOFED, MCB, MFA, Ministry o f Revenue, ICTAD, Federal Supreme Court and all the eleven regional BOFEDs and Bureaus o f Capacity Building. MOFED wi l l be responsible for the transfer o f money and compiling all the financial reports, including annual financial statements and the external audit requirements. MCB, through i t s Planning and Programming Department, i s responsible for overall co-ordination, monitoring all the activities o f the Program and report compilations. The Ministry’s BFD wi l l be responsible for the overall procurement monitoring as well as procurement o f ICB.

At MOFED, the Counterpart Funds Unit (CFU) wi l l be responsible for the management o f the SAs in U S Dollars and the pooled Birr account. Based on the approved work plan, CFU wi l l transfer money to BOFEDs and line ministries. The CFU wi l l collect all the statements o f expenditures from all regional BOFEDs and line ministries and submit requests for each donor for the replenishment o f the SAs. The Central Accounts Department (CAD) at MOFED wi l l be responsible for regular financial reports and the annual audit o f the Program accounts. Each BOFED wi l l establish one Birr account for the implementation o f PSCAP activities under the “Regional Program” and make payments as per the instruction o f BCBs. BOFEDs wi l l be responsible for the recording and reporting o f the financial transactions o f the Program to MOFED monthly.

Funds flow

For each donor, including IDA, MOFED wi l l open one special account in U S Dollars at the National Bank o f Ethiopia. In addition, MOFED wi l l open one Birr account for which money from the SAs

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and the government contribution wil l be deposited. The Birr account wi l l serve as a consolidated fund for all donors and the government. MOFED wi l l be responsible for the day-to-day management of the SAs and the pooled Birr account.

The first installment from IDA wi l l be deposited in the Special U S Dollar Account opened at NBE. MOFED manages the flow of funds between the SA in U S Dollars and the pooled Birr account, based on projections for payments o f goods and services expected to be procured locally or internationally. MOFED can draw from the U S Dollar SA to the pooled Birr account as required.

Federal EAs and regions, through the BOFEDs, are required to formally submit requests for budget transfers, financial reports, and Statements of Expenditures (SOEs) justifying the use of funds previously received from MOFED. Budget transfers requests and SOEs are sent to the CFU and financial reports to CAD in MOFED. SOEs record amounts and purposes of expenditures incurred from the advanced funds. On receipt o f the SOEs from EAs, CFU sends an application for withdrawal to IDA and other donors for the replenishment o f the SA. The SA i s replenished by an amount equivalent to the total of SOE.

Staffing

The staffing level at each o f the executing agencies varies in number and quality. For example, the CAD has 29 staff, out o f which 7 are degree holders and the others have diploma from various colleges. The CFU at MOFED has 2 staff, o f which 1 i s a degree holder. The Addis Ababa BOFED has 17 staff, out o f which 5 are degree holders and the others are diploma holders from various colleges. The SNNPR BCB has 10 staff (3 degree holder and 7 diploma holders) serving in a pool. The pool serves the BCB and regional health bureau.

BCBs receive accounting services from an administrative pool, which supports more than two institutions. Some o f the BCB i s intending to recruit contractual staff to look after the accounting task o f the Program. MOFED and BOFEDs also need additional staff to discharge their responsibilities properly. In general, MOFED, BOFEDs and BCBs do not have sufficient staff in place to handle both the government and donor financial transactions. As agreed during appraisal and subsequent negotiations of the Program, required recruitment o f key staff has been initiated and wil l be incorporated into the first year procurement plans.

Budgeting and planning

According to the Government o f Ethiopia’s Chart o f Accounts, PSCAP wil l be proclaimed annually as a Program under the MCB, which i s designated as apublic body. Allocations to federal executing agencies (for example, Urban Management Capacity Building Program, or ICT) and regions (for example, Tigray National Regional State or Oromiya National Regional State) wi l l be classified and proclaimed as “subprograms ” under PSCAP in the federal budget in order to allow for mid-year and annual reallocations. As such, resources leveraged by regions from PSCAP wi l l be fully additional to their subsidy and therefore, not offset in general purpose transfers. Each federal and regional EA wi l l prepare a consolidated PSCAP annual plan for each budget year and following various technical reviews (discussed in annex 9), MCB shall propose the approved elements of the plan as part o f the annual budget proposal. Following Cabinet approval and the subsequent appropriations process, MOFED wil l transfer the resources to the federal EAs (designated above) and BOFEDs.

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Accounting policies and procedures

Starting from July 2002, the Government has introduced a double entry modified cash basis of accounting. The new accounting reform has been introduced at the federal level and to five regions, namely, Amhara, Oromiya, Addis Ababa, Tigray and SNNPR. These regions and federal line ministries are using a computerized Budget Disbursement and Accounting System (BDA) to some extent. The other regions are using a manual system of accounting based on single entry.

The main elements o f the accounting reform are the adoption of (i) a revised and comprehensive chart o f accounts consistent with the reformed budget classification, (ii) a system of ledgers accommodating all types o f accounts (including transfers, current assets and liabilities, and fund balance in addition to revenues and expenditures), (iii) double entry book-keeping (thus, self- balancing set o f accounts), (iv) a system of control o f budgetary commitments (recording commitments as well as actual payments), (v) modified cash basis transaction accounting and (vi) revised monthly report formats to accommodate double-entry book-keeping and commitment control and permit better cash control.

The computerized BDA system enables public bodies to produce financial reports much more easily. In the meantime, accounting and financial reporting are performed manually in most jurisdictions. Massive capacity building would be required in order to accelerate the rollout o f the BDA system. This would need to include support to clearing accounts backlog, equipment and customization of software, training o f staff, etc.

The new chart o f accounts i s capable o f recording the financial transactions and producing the required regular reports for PSCAP. However, MOFED needs to prepare concise guidelines on how to record transactions and report the results because (1) all regions are currently not using the same chart o f accounts and accounting system, (2) the chart o f accounts do not include account nos. for PSCAP activities, and (3) the specific reporting formats for the program (therefore, the Bank’s Support Project) need to be clearly mentioned.

All the source documents wi l l be kept at the regional BCBsA3OFEDs and federal EAs where the transactions took place. BCBs/BOFEDs and all federal EAs wi l l report to MOFED on regular basis. MOFED wil l develop the reporting formats before effectiveness of the Program.

Internal audit

MOFED and BOFEDs have an inspection department performing post audit activities on assessing whether the budget utilization i s in line with the intended purposes. The staff o f the inspection department varies from region to region. Each of the EAs has an internal audit department, which performs post audit activities on all the financial transactions o f the entity. The recent CFAA report for the Ethiopia recommended that the government should consolidate the organizational structure, redefine the role and responsibilities of the internal audit function to better address the need of the government. The Expenditure Management and Control activities (EMCP) under the Civil Service Reform Program i s currently working in improving the internal audit function. It i s envisaged that the Inspection Departments at MOFED and BOFEDs and the Internal Audit Section of each EA wil l perform post-audit activities on the financial transactions o f PSCAP.

External audit

According to the Ethiopian Constitution, the Office o f Federal Auditor General (OFAG) i s responsible to carry out the audit o f all the financial transactions o f the federal government and

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2

subsidies to the regions. Each o f the regions has regional Auditor General responsible for auditing financial transactions in the region. The OFAG usually delegates i t s responsibility mostly to the Audit Services Corporations, the government owned audit firm, and in some cases to private audit firms to carry out the audit o f donor-financed projects. For the Bank’s PSCAP Support Project, OFAG wi l l assign an external auditor acceptable to IDA.

of the PIP. Organize workshop(s) for finance staff at all levels to familiarize them with the flow o f funds, recording and reporting requirements Before effectiveness Borrower

MOFED i s currently the main body responsible for closing the accounts and getting the audit reports for two sector programs, ESDP and HSDP. MOFED’s experience-to-date with these programs suggests that periodic delays in the submission o f audit reports were caused primarily by accounts backlogs within regions. In order to improve the reporting system for PSCAP, the capacity at all levels should be strengthened by adding additional staff and providing regular training by MOFED on recording and reporting.

3

According to the new audit policy o f IDA, MOFED will prepare a consolidated Program accounts, which include all the sources from pooled donors and the government and related Program expenditure and the auditors will express a single opinion on the consolidate Program accounts. Considering the nature o f the Program, the audit reports should be submitted to IDA nine months after the end o f each fiscal year, which ends on July 7 o f each year.

- .

of PSCAP Incorporation o f initiatives to strengthen the financial management capabilities o f EAs Before effectiveness Borrower into the final procurement plan

Reporting and monitoring

Federal and regional EAs are responsible for reporting the uses o f hnds transferred from MOFED. MOFED requires monthly reports from al l EAs participating in the implementation o f the Program, but from the practical point o f view quarterly reports are highly recommended. MOFED will develop short guidelines on reporting.

The Bank requires quarterly Financial Monitoring Reports (FMRs) to be submitted 45 days after the end o f each quarter. The FMRs includes financial, procurement and physical reports. Considering the nature o f the Program, IDA agreed to receive FMRs on a semi-annual basis, to be received 45 days after the end o f each six months. MOFED wi l l be responsible for the financial sections and M C B for the other two sections o f the FMR. M C B after receiving the financial reports from MOFED will submit the whole FMR to IDA. A format for the FMR was agreed during the negotiation.

Action plan

I Action to be taken I Expected completion date I Responsible body 1 I Preparation of a short guideline on recording I

I I and reporting of financial transactions as part 1 Before effectiveness I Borrower I

Opening o f bank accounts at the national and Before effectiveness 1 4 I regional levels Borrower

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Supervision plan

Implementation of PSCAP i s highly decentralized, involving a l l the regions and five federal ministries/authority, and envisages the utilization o f IDA support equivalent o f US$lOO million over a five-year period. The supervision requirements o f the Support Project wil l be intensive and should include at least two supervision missions per year, along with the agreed quarterly meetings of the Donor PSCAP Working Group with the Government on progress. Each supervision mission should include visits to the regions to verify that funds are being used for their intended purposes.

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ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS

ETHIOPIA: Public Sector Capacity Building Program Support Project

General

Procurement at the federal level i s regulated by (a) the Financial Proclamation No. 57/1996 which constitutes the Procurement Law, (b) the Financial Regulations No. 17/1997 issued by the Council o f Ministers, and (c) the Ministry o f Finance Directives - procurement and contracts, issued in 1997 and revised in 1999. Two Country Procurement Assessment Reviews (CPARs) were carried out in 1998 and 2002. The reviews include detailed diagnosis o f the current procurement system, its strengths, weaknesses and an action plan to address the weaknesses. The main weakness identified were (i) lack of an oversight body for policy and monitoring, (ii) weak procurement procedures, (iii) lack of a legal and regulatory framework, and (iv) lack of adequate procurement capacity.

The main recommendations and action plan of the CPAR include (i) enactment o f a procurement law, (ii) establishment o f a regulatory body, (iii) development of procurement directives, (iv) preparation of standard bidding documents, manuals and guidelines, and (v) implementation of a comprehensive capacity building (including training) strategy. The Government has accepted the recommendations of the CPAR and has established a taskforce to lead the procurement reform process. As part o f the procurement reform program the Government has drafted a new procurement code that i s expected to be enacted by July 2004. The code provides for the establishment o f an independent regulatory body and the Government plans to fully decentralize procurement functions to civil service institutions at the federal level staring from the middle of 2004.

The directives issued by the MOFED have been adopted by regions without major changes and are applicable for procurements done at the regional level. The directives provide waivers for procurement financed by donors or lending institution, and the procurement follows the guidelines and procedures of the donor or lending institution, if indicated in the financing agreement and the financier wants to exercise its right.

Use of Bank Guidelines and Standard Bidding Documents

Al l goods financed under the Support Project would be procured in accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits o f January 1995, lastly revised in January 1999. Bank Standard Bidding Documents for Goods, the Standard Pre-Qualification Document (if applicable) and the Standard Evaluation Forms shall be used.

Consultants wil l be selected in accordance with the Guidelines: Selection and Employment o f Consultants by World Bank Borrower of January 1997 lastly revised in May 2002. IDA’S Standard Request for Proposals (SRFP), the Forms of Contracts as needed (lump sum, time based, and/or simplified contracts for short-term assignments and individual consultants) as well as the Sample Form o f Evaluation Report for Selection of Consultants shall be used for all consulting assignments.

The Government i s planning to develop new standard bidding documents for the procurement o f goods, works and services. The National Bidding documents, when developed, can be used for national competitive bidding after verification by the Bank that the countries laws and procedures are acceptable. In order to be acceptable the national procedures should ensure that (i) bids wil l be advertised in national newspaper(s) with wide circulation; (ii) the bid documents clearly explains the bid evaluation and award criteria; (iii) bidders are given adequate response time (minimum four

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weeks) to prepare and submit bids; (iv) bids are awarded to the lowest evaluated bidder; (v) foreign bidders are not to be precluded from participation in NCB; and (vi) no domestic preference margins are applicable to domestic manufacturers and suppliers.

Advertising. The GPN was issued on March 6, 2004 in the United Nations Development Business (UNDB) and Development Gateway, listing the Program Components and goods, training, and consulting services for which specific contracts wil l be advertised. The Borrower wil l keep a roster o f the responses received from potential bidders interested in participating in bidding for contracts.

It i s not anticipated that there would be any contract with estimated value exceeding US$10 million. Specific Procurement Notices (SPN) wil l be published in at least one national newspaper o f wide circulation for contracts to be procured under ICB and NCB procedures and for consultant contracts with an estimated cost o f US$lOO,OOO or more to obtain expressions of interest (EOI) prior to the preparation o f the shortlist. The Borrower i s encouraged, in addition to national advertising, to advertise also in UNDB and DG-Market, in order to get the broadest interest possible from potential bidders. The Borrower may, advertise on the online version of the UNDB and the Development Gateway to save time. The date o f advertisement o f a specific contract should coincide with the date that the bidding documents are available for purchase by interested bidders. Sufficient time would be allowed (not less than 30 days) for NCB and not less than 45 days for ICB contracts.

Consultant contracts estimated to cost US$200,000 or more would be advertised on the online version o f Development Business or DG-Market and in an International or Technical Newspaper, in order to seek “Expressions o f Interest”. The Borrower wil l send a copy of this advertisement to those firms that have responded to the expressions of interest for consulting contracts listed in the GPN. The Borrower wil l wait at least two weeks after the advertisement has appeared requesting expressions of interest, before preparing the short l ist.

Procurement capacity

The Country Procurement Assessment Report (CPAR) done in 1998 and updated in 2002 has identified procurement capacity as one of the major weaknesses in public sector procurement. The procurement capacity assessments undertaken for the Program also confirm these findings. The assessments also concluded that the procurement risk was high at the regional and federal levels.

The Ministry o f Capacity Building (MCB) has a procurement unit under the BFD that was established recently during the implementation o f the CBDSD Project. This unit would play a major role o f coordinating procurement activities of the Program. However, the unit’s performance has not been very satisfactory. The regional BCBs generally use a pool service for conducting procurement that i s comprised o f members from different bureaus. The procurement handled by the regional procurement pool services i s mostly limited to small value procurement for internal use o f the offices and no international procurement has so far been done by the regions. Some regions have however members from the regional health and education bureaus that have some experience in international and World Bank procurement procedures.

The following six constraints were identified during the capacity assessment done of the EAs. First, the number o f procurement staff in each EA i s not adequate and a majority o f the staff have not participated in procurement training programs. Second, there is lack or very limited experience at regional level especially in selection o f consultants and international procurement. Third, the procurement unit at MCB and the pool system organizational setup o f the regional Procurement Units i s not adequate for handling the large volume o f procurement anticipated under the PSCAP. Fourth,

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the procurement records management systems are not adequately organized. Fifth, there i s no national and standard documents available for procurement of goods, and consulting services. Finally, some national procedures, especially on the procurement o f works are not acceptable.

In order to build capacity, one international consultant and two additional national procurement specialists with adequate qualification and experience would be recruited to the BFD to assist in the management o f the procurement functions and building procurement capacity. The advertisements for these consulting posts were issued prior to negotiation. The international consultant and two local procurement consultants shall be employed prior to effectiveness. The former shall be responsible for providing technical assistance and training in the management of procurement activities at federal level and regional bureaus, and for mentoring national procurement staff.

A comprehensive and intensive procurement training program would be conducted for procurement staff in each of the EAs for a l l staff that have not already participated in such type o f training. At least two staff from each EA that i s involved in the preparation of bidding documents, and evaluation of bids would participate in the training program. The training should cover all aspects o f procurement and focus on the identified weak areas such as: procurement planning and monitoring, selection of consultants, preparation of tender documents, and evaluation o f bids. The training program could include specialized training for selected staff at management training institutes in Africa such as ESAMI, GIMPA etc. The f i rst round of training would be conducted prior to effectiveness. An orientation workshops would be conducted to staff in the EAs that are involved in the procurement decision-making process including tender committee members, department heads, bureau heads with the assistance o f the international consultant during Program launch.

The number and qualification of the procurement staff in each EA shall be reviewed and additional staff shall be employed or assigned where shortages are identified. Each EA shall have a separate desk for procurement with at least two qualified staff with adequate training in procurement. Prior to the commencement o f any procurement function, relevant EAs including the BFD in MCB should submit participation agreements that confirm satisfactory compliance with eligibility criteria including establishment o f prescribed institutional arrangements; delineation of service standards for procurement and financial management; confirmation that staff involved in procurement have received necessary training, and national and international consultants involved in procurement are both qualified and appropriately tasked to carry out PSCAP related activities.

Procurement planning

Five-year drawing rights have been assigned to each EA and annualized in order to establish the f irst year’s budget envelope. Five-year PSCAP Action Plans prepared by federal EAs and regions are being revised within the medium-term resource envelopes. Furthermore, a draft consolidated procurement plan including all budgeted items for twelve months has been prepared prior to negotiations. The draft i s being further revised to reflect the period for the implementation o f the full procurement cycle for all the items including those that may last eighteen months or more, and wil l be further refined and finalized well in advance of effectiveness. It i s noted that this rolling procurement plan and the five-year Action Plan are to be regularly revised in line with the in-year and annual reallocation arrangements envisaged under this performance-oriented program. A draft Program Implementation Plan (PIP) incorporating operational guidelines has been prepared, and wil l be finalized as a condition for effectiveness.

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Procurement implementation arrangements

In i ts PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD at MCB shall be responsible for monitoring all procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In addition, the BFD i s responsible for handling all ICB procurement o f goods under the Program. National procurement o f goods and selection o f consultants would be handled as follows:

Procurement for the three programs under MCB (CSRP except expenditure management and control activities, JSRP except strengthening of the judiciary, and DLDP) wil l be handled by MCB procurement unit from preparation o f bidding documents and RFPs, until award of contract. The contracts for procurement o f goods would be signed by MCB. The contracts for the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specifications and terms o f references and technical evaluation o f bids and proposal.

Responsibility for procurement (expect for ICB o f goods) for the TSRP, UMCBP, ICT, expenditure management and control activities under the CSRP, and strengthening of the judiciary activities under the JSRP activities at federal level wi l l be carried by the Ministry o f Revenues, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), a designated office in MOFED, and the Federal Supreme Court respectively.

BCBs are responsible for handling all procurement activities, except ICB procurement o f goods, within the respective regions and city administrations (i.e,, Addis Ababa and Dire Dawa). Relevant lead institutions in each region would participate in the preparation o f procurement plans, specifications, Terms o f Reference, and technical evaluations of bids and proposals.

MFA i s tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-Gumuz and Gambella) in the management o f procurement as required.

It i s anticipated that procurement arrangements wil l evolve as capacity increases. Regional proposals for building up their procurement capability and for changes in procurement arrangements wil l be regularly reviewed semi-annually by IDA and donors.

Procurement methods (Table A)

Goods

The program wi l l finance office and field equipment, and supplies. To the extent possible and practicable, goods and equipment to be purchased under the program would be combined into packages worth at least US$150,000. Packages estimated to cost the equivalent o f US$150,000 or more would be procured under ICB procedures using Bank’s Standard Bidding Documents. Goods that can not be packaged and procured efficiently using ICB procedures wi l l as much as possible be packaged in sizable contracts to be awarded on the bases o f NCB procedures. Contracts estimated to cost less than US$150,000 equivalent would be procured using NCB. Procurement for readily available off-the-shelf goods that cannot be grouped together estimated to cost less than US$50,000 equivalent would be procured on the basis o f Shopping Procedures. Solicitations for National and International Shopping wi l l (a) be issued in writing to at least three reputable suppliers (it may be better to approach five or six suppliers because not all three suppliers may respond, so that at least three competitive quotations are received.), (b) include specifications, and if goods are not

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immediately available, the delivery time, (c) give the estimated cost, including cost o f inland transportation and insurance, (d) be opened at the same time for evaluation (to avoid abuse), and (e) in the case o f International Shopping quotations, be solicited from at least three suppliers from two different countries. Alternatively such goods may also be procured from UN Agencies (Inter-Agency Procurement Services Office or IAPSO) provided each individual contract does not exceed us$loo,ooo. Services

Consulting services shall include development o f legal frameworks and policies; training needs assessments for strengthening human resource and financial management skills; studies in organizational structures and functional assignments in rural districts and municipalities; development o f guidelines and manuals for new systems for improved service delivery, law reform; development o f WAN/LAN and other management information systems.

As a general rule, consultant services w i l l be selected through the Quality and Cost Based Selection (QCBS) method. For contracts estimated to cost less than the equivalent o f US$200,000 per contract, the shortlist may be made up entirely o f national consultants in accordance with section 2.7 o f the guidelines, provided that foreign consultants who wish to participate are not excluded from consideration. Indefinite Delivery Contract (IDC) procured by using QCBS method may be used for large contracts involving technical assistance taking into consideration the capacity limitation o f regional offices. Consultant for complex and highly specialized assignments with high downstream impact and assignments that can be carried out in substantially different ways may be procured under contracts awarded using Quality Based Selection in accordance with the provisions o f clause 3.2 o f the Consultant Guidelines. Services for audit and other similar services estimated to cost less than US 100,000 equivalent per contract may be procured under contracts awarded using least-cost selection method in accordance with the provisions o f clauses 3.1 and 3.6 o f the Consultant Guidelines. Consulting assignments costing less than US$lOO,OOO may be procured by using Selection Based on Consultants Qualifications (SBCQ) by comparing the qualification o f consultants who have expressed an interest in the job or who have been identified. Individual consultants will be selected in accordance with Section V o f the Guidelines. Services for tasks that meet the requirements o f paragraphs 3.8 to 3.1 1 o f the Consultant Guidelines may be awarded using the Single Source Selection method. Services for which a team o f Consultants are not required and meet all the requirements set forth in paragraph 5.01 o f the Consultant Guidelines shall be procured under contracts awarded to individual consultant in accordance with the provisions o f paragraphs 5.1 through 5.3 o f the Consultant Guidelines.

Training shall include human resource development in the areas o f financial and human resources management; justice system, tax system; information and communication technology; and urban management. Selection o f training institutes for workshopshraining for which the quality o f training i s o f critical importance and the training can be carried out in substantially different ways, the selection may be based on a competitive process using Quality Based Selection (QBS) method. For standard programs for which detailed course contents can be adequately defined in advance Quality and Cost Based Selection (QCBS) may be used.

Prior review thresholds (Table B)

All goods contracts estimated to cost US$l50,000 or more and the f i rs t contract under N C B wil l be subject to IDA review o f bidding documents prior to inviting for bids and bid evaluation reports prior to contract award.

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Single source selection irrespective o f value wil l be subject to IDA prior review. Consultancy contracts with firms with estimated value o f US$lOO,OOO or more, and consultancy contracts with individuals estimated to cost US$50,000 or more and the first contract wi l l be subject to prior review by the Bank in accordance with the procedures in Appendix I o f the Consultants Guidelines.

Contracts not subject to prior review wil l be selectively reviewed by the Bank during program implementation and wil l be governed by the procedures set forth in paragraph 4 o f Appendix I to the relevant Guidelines.

Procurement Methods (Table A) Table A: Program Costs by Procurement Arrangement

(US$ million equivalentl2

Expenditure Category

Goods & Equipment

Consultant Services

Training

Operating Costs

Total Program Cost Funded by IDA’S Support Project

ICB

30.7 (11.7)

0 0 0 0 0 0

30.7 (11.7)

Procurem NCB

it Method NSAS

28.0

0 0 0 0 0 0

28.0

(3.6)

(3 4

13.3

0 0 0 0 0 0

13.3 (2.7)

(2.7)

Others3

0 0

145.8 (37.0) 160.0 (40.0)

20.0

325.8 (5 .o>

(82.0)

Total

72.0

145.8 (37.0) 160.0 (40.0)

20.0

397.8

(1 8.0)

(5.0)

(100.0)

* Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies Includes goods to be procured through national shopping, consulting services, services o f contracted staff o f the project

management office, training, technical assistance services, and incremental operating costs related to managing the project.

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26.6

(6.7)

Annex 6, Table A2: Consultants Selection Arrangements (US$ mi l l ion equivalent)

CQ QCBS QBS IC Grand Total

26.6

(6.7)

A. Firms

Total

20.0 88.8 10.4

(5.6) (22.2) (2.6)

20.0 88.8 10.4 26.6 145.8 (5.6) (22.2) (2.6) (6.7) (37.0)

119.2 (30.3)

Expenditure Category

Goods

B. Individuals

Contract Value Procurement Contracts subject to Prior Threshold Method Review

Greater than 150,000 ICB A l l Less than 150,000 NCB First contract for each

Overall Procurement Risk Assessment: Frequency of procurement supervision

missions proposed:

High Once every six months (includes special procurement supervision for post-review/audits)

Table B: Thresholds for Procurement Methods and Prior Review (US$)

Note: ICB - International Competitive bidding; NCB -National Competitive bidding; NS/IS -National Shopping / International Shopping; QBS - Quality Based Selection; LCS - Least Cost Selection

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Table C: Allocation of Credit Proceeds Expenditure Category Amount in US$ million Financing Percentage

Expenditure Category

1. Pooled Funds

Expenditure financed under Subprogram activities, including goods, consultant services, training and operating costs, for:

(a) Federal Program (b) Regional Program

Z. Non-Pooled Funds

Expenditure financed under Subprogram activities, including goods, consultant services, training and operating costs, for:

(a) Federal Program (b) Regional Program

3. Refunding of the PPF

Total

(1) Goods - the amounts shown here include all I

Amount (US% million)

13.22 54.91

6.48 25.09

0.30

100.0

Financing Percentage

Such percentage o f Pooled Fund expenditures as the Association may determine for each Fiscal Year

100% o f foreign expenditures and 85% o f local expenditures

Amounts due pursuant to Section 2.02 (c) o f the DCA

1 procurement across P S C M (Federal & Regional); (2) Consultants - the amount shown includes the estimated cost o f procurement o f international consultants (Federal & Regional Programs) (3) Training - the amount represents federal training activities. (4) Programs - the amount represents estimated costs o f goods & consultants to be procured locally and al l training activities at the regional level. (5) Operating Cost - the amount represents the recurrent cost estimate. (6) Unallocated - the amount represents the 12% contingency across al l categories to meet any unforeseen price and physical variations & exchange rate fluctuations during the implementation o f the program.

DISBURSEMENT ARRANGEMENTS

The closing date o f the proposed Credit wi l l be July 7, 2009 The proposed IDA credit would be disbursed against the categories shown in Table C in Annex 6. Disbursements wil l be made in accordance with procedures and policies outlined in the Bank's Disbursement Handbook.

The Support Project will utilize the traditional disbursement method for disbursing IDA funds from the Non-Pooled Funds category, that is, based on SA, SOE procedures and direct payment procedures (see Uses o f Statement o f Expenditures below). As a basis for disbursing IDA funds from the Pooled Funds category, the Borrower, the Bank, and relevant pooled donors (or cooperating partners) will

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need to (i) execute an MOU as well as annual Side Agreements governing the proportion o f expenditures to be replenished by respective cooperating partners, and (ii) agree on a satisfactory SOE format-with sufficient detail-for pooled fund expenditures to be replenished from the SA. To ensure that parallel and differing SOE and disbursement procedures are not introduced under the Program, the Borrower and the Bank wil l ensure that disbursement from the Non-Pooled Funds category will cease, and remaining funds reallocated to the Pooled Funds category once utilization o f the pooling arrangements i s initiated.

At this stage, the capacities at all levels seem very low in terms o f producing the regular financial and other reports required to sustain report-based disbursements by project launch. The Government and the Bank have therefore agreed that disbursement from IDA w i l l follow a traditional disbursement method at the outset. Over time, it i s anticipated that the Government would transition first, to the more detailed SOE format describe above, and eventually, to a report-based method-comprising regular Financial Monitoring Reports (FMRs) plus additional statements-to facilitate disbursement from the Pooled Funds category.

Uses o f Statement of Expenditures (SOEs)

Disbursements made on the basis o f SOEs, as described above, will be as follows: (a) for goods and grants on all contracts less than US$150,000; (b) for individual consultants on all contracts less than US$50,000; (c) for consulting firms on al l contracts less than US$lOO,OOO and (d) for training and workshops, and operating costs on all contracts regardless o f the amount. The Borrower w i l l retain all the supporting documentation for SOEs, including completion reports and certificates, at the point o f transaction. The supporting documents w i l l be made available to IDA during Program supervision and wil l be audited annually by independent auditors acceptable to the Association. Disbursements for expenditures above these thresholds wil l be made against presentation o f full documentation relating to those expenditures. During the launch workshop, a session on preparation o f withdrawal applications, including the preparation and submission o f required supporting documents i s required.

Special Account

To facilitate disbursements against eligible expenditures under the Credit, the Treasury Department o f MOFED will establish an SA in the National Bank o f Ethiopia. The authorized allocation for the Special Account w i l l be US$15,000,000. Upon effectiveness, IDA shall make an initial deposit up to US$8,000,000 into the Special Account. Once the total disbursements from the Credit account, including commitments, have reached an aggregate amount o f SDR 15,000,000, the initial allocation may be increased up to the authorized allocation. The CFU wil l submit replenishment applications at least once a month.

Counterpart funds

The Government shall open a local currency account at the NBE and shall deposit Birr 9,000,000 for the first program year and subsequent deposits by February 15 and July 15 o f each fiscal year.

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Project Schedule Time taken to prepare the project (months) First Bank mission (identification) Appraisal mission departure Negotiations Planned Date of Effectiveness

ANNEX 7: PROJECT PROCESSING SCHEDULE

ETHIOPIA: Public Sector Capacity Building Program Support Project

Planned Actual 11 months 21 months July 2002 July 2002

March 2003 January 2004 April 2003 March 2004 July 2004

Bank staff who worked on the project included:

Task Team Leader, overall design Review o f overall design, operational support

Education sector

Review o f program design, operational support

ent assessment and related issues

Bank funds expended to date on project preparation: 1. 2. Trust funds: Not Applicable 3. Total: US$328,143.51

Bank resources: $158,684.38 in FY2003; $169,459.13 in FY2004

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Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$lO,OOO 2. Estimated annual supervision cost: US$170,000

Donor members o f PSCAP Working Group who worked on the project included:

Multi-donor team members DfID S. Lister, Consultant, Expenditure Management K. Brown, Consultant, Civil Service Reform R. Mellors, Consultant, Decentralization M. Frazer, Consultant, Expenditure Management K. Gebreselassie, Expenditure Management C. Fumo, Social Development R. Blandon, Tax Systems Reform CIDA C. Piggott J. Rivard S. Racine, Justice Systems Reform DCLlIreland S. Assefa GTZ/Germanv H. Matthaeus, GTZ, Urban Management IMF A. Kyei, IMF, Tax Systems Reform M. Netsere, IMF, Tax Systems Reform Italian Cooperationfltaly A. Cecci, Urban Management Netherlands A. De Boer P. De Keizer M. Vogels SIDA E. Korsgren P. Sevastik, Consultant, Justice Systems

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ANNEX 8: DOCUMENTS IN THE PROJECT FILE

ETHIOPIA: Public Sector Capacity Building Program Support Project

A. Correspondences During Preparation . Letters to Ministry o f Capacity (MCB) Building regarding PSCAP World Bank, Comment on PSCAP Action Plan Guidelines to Director o f MCB External Relations and Resource Mobilization, June 6,2003 World Bank, Feedback on PSCAP Action Plan Preparation Process to the Minister o f Capacity Building, August 6,2003 PSCAP Donor Group, Donor Follow up on Pre-appraisal to the State Minister o f Capacity Building, November 24,2003 World Bank, Management Visit to Minister o f Capacity Building, November 17,2003

World Bank, Follow Up on World Bank Management Visit, November 24,2003

MOFED letter on specific purpose grant MCB letter on institutional arrangements

o

o

o

o

o

o o

. Letter to MOFED

. Letters from Government

B. World Bank and Joint Mission Aide-Memoires During Preparation . . . Capacity Building Mission, July 2001 PSCAP Identification Mission, Aide Memoire, July 8 -August 29,2002 PSCAP Preparation Mission, Aide Memoire, February 12-28,2003 PSCAP Pre-Appraisal Mission, Aide Memoire, September 15-26, 2003 PSCAP Appraisal Mission, Aide Memoire, January 26-February 10,2004

C. Government Documents, Action Plans, and Related Materials National Program Document Vol I and II,2003/04 - 2007/08 . PSCAP Concept Document, May 2002 . Federal PSCAP Plans

o Expenditure Management and Control Program - Strategic Plan o Federal PSCAP Plan - Civil Service Reform Program (CSRP) o Federal PSCAP Plan - District Level Decentralization Program (DLDP) o Federal PSCAP Plan - ICT o Federal PSCAP Plan - Justice Sector Reform Program (JSRP) o Federal PSCAP Plan - Tax System Reform Program (TSRP) o Federal PSCAP Plan - Urban Management Capacity Building Program (UMCBP)

Regional PSCAP Plans o Addis Ababa City Government PSCAP Action Plan o Afar National Regional State Government PSCAP Action Plan o Amhara National Regional State Government PSCAP Action Plan o Benishangul-Gumuz National Regional State Government PSCAP Action Plan o Dire Dawa City Government PSCAP Action Plan o Gambella National Regional State Government PSCAP Action Plan o Harari Peoples National Regional State Government PSCAP Action Plan o Oromiya National Regional State Government PSCAP Action Plan o SNNPR Government PSCAP Action Plan o Somali National Regional State Government PSCAP Action Plan o Tigray National Regional State Government PSCAP Action Plan

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First PSCAP Design Workshop, May 9-10,2003 Joint Government - IDA Communique, May 9- 10,2003 0

0 0

0 0

0

0

0 0 0 0 0 0

0

0

0 0

Welcoming Note - World Bank, May 9-10,2003 Group Questions for Breakout Session, May 9-1 0,2003 Summary o f Breakout Session, May 9-10,2003 Civil Service Reform Program - Presentation, May 9-1 0,2003 Information, Communication and Technology - Presentation, May 9- 10,2003 Urban Management Capacity Building Program - Presentation, May 9-1 0,2003 Tax System Reform Program, May 9-10,2003 Justice System Reform Program, May 9-10,2003 Regional Perspective: Amhara, May 9-10,2003 Regional Perspective: Benishangul-Gumuz, May 9-1 0,2003 Regional Perspective: Oromiya, May 9-1 0,2003 Regional Perspective: World Bank, May 9-1 0,2003 Sectoral Perspective: Health, Tigray, May 9-1 0,2003 Sectoral Perspective: Primary Education, Amhara, May 9-1 0,2003 Sectoral Perspective: Performance Management, DfID, May 9-1 0,2003 Sectoral Perspective: Urban Services, Addis Ababa, May 9-10,2003 . Agenda, Thematic Notes and Minutes o f the PSCAP Action Plan Preparation Workshops

o o Awassa, June 21-22,2003 o Bahir Dar, July 5-6,2003 o Adama, July 19-20,2003 o Makale, August 1-3, 2003

Addis Ababa with Emerging Regions, June 18-19,2003

' . '

.

Ethiopia: Progress in Implementation o f Tax Reform, November 18-22,2003 Implementing Capacity Building Strategy and Program, Unofficial Translation, February 2002 Oromiya Bureau o f Finance & Economic Development, Decentralization Process in Oromiya, October 2002 Oromiya Bureau o f Finance & Economic Development, Learning Decentralization by Doing- Financial Decentralization in Oromiya, October 2002 Tigray Bureau o f Finance & Economic Development, Highlight on the Framework o f the Financial Management, October 2002 Tigray Bureau o f Finance & Economic Development, Summary Notes on the Exercised Endeavors to Strengthen Decentralization, October, 2002

D. CommuniquCs, Press Releases, and Newsletters '

' '

Frontline httu://www,worldbank,ordafr/et/uscap,htm PSCAP Website: http://www.worldbank.orcr/afr/et/pscap,hm

World Bank, Oromiya Regional State Joint Communique, November 4-7, 2002 World Bank, Amhara Regional State Joint Communique, February 24-26,2003 World Bank, Tigray Regional State Joint CommuniquB, October 28-November 1,2002 World Bank, CAS Workshop on Decentralized Service Delivery, Joint Communique World Bank, CAS Workshop on Capacity Building, Information Note

Background Notes, Papers, and Assessments By World Bank, and Multi-Donor Teams . '

'

AFRITAC, Report on Cash Management World Bank, Concept Note on Federal Legislative Framework for Urban Land Management in Ethiopia, March 2,2003 World Bank, Committing to & Monitoring Capacity Building Outputs through PSCAP Action Planning, July 19,2003 World Bank, Output Oriented Action Plans for PSCAP, Presentation, July 19,2003.

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World Bank, Political and Administrative Accountability Review, Background Note to IGR World Bank, Design Options: PSCAP Grant and Drawing Rights Approach, Background Note World Bank, PSCAP: Informatics, Presentation World Bank, PSCAP: Platform for State Transformation, Presentation World Bank, PSCAP Regional Technical Notes on Decentralization, Municipal Development and Civil Service Reform

o Tigray, October 28-November 1,2002 o Oromiya, November 4-7,2002 o Amhara, February 26-28,2003

World Bank, Cost o f Decentralization, Background Note, April 2003 World Bank, Financial Management Assessment Report, February 2004 World Bank, Procurement Assessment Report, February 2004 World Bank, Social Appraisal Report, April 2004 DfID, Review o f Capacity Building Approaches for Local Government, July 2003

Inputs from World Bank Sector Teams . . . . . . . . . . .

World Bank, Minutes o f Community Empowerment World Bank, Brainstorming Minutes on Decentralized Fiscal Support for Infrastructure World Bank, Programmatic Design o f Community Empowerment, Background Note World Bank, Education Team Note on PSCAP World Bank, Education Team Note on PSCAP - Prototype Capacity Development Matrix World Bank, Environment Team Note on PSCAP World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia-2 World Bank, Note from Infrastructure Team World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Road World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Energy World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Water World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Urban Development

Economic and Sector Works . . . .

Multi-Donor/GOE, Country Financial Accountability Assessment, March 3 1,2003 World BanWGOE, Country Procurement Assessment Report, March 2003 World Bank, Woreda Studies-Volume I, January 2002 World Bank, Woreda Studies-Volume 11, January 2002 World Bank, Municipal Decentralization in Ethiopia, July 2001 World Bank, Issues in State Transformation: Decentralization, Delivery and Democracy. An Institutional Governance Review Concept Note

Donor Coordination and Harmonization . . . . . . PSCAP Donor Working Group Members Minutes o f PSCAP Donor Working Group Meetings, March 14 and 19,2003 Minutes o f PSCAP Donor Working Group Meetings, July 16,2003 Minutes o f PSCAP Donor Working Group Meetings, August 13,2003 Minutes o f PSCAP Donor Working Group Meetings, August 27,2003 Minutes o f PSCAP Donor Working Group Meetings, November 1 1-1 8,2003 Bilateral Donors, Harmonization Issues Note, February 10,2004

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ANNEX 9: KEY FEATURES OF RESOURCE ALLOCATION AND MANAGEMENT: EXCERPT FROM THE PROGRAM IMPLEMENTATION PLAN

ETHIOPIA: Public Sector Capacity Building Program Support Project

This chapter describes resource allocation and resource management arrangements under PSCAP. This includes an explanation of the Program’s rules o f access and allocation for drawing rights; i t s appraisal criteria for plans from federal and regional institutions; i t s planning, budget, and execution system with the Government’s public financial management (including the chart o f accounts and financial calendar); and finally, PSCAP’s performance-oriented execution and reallocation features.

Specific-purpose federal program

As a specific-purpose federal program, PSCAP serves as a pillar of Ethiopia’s evolving intergovernmental fiscal system. The Program allocates five-year drawing rights to additional federal resources across federal and regional beneficiary institutions. Failure to utilize these time-bound rights results in their reallocation from poor performers to high performers within a given fiscal year and across fiscal years. These performance oriented features of PSCAP represent an important innovation in terms o f the design of fiscal transfers within the Ethiopian public finance system.

At the same time, the basic planning, budgeting, and execution system of Program i s fully with the requirements of the Government’s public financial management as well as i t s SDPRP monitoring systems. Federal and regional institutions participating in PSCAP use the Government’s chart o f accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term and annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government’s system i s designed to ensure that the planning and execution of capacity building activities i s undertaken in a flexible manner in line with the changing demands on the ground. I t i s also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financed and implemented in GOE’s state transformation process (Table 3).

Budget classification of PSCAP expenditures

The Government o f Ethiopia’s Chart o f Accounts wi l l be utilized to plan, budget, and report on PSCAP expenditures. Specifically, PSCAP wi l l be proclaimed annually by Cabinet in the GOE budget as aprogram under the MCB, which i s designated as apublic body. Allocations to the 6 eligible federal institutions and the 11 regions wi l l be proclaimed under PSCAP subject to mid-year reallocations based on performance.

Coding and Classijication of the Federal Component. PSCAP budget coding and classification for the federal level allocation wi l l be structured as follows: (a) Public Body codes wi l l be designated as “Ministry o f Capacity Building”; (b) Program code wi l l be designated as “Public Sector Capacity Building”; (c) Sub-Agency codes wi l l only be designated for the CSRP, DLDP and JSRP as “Planning and Programming Department; (d) Subprogram codes wil l be designated as Ministry o f Revenue; Ministry o f Federal Affairs; Ministry o f Finance and Economic Development; Information, and communication Technology Development Authority; and (e) Project code wi l l be designated for each subprogram (i.e. Urban Management and Reform Project, Tax Systems Reform Project, Information & Communications Technology Reform

- 87 -

Project, Civil Service Reform Project, District Level Decentralization Reform Project, Justice Systems Reform Project, and Program Support Project).

Coding and Class$cation of the Regional Component. PSCAP budget coding and classification for the regional level allocation wil l be structured as follows: (a) Public Body code wi l l be designated as “Ministry o f Capacity Building”; (b) Program code wi l l be designated as “Public Sector Capacity Building”; (c) Sub-Agency code wil l be designated; (d) Subprogram code wil l designated for each region (Le. Tigray Public Sector Capacity Building, Afar Public Sector Capacity Building, Amhara Public Sector Capacity Building, etc.); and (e) Project Code wil l be designated for each regional subprogram (Le. Civil Service Reform Project, Justice System Reform Project, Tax Systems Reform Project, Urban Management Reform Project, Information & Communications Technology Reform Project, District Level Decentralization Reform Project, and Program Support Project).

Rules of access o r eligibility criteria

PSCAP i s envisaged as a nation-wide program, designed to help remedy the severe public sector capacity constraints at the federal, regional, and local levels. To ensure the consistency of PSCAP activities undertaken by a wide array o f beneficiaries with national policies and priorities, the Government has established clear rules o f access. These access rules or eligibility criteria are detailed below and should be met by federal lead institutions as well as regions before their annual implementation plans can be considered for financing under the Program:

1.

2.

3.

4.

5.

Signed “Participation and Performance Agreement” by the relevant minister responsible for federal subprogram or relevant cabinet member in the case o f regions (sample participation and performance agreements are included in Section 4 of this PIP).

Establishment o f appropriate governance and implementation arrangements;

Completion of relevant capacity assessments across all participating sectors and levels of participating institutions, especially in the case o f woreda and municipal strengthening;

Timely submission of endorsed costed medium-term rolling plans, as well as technically sound, feasible annual implementatiodprocurement plans in line with financial calendar;

Explicit provision for evaluation o f annual performance including dissemination to the public o f such evaluations, satisfaction score cards, etc, as part o f the consultative planning process.

Inputs from various nation-wide reviews

As key inputs to the PSCAP planning, budgeting, and execution process, several review processes should be underway at the close o f any given fiscal year. Specifically, the Government i s responsible for consolidation o f PSCAP outturn data (based on Statements of Expenditures) for the previous year by subprogram and region. These data are compiled in the form o f a consolidate physical and financial report by the Planning and Programming Department and submitted as an input to the Joint Annual Performance Review Mission (ARM) no later than September 30. The ARM for PSCAP is held not later than October 1 each year and its findings-widely distributed-should serve as inputs to the SDPRP Annual Progress Report (to be issued in late October each year) as well as the annual multi-year planning exercise for PSCAP (see below).

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Fiscal framework-medium-term projection and division of PSCAP resources

Each year, during the Government’s multi-year planning exercise, the Ministry o f Finance and Economic Development (M0FED)-in close consultation with the Ministry of Capacity Building (MCB)-will ensure the medium-term projections of available PSCAP resources from external and Government resources-stimated in Year 0, February 2004, to be approximately Birr 3.3 billion over the 5 year planning period-are appropriately reflected in the Macro-Economic and Fiscal Framework (MEFF), which i s prepared no later than October 26.

Once the overall available pool o f resources available over the medium-term has been established, both Ministr ies wi l l initiate a formal dialogue with relevant PSCAP stakeholders such as lead institutions and regional governments on the vertical and horizontal division o f resources and issue revised medium-term indicative planning figures for federal subprogram and regions no later than November 10. Guidelines for the vertical and horizontal split are described below and should provide the basis for joint Government-donor review:

Vertical Division of PSCAP Resources in the First Year and Subsequent Years. During program preparation, an original 80-20 percent vertical division o f PSCAP resources (drawn from domestic and donor sources) over five years was effected between regional and federal levels of government respectively. Each year, the actual allocations for federal and regional components of PSCAP should be revised on changes in resource projections. Changes in the proportions between federal and regional allocations (Le., the 80-20 split) should be undertaken in a transparent manner, in dialogue with federal and regional authorities, no more frequently than once a year, and on the basis of clear criteria such as the previous year’s performance as well as existing multi-year commitments at the federal and regional levels.

Horizontal Split of the Regional PSCAP Component in the First Year and Subsequent Years. Once the vertical split has been reviewed each year, a horizontal split o f the regional component i s undertaken on the basis of the established formula for the federal-regional subsidy as well as re-pooled drawing rights which high performers could draw down. The formula consists o f three factors-the region’s population, i t s level o f development gap, and i t s previous years’ own revenue performance-weighted at 65%, 25%, and 10% respectively. During program preparation, the above-mentioned formula was applied and five-year drawing rights were assigned to each region.

Each year, up to 50% o f the five-year drawing rights o f individual regions wil l be subject annual reallocation from poor performers to high performers. Reallocation recommendations by the PSCAP Federal Technical Team wi l l comply with the following rules and be clearly communicated to all regions and federal institutions:

1. A cut-off point o f fund utilization (as evidenced by SOE replenishment requests) and activity-based performance, 75% in both cases, wi l l be established. Regions performing above this cut-off point are not subject to reallocation.

2. A minimum entitlement equivalent to 25% o f the approved annual plan in any given year wi l l be established for all regions to ensure that under-performers continue to have incentives and resources to establish a the minimum statutory level o f capacity.

3. At end-year, poor performers or those with 25% or less o f fund utilization and activity-based performance wil l have 50% o f their remaining five-year drawing rights re-pooled and reallocated to high performers purely on the basis of performance ranking.

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4. All such reallocations wil l be reflected in readjustments to their overall five-year envelopes.

In future years, the formula as well as rules for annual reallocation wil l be reviewed and revised as necessary and any changes or modifications, wi l l be made on the basis of extensive consultations, and widely publicized to a l l regions and related beneficiaries.

Planning-aligning with Public Investment Program (PIP) preparation

As one o f the Federal Government’s major capital spending initiatives, PSCAP i s reflected within the Government’s Public Investment Program. PSCAP planning i s therefore integrated and aligned with the PIP preparation timetable, as laid out in the financial calendar.

Accordingly, following the issuance of revised indicative medium-term planning figures, federal lead institutions and regions (under the guidance of their Regional Technical Teams) undertake and submit to the PSCAP Federal PPD their revised and appropriately costed rolling five-year PSCAP Action Plans no later than December 25. As noted in the eligibility criteria, the revisions of these plans should be undertaken in a participatory manner involving consultations with various regional and local stakeholders. Revisions of the PSCAP Action Plans should reflect the public sector capacity building priorities identified in woreda and municipal development plans.

The Federal Technical Team (FTT), MCB, and MOFED review and finalize revised medium-term consolidated PSCAP Action Plans (by federal and regional components) no later than February 8. As part o f this exercise, on the recommendation of the FTT, both ministries finalize the Annual Fiscal Plan for PSCAP part o f the Government’s overall fiscal plan) no later than January 24.

Budgeting-Preparation, Appraisal Adoption, Execution, and Re-allocation

Based on the Annual Fiscal Plan (Le., the annualized drawing rights), federal lead institutions prepare their PSCAP budgets along with annual procurement plans no later than March 1. These are submitted to the FTT via the Planning and Program Directorate (PPD) for appraisal and review. Similarly, regions submit their annual budgets and procurement plans to the Federal PPD no later than February 22 so that their Regional Technical Teams can pre-appraise, review, endorse, and submit their plans to the FTT no later than March 1. Regional Technical Teams, under the guidance o f respective BCBs, are expected to have prepared their matching budgets for PSCAP activities (for example, for civil works and ongoing recurrent or O&M) at the same time.

The FTT then reviews and appraises annual implementation and procurement plans under the federal and regional components against the following appraisal criteria established within and across subprograms:

1. The relevance of planned activities given existing assessments i s established, as well as provisions for additional assessment where required are included;

2. Prioritization of the “minimum mandatory” capacity building--especially with regard to financial management, procurement, and related program support activities-is established as a necessary precursor to any more advanced activities;

3. Demonstration that civil works required to house any goods (e.g. especially ICT) are in place, and that budgetary provisions have been made for additional upfront civil works and ongoing recurrent as well as operations and maintenance requirements o f goods procurement;

- 90 -

4. Evidence that annual plans are based on consultation with key stakeholders including local governments, regional bureaus, communities, and other stake holders, and that this consultative planning process becomes increasingly “bottom up’’ in each successive year as evidenced by steadily increasing numbers of woreda and municipal action plans, formal public consultations, participation of reference and focus groups in the planning process;

5. Sector-specific criteria such as sequencing, the previous year’s performance, and the submission o f relevant TORS.

6. Explicit focus on issues related to gender and HIV/AIDS mitigation.

It i s anticipated that the FTT wil l need to provide comments and suggest revisions in federal and regional plans as a basis for finalizing annual implementation and procurement plans. Once revised, the plans should be submitted to IDA for no objection no later than March 15. The FTT finalizes these plans for the federal and regional components no later than March 22 and submit them for cabinet approval.

PSCAP’s annual plan for the Year Y+l wil l be submitted along wit the overall budget to the Council o f Ministers no later than May 22. Matching requirements in regional budgets (for civil works and recurrent costs) wi l l be submitted to regional cabinets at the same time. The Cabinets should recommend the federal and regional budgets inclusive o f PSCAP budgets no later than June 2. Approval and adoption by federal and regional legislatures wil l be undertaken roughly between June 8 and July 2, in anticipation of the coming fiscal year.

Execution and Mid-year Reallocation

Once proclaimed and allocated, execution of PSCAP budgets begin at the start o f the fiscal years on July 8. Following an initial release to cover implementation financing requirements for up to the first quarter, funds are released to federal lead institutions and regions for monthly reimbursement against consolidated SOEs.

Mid-year Reallocation Rules. PSCAP also envisages mid-year reallocation o f annualized drawing rights, Le., a re-appropriation between regions within a federal budget line. Key performance criteria used as a basis for these in-year adjustments are SOE submissions and activity-based progress reports. Accordingly, federal lead institutions and regions submit their consolidated reports on year- to-date SOE submissions and activity-based performance, as well as projected budget utilization through the end o f year Y to the Federal Technical Team (FTT) no later than January 22.

The FTT wil l recommend in-year reallocations across regions on the basis o f the following rules (similar to those applicable for annual reallocation), which are to be clearly reiterated to all regions and federal institutions at the start o f each year:

1. A cut-off point o f fund utilization and activity-based performance, 75% of projected cash flows in both cases, wi l l be established. Regions performing above this cut-off point are not subject to reallocation;

2. A minimum entitlement equivalent to 25% o f the approved annual plan in any given year wi l l be established for all regions to ensure that under-performers continue to have incentives and resources to establish a the minimum statutory level o f capacity;

-91 -

3.

4.

5.

At mid-year, poor performers or those with 25% or less o f fund utilization and activity-based performance wil l have 50% of their remaining annual drawing rights re-pooled and reallocated to high performers;

In-year reallocations wil l be reflected in readjustments to the annual and five-year envelopes;

Access rules for high performers seeking to draw down on re-pooled drawing rights are the submission of revised plans (with revised projections for utilization through end-year), compliance with financial and physical reporting requirements, and satisfactory achievement o f the in-year cut-off point.

The FTT wi l l hold discussions with regions on i t s review and recommendations for in-year reallocation between regions within annualized budgets no later than February 8. Following these discussions, the reallocation proposal wi l l be submitted for no objection by IDA on February 15, and then MCB and MOFED issue in-year reallocations between regions and federal institutions no later than February 22.

The Role of the Supplemental Budget. In the case in-year reallocations prove insufficient for high performers, MCB may seek to draw down on future years’ annualized drawing rights or allocations. In such cases, high performers should demonstrate nearly full (over 85%) utilization of annual drawing rights and realistic projections for utilization that exceed available resources from in-year reallocation. Once reviewed by the Federal Technical Team, the proposed use o f future annualized drawing rights (financed in part o f fully through IDA support) through the Government’s supplemental budget mechanism should be submitted to IDA for no objection. Following IDA’S no objection and finalization by the MCB, allocations within the supplemental budget for high performers wil l be finalized and communicated the EAs in questions as well as all other stakeholders involved in PSCAP.

I I t I

I

m a I

N E 3 I

R 3

I

i z .t

7 C :

c 7 4 a f w " E c U

I6

- 94 -

ANNEX 10: HARMONIZATION ISSUES FOR BILATERAL DONORS-PREPARED BY BILATERAL MEMBERS OF PSCAP JOINT GOVERNMENT-DONORS WORKING GROUP4

ETHIOPIA: Public Sector Capacity Building Program Support Project

Introduction

This note i s intended to encourage strong bilateral support for the PSCAP and to clarify joint thought amongst all donors about how and under what conditions, commitments should be made to PSCAP, and the implications arising therefrom. Donors acknowledge that an enormous amount o f effort has gone into planning and developing the Programme so far, mainly by the GoE and the World Bank. I t must also be acknowledged that the GoE i s already implementing some of the PSCAP programmes with i ts own resources. Bilateral donors are much encouraged by:

9 . 9 . 9

Government’s expressed determination and commitment to address the capacity building needs o f the country; Government’s desire to establish a comprehensive, holistic and integrated approach to capacity building under one umbrella programme; High level o f ownership o f PSCAP plans by the regional governments o f the country; The overall intergovernmental design and drawing rights approach; and The general content o f the subprogrammes o f PSCAP.

There are, however, some design and programming issues which need to be considered for PSCAP implementation, over which the donors (and IDA) have serious and valid concerns: inter alia the quality o f the various plans, the approach in some components, gender and HIV/AIDS analysis and mainstreaming, the sustainability o f the heavy ICT investment, monitoring and evaluation arrangements and the planning and resource allocation timetable. However, it i s fe l t that further efforts at this time to resolve all o f these issues are more likely to hinder the process o f project formulation and approval. Rather, the emphasis should now be on how to best optimise bilateral and IDA contributions and facilitate a learning process in the programme as it proceeds. It i s considered likely that much o f the programme will get o f f to a slow start given the lack o f capacity for procurement and the giant step that s t i l l has to be made in most o f the programmes from the present plans to actually doing something. I t i s also likely that the enormous challenges the programme i s posing in terms o f content, approach and implementation management wil l necessitate continued revision o f plans, especially over the first 2 or 3 years. As already indicated at the Pre-Appraisal stage, the Promamme should therefore be seen vew much as a learning bv doing process.

Three critical issues stand out which require resolution before implementation. These are: 9 . . Harmonisation procedures

If and how the bilateral donors should engage; Confirmation o f the approach to capacity building; and

Bilateral donor engagement

The GoE objective i s to design and implement a single, multi-donor solution to the public sector capacity building challenge, and their desire i s for al l bilaterals to j o in with IDA to support this programme. To

Specific donor agencies represented in the drafting o f the note during the appraisal of the program included DffD, CIDA, DCI, GTZ, Netherlands, and SIDA.

- 95 -

become committed, bilateral donors intending to participate should endorse the overall programme design and implementation arrangements. There are 3 basic options open to them: . Stay on the outside if they have strong reservations or incompatible agreements with their current

programmes, leaving PSCAP largely to the Bank and the GoE. Make minor contributions on the margins. Get fully involved as either a pooling or non-pooling donor, and seek to influence the course of the Programme from the inside.

I t can be clearly argued that Ethiopia deserves a chance to implement PSCAP even if their plans could be further improved. Options 1 and 2 leave one on the outside o f one of the ‘biggest development efforts town’ and could be interpreted as a reluctance to respond to GoE plans and priorities. Also, the opportunity costs of trying to undertake and negotiate parallel programmes to PSCAP would likely be higher given that the space wi l l be restricted. There are strong arguments, if one i s to be involved at all, to fully embrace PSCAP and seek to join a learning process through option 3.

Confirmation of the approach to capacity building

There are a variety o f approaches evident in the PIP covering the range from demand to supply driven, but in some of the subprogrammes there i s an inappropriate emphasis on deficit analysis followed by ‘prototype design’, top down delivery and bulk training. PSCAP will, however, inevitably become a learning process, with some aspects succeeding and others requiring modification as implementation proceeds. Since PSCAP i s intended to be transformational, it must give strong emphasis to planning and implementation approaches which are highly participative and which promote ownership of development plans and capacity building by citizens and officials at all levels. As both bilateral donors and IDA can bring considerable lessons learned from their current programming, there should be a strong commitment by all donors to incorporating those lessons learned from their current programming into the PSCAP process. MCB has demonstrated considerable openness to the views o f various stakeholders regarding design, but it would be desirable for it to confirm i t s position regarding their capacity building approach.

Similarly, the monitoring and evaluation system should be a driver o f a participative learning process rather than a formalised recording system for central government and donor consumption. The GOE has shown a commitment in the PIP to biannual (and quarterly) review mechanisms, therefore, it behoves al l donors to be fully engaged in the review process.

The implications of a more demand driven learning approach are significant in terms o f the nature and scale of the review process. This should not be a ‘business as usual’ presentation o f routine data. Rather, it requires a more collaborative and elaborate mechanism for review of experiences, analysis o f problems and development of new solutions through an action-reflection process. Woreda, Regional and Federal level review meetings thus become fundamental learning fora. There i s an obvious need to develop a clear TOR for a joint GovernmentDonor Review process. This platform wi l l enable problems to be jointly owned and resolved by both the actors themselves and the donors. Now is an appropriate time, particularly for the Bilateral donors, to make firm commitments of time and the sharing o f resources necessary to participate fully in ALL Regional and Federal Reviews, if donors are to have any hope of being adequately informed on the issues from all 6 subprogrammes in all 11 administrative regions. It i s obvious a careful sharing o f resources and responsibilities wi l l be required to ensure effective coordination across all subprogrammes at both the federal and regional levels.

- 9 6 -

Donor harmonisation

It i s important for non-IDA donors, who now wish to become fully involved and strengthen this learning process, to iron out and harmonise their respective positions. It i s also no longer acceptable to simply leave the key donor role to the World Bank, as has happened during the preparation phase. The GOE and World Bank have taken steps to encourage full bilateral participation through a number o f harmonization approaches in Ethiopia, such as the PRSC, SDPRP and PSCAP. A l l participating donors should therefore take up responsibilities for supervision and involve themselves fully, if they want their perspectives to be taken into account. It i s also important that GoE and all donors maintain dialogue on harmonisation throughout implementation. Harmonisation should promote policy dialogue aligned to the SDPRP cycle, taking into account the concerns of pooled and non-pooled partners to PSCAP. The following issues represent the consensus views of bilateral donors in terms o f harmonisation:

Pooling offers the most straightforward and coherent arrangement and simplifies the implementation management for what i s a wide-ranging and complex programme. I t should be encouraged. Budgetary off-set and the full additionality o f PSCAP resources are compelling reasons to support PSCAP through the pooling arrangement. For various reasons, however, some donors may be unable to join this arrangement, although they wish to be fully involved in PSCAP and to integrate their activities as closely as possible. This should also be accommodated.

On-going bilateral programmes: Several bilateral donors are presently engaged in on-going programmes which closely relate to the scope of PSCAP. Wherever possible, donors and the GoE agencies which they are supporting should endeavour to harmonise the planning and implementation arrangements for their programmes with those being established for PSCAP.

Donor HarmonisatiodParticipation Agreement: The M O U wi l l be the legal binding document for all donors involved in the pooling arrangements for PSCAP. It i s important however, that non-pooling donors also be encouraged to sign on to an overall participation agreement that confirms their commitment to a code of practise covering mechanisms for non-pooled contributions, co-ordination and participation in joint review procedures etc. Such a HarmonisationParticipation Agreement wi l l take into account the OECD-DAC principles on harmonisation, as well as local requirements for PSCAP.

Procurement: Procurement arrangements should ideally be designed to strengthen the GoE system. At the same time, donors are concerned about capacity constraints that may slow the momentum of PSCAP. Donors emphasize the need and support GOE efforts to establish strong capacity for procurement planning and management within the framework o f IDA procurement methods for pooled funds. Lessons from a variety o f donor experiences (CBDSD, ESDRF, ERA) and the CPAR recommendations should be integrated into PSCAP procurement. Donors agree to work as a team to appraise GOE procurement TORS to ensure quality control in a timely manner. They wil l also take active interest in the annual GOE procurement plans to stimulate dialogue on capacity development methodologies. Options allowing responsive bilateral procurement o f technical assistance via Channel 3 should be maintained. Donors also endorse efforts to ensure a diverse source o f supply from the public, private and NGO sectors for PSCAP training and other requirements.

Fiduciary requirements: Bilateral donors should also work closely with the World Bank and MCB to plan and harmonize fiduciary and other assessments, in order to maximize harmonization of individual donor planning, approval and review processes.

- 97 -

Additional Issues

Loans versus rrrants: PSCAP i s a human resource and public service development project which, because o f i t s size and enormous complexity wi l l inevitably become a learning by doing programme. The likelihood of the Programme generating significant financial returns in the short or medium term i s low. The risk analysis in the PAD also shows almost all output risks to be high, substantial or moderate. It would therefore be appropriate to maximise the use of grant funds and for the Bank to maximise use o f i t s own grant facilities in the IDA contribution. Creative bilateral financing of PSCAP, such as the interest buy-down option, urging o f bilateral Executive Director’s at the Board to consider increasing Ethiopia’s grant facility from IDA, and the sympathetic review o f Ethiopia’s HIPC completion point and urgent need for topping up, should be encouraged.

Gender and HIV/AIDS: Donors are concerned that these important issues should receive more focus through PSCAP especially in the programme objectives, activities and indicators.

Monitoring and evaluation: Whilst the reasons for the delay in formulating a comprehensive M&E strategy are understood, donors are concerned that this dimension o f the programme i s not fully available to be appraised during the present mission. An effective monitoring and evaluation system wi l l be an essential tool in PSCAP to ensure learning at all levels and to keep abreast o f the numerous sub programmes and activities. Serious attention should be given to revisiting sub programme log frames and to developing clear linkages with the overall PSCAP log frame.

Due diligence and learning-by-doing at the sub-national level: The need for all donors to be able to participate fully in a learning programme and conduct satisfactory due diligence requires a commitment from donors to engage fully at the regional and woreda levels. Therefore, the World Bank and bilateral donors wil l engage with MCB and MOFED to harmonize donor and GOE input into joint review processes, through both formal M&E mechanisms, such as the Annual Review Mission (ARM), and informal M&E mechanisms, that can facilitate the review processes, provide additional donor input to the periodic reviews, and facilitate inter-regional learning. Modalities for strengthening this commitment wi l l be discussed between donors, MCB and MOFED in the run up to implementation and reflected in the Harmonization Agreement. This i s not a parallel monitoring system or mechanism for TA, but wi l l complement and strengthen existing joint Monitoring and Evaluation arrangements, as has been established in the SDPs. It does, however, imply that bilateral donors wil l increase their presence and gain more knowledge and insight into PSCAP implementation in the regions.

- 9 8 -

Project ID

PO49395

PO50938

PO44613

PO75915

PO81773

P 0 5 0 3 8 3

PO57770

PO69886

PO73196

PO52315

PO67084

PO50342

PO35147

P 0 6 9 0 8 3

PO00756

PO00738

PO00733

P 0 0 0 7 5 5

PO00732

PO00771

FY

2003

2003

2003

2003

2003

2002

2002

2001

2001

2001

2001

2001

2001

2001

1999

1998

1998

1998

1998

1996

ANNEX 11: STATEMENT OF LOANS AND CREDITS

ETHIOPIA: Public Sector Capacity Building Program Support Project

Purpose

ETHIOPIA -ENERGY ACCESS

Capauty Building for Dec Sew Del

ET Road Sector Development Program II

ET Pastoral Community Development

EMERGENCY DROUGHT RECOVERY PROJECT

Ethiopia FOOD SECURITY PROJECT

ET CULTURAL HERITAGE

Multisectoral HIWAIDS

ET Daqobilization and Reintegration Pro]

ET CONSERVATION OF MEDICINAL PLANTS

EMERGENCYRECOVERYANDREHAB PROJECT

Women Dev Initiatives

ET CONSERV a SUSTAIN USE MEDIC PLAN

AFTKL ET GLOBAL DISTANCE LEARNING

Health Sector Dev

ET ENERGY II

ET AG RESEARCH ~ T ~ I N I N G

ETHIOPIA ROAD SEC DEV PROG

Educ Sect Dev

Social Rehab (ESRDF I)

Total

Original Amount in US$ Millions

IBRD

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

IDA

132.70

26.20

0.00

0.00

0.00

85.00

5.00

59.70

170.80

2.60

230.00

5.00

0.00

4.90

100.00

200.00

80.00

309.20

100.00

120.00

1610.90

GEF

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

1 .80

0.00

0.00

0.00

0.00

0.00

0.00

0.00

1 .60

Cancel.

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.02

0.00

0.00

0.00

0.00

0.00

0.00

11.48

11.50

Undlsb.

147.29

27.90

134.39

29.57

16.23

97.85

5.22

35.32

36.02

2.03

107.79

4.17

1.88

5.25

31.05

36.49

21.42

87.35

11.52

33.11

871.85

Difference expected and actual

disbursementsa

Orig

29.08

11.55

2.00

-0.34

-12.18

-3.05

1.06

35.65

29.29

-0.88

86.31

1.82

1.03

4.74

28.13

39.30

17.86

88.18

12.39

24.65

396.82

Frm Rev'd

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.80

0.00

0.00

0.00

0.00

0.00

67.54

0.00

21.56

89.90

- 99 -

ETHIOPIA STATEMENT OF IFC's

Held and Disbursed Portfolio 30 June, 2003

In Millions U S Dollars

Committed Disbursed - IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

FY Approval Company

Total Pending Commitment:

Approvals Pending Commitment Loan Equity Quasi Partic

0.00 0.00 0.00 0.00

- 100 -

ANNEX 12: COUNTRY AT A GLANCE

ETHIOPIA: Public Sector Capacity Building Program Support Project

Ethiooia at a dance 8MOi03

POVERTY and SOCIAL Ethbpia

2002 PopuJation mid-year (mf/#onsf GNI per capna (Atlss mralhod, US$) GNI (Aftas mtw, US$ billions)

Average annual growth, 1898-02 Po~lairon (%j Labor force m) Most recent estimate (latest year available. 1996-02) Povedy (35 of pcpulafrw, below national poveriy line) Urban popul&on f% OF total populatron) bk expedancy at birth (years) infant mortality (per T, 000 live bjrths) Child malnutnlion (56 ofchridmn under 5) Access to an improved water source (% of ppulahon) IiJrtpracy (% ofpopulation age 15+) Gross pnmary enrollment (% of schookage population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERFd TRENDS t982

GDP /US$ billions) 5 4 Gross domestic InvesimentIGDP 13 4 Exports d goods and services!GDP 9 5 Gross domestic SavtngslGDP 5 6 Gross natmnal savingslGDP 6 8

Current account balandGDP -6 8 Interest wytnents/GDP 0 4 Total deWGDP 60 2 Total debt servtce/expOrts 13 8 Pmsent value of debYGDP Present value of debtlexpons

1982-02 1992-02 (average annual growth) GDP 0 7 5 5 GDP per capita -2 4 3 0 Exports of goods and semces -3.2 $ 2 6

67.3 100 6.7

2.4 2.2

44 16 42

116 47 24 58 64 76 52

1992 10.0 9.2 4.5 3.0 7.2

-3.3 0.4

93.0 23.1

2001

7.7 5.2

-1.6

Sub- Saharan

Afrlca

688 450 306

2 4 2 5

33 46

105

58 37 86 92 80

2001 6 2

18 0 15 4 2 2

13 8

-4 2 1 0

91 3 18 5 46 7

295 5

2002

5 0 2 7 7 7

iow- Inwme

2.495 430

1 072

I 9 2 3

30 59 81

76 37 9s

103 87

2002

6 0 20 2 15 2

1 9

0 7 108 9 11 6

2002-06

Welopment diamond'

Life expeciancy

GNJ Gross per primary cepita rolimeni

1 Access to improved waef source

-.- Ethropta - Low-income group

Economic ratios'

Trade

T

Indebtedness

-Ethiopra - Low-income group

STRUCTURE of the ECONOMY

4% of GOP) Agncunure Industry

Services

Private wnsumphon General government consumption imports of goods and Services

Manufacturing

(average annual growth) Agriculture industry

SSMceS

Pnvate consumption General government consumption Gross domestic investment imports of qoods and services

Manufacturing

I 1982 $992 2001 of investment and GDP (X)

542 6 2 9 52 3 12 3 8 2 11 1 11 1

I 7 6 4 8 7 0 334 28.9 36 5 794 869

W G M -DP 150 10.1 17 5 21 0 174 107 31 2 335 I

1982-92

1 3 -2 9 4 4 1 8 1 5

-1 0 -1 8 0 0

1992.02

2.8 6.1 6.6 8.3 2.5

16.4 10.3 8 0

200.1 2002

11 5 4 5 5 8 5 4 7 9 4 6 5 5

11 4 -4 0 -185 2 6 8 27 4 17 4 -1 8 5 5

I Growth of exports and imports (XI I

0 I 40 30 20 10

-10

Note 2002 deta are preliminary estimates Thts table was produced from the Development Economics centra! database " The dramonds show four key indrcatots In the country irn bold) compared mth ~ t s income-group avetaqe. If data are missinq. the diamond wiJ1

be incomplete

- 101 -

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Governrnenr fhance (56 of GDP includes cirfrent grants) Current revenue Current budget balance Overall surplusfdeficit

TRADE

(US$ mllionsl Total exports (fob)

Coffee Leather and leather products Manufactures

Total imports (cM Food Fuel and enemy Capital W s

Export pnce index (1995=fM) import pnce index 11995=1OOJ Terms of trade (1995=100)

BALANCE of PAYMENTS

{US$ mrl/ions) Exports of goods and sefv~#s lmp~tts of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing Items (net) Changes in net reserves

Memo: Reserves tnduding gold (US$ mt(lrons) Conversion rate (DEC, local#S$f

EXTERNAL DEBT and RESOURCE FLOWS

{US$ mrlllons) Tdai debt outstanding and drsbursed

1BRD IDA

Total debt service IBRD IDA

Gffiaaf grants Gffiaaf creditors Pnvaie creditors Foreign direa investment POrtfOtfO equity

World Bank program Commitments Disbursements Pnnwpal repayments Net flows interest payments Net transfers

Composition of net r e s w r a flows

1982

5 9 4 2

16 6 -1 7 -8 0

1982

376

848

84 110 77

1982

512 946

-435

-9 73

-371

43 1 BO

277 2 1

1982

3 280 48

302

76 8 3

107 1345

98 2 0

30 28

5 23 6

17

1992

21 0 1 1 3

106 -5 0 -9 6

1992

154 81 28

675 131 120 320

63 96 86

1992

453 1,074 -621

-86 372

-335

381 -46

172 2 1

1992

9 341 12

964 109

8 13

886 184 80 0 0

150 112

13 99

8 92

2001

-7 2 -7 0

19 6 -0 3

-10 0

2001

44 1 175 38

1,558 241 265 589

59 118 50

2001

957 1.945 -987

-59 774

-264

257 13

8 3

2001

5,697 0

2.151 182

0 36

413 434 -10 20 0

202 455

22 433

14 419

2002

-7.2 -6.3

22.1 -0.1

2002

467 166 44

1,598 177 244 624

2002

909 2,004

-1,095

-50

-136

8.5

2002

6,523 0

2.756

108 0

17

548 4

343 465

5 460

12 447

0

3

1s

10

5 I -10

DPdefiabr -CPl I I

Export and import b e l s (US$ mill.)

1 , w

1 ,wo

300

0

I Current account balance to GDP ("A)

'T 0

5

-10

I

Composition of 2002 debt (US$ mill.)

F B B G:BB

A . IBRD E I Bilateral B . IDA D. Cnher mltilaierai F . Rivate C .!Mi= G . Short-Ienn

The World Bank Group http:ihfw.worfdbank orgldatal 8120103

- 102-

ANNEX 13: LETTER OF SECTORAL POLICY

ETHIOPIA: Public Sector Capacity Building Program Support Project

nh.+t%y ~k&.rt'f! %~P.'hi-h~? &~~-'-nhh P7'tH-W Ph.bC"S. nor-). @7.%h+f:

The Federd Democratic Republic of Ethiopia Ministry of Finance and Economic Development

Dear Mr. Madavo,

R13: LETTER OF SECTOR PC>I,ICY

1. I am writing t o request, on hehalf of the Fedcrd Deinocratic Kcpoblic of Ethiopia, for thc approval of the five-year Pubi'ic Secror Captrciiy LZicilrfirig Progrwrrtw Siqqmri PrrJjkr:t (PSCAP) of LiS$IOO million. The proposed credit w i l l reinforce our ongoing rl'forts to reduce poveiiy. promote growth. and ripidly imp lement the wide range of dcvclopriiciit policies and progranis i n tlic cuntr;?xt o f our Sirsrainnblc Qtwrfupnrerii trrrd Poverry R e d i d o i l Prc7~rcxn1 (SDPKP), Spccitically. the credit wi l l deepen through nation-wide capacity building and institutional transfortnation efforts in order to improve the scalc. efficiency, and nsponsi\{eness of public service deli wry :it thc federal, regional. and Iacal level; eriipowel- citizens to particip:ue Iiiorc cffecrivcly i n shaping their own developineni; arid prorrrotc good govcrnnnce arid accouiitahility

UACKGHOUNL) AND HICCEK'I' l)EVEI,OPhIENTS

2. Since i t s daiiiocratic transition in tlic curly 1990s. thc Ciovcrnnicnt has pursued a long- tcrm smtegy of iesti[utionitl tratisformaiion across tiers (federal, regional arid local) and branches (oxccutivc, judiciriry. and legislature) of govemmcnt. T h i s proccss of' "state transt'ormation" has involved the Jcvelopnrerit of niulriplc insritutionni refom] initiatives in parallel (for examplc, iivil servicc and jtistice systems refoniis. wcrcda Jecentrrilizntioii aid irrbnn mariugcmcnt), the estiiblishmznt of u natioii-widc capacity buildicig systeiri designcd to finance, iiiiplemenr. and iiwiiiroj' iirstirirtiorial change; and thc imssive scale-up o i capacity building across sectors. Spanning nearly a decade. Ethiopia's transfornution :igciidii Iins cvotvcd over three phases in response to growing aw;wriess i t tat pervastvc dcf'icits i n cap;tcity have Iiampcrcd the nbikity o f public institutions to sccurc the ftinduiiitmtals of poverty reduction aiid deinoci-atic dcvelopnient such as thc efficient and rcsponsive service dclivcry. rhe cmpowcmcnts of citizens through grassroots pnwpntion, and the promotion of good govemsnce.

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scrbnti nmtwgmieiii cirpuciry hntildiiig efforts which coinprisc, legully cunstitutins. tmpo\vcriiig, rcsciucturing, and c;tpacitn!ing municipaiitics as the basic units of urban pm-nancc , responsible for service delivery. cmporvernrerit, and encouraging wealth crcariuri across Ethiopia's rapidly grorviirg cities and secondary towns;

a nution-widc arid sector-specific irririnlivcs such :is ihc tiorcdii- and scho~ l -nc~ projecls to enhance ICT penetralion and ongoing cfforts to dcsclop applicarions related to core public ma i iag~ i i ien t such as financial. personnel, and land rnanagemcnl systems. as wcl l its s w o r specific WJ ~orit~tiuaity-b;is;Lld iriitiutises;

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f l u .sysmrr I * C $ I ~ I t o r-nmp-up C~ovt'rnniei~t'~ revenue pcrfoniianoc including through ttic roll-OUI u i ongoing initiatives i n iux policy development. tax administration and Custorlis adiiiii~i~traiti~~i reforrns.

efforts to strcngrhsri formal chccks and balanccs 2nd :iccouiirnbiIity rnccfimisms in r i t e p ~ i w sysfcw through a well-sequenced. integmted reforin of thr, judiciary, taw niakieg, hu' cnfotceriient, w d legislative oversight insatutions,

b. III rcsponsc to rhesc ctiallctigccs, the Govcrnmcnr has rcccritly lauricltcd a third phcise of the ir:inslbrmatron program designed fo scale up suiiport for the six core public sector refunti programs lhrouph the crcniion of the five-ycur omnibus federul specific purpose PSCAP. The Goventnierrt's vision, rcllected in i t s national p r o g m docurwrit for {tie IJSC'AI.', is based on tlircc pillurs-siii~iil~;:ncotis, itarion-widc imphientarion of SIX subprogr", sequenced in fine v. ilh regional and locai priorities; alignnien[ o i program support with Erhiopia's puhlic Fiiiaricial nianrlgcincnt and inkrgouc"nental system: unci pooling of dotior resourceb iind h:intiorritation ui' fiduciury requiremerits tlirough i i

Sccror-WiJc Approscfi [hat involkcs a l l intercatd parrilers,

7 , 11) ixmuing a Sector-Wide Aplmach (SWAP) to PSCAP, thc Ciowniment has takes severin1 iniportant steps during tlir proyam prepnration and design process that bode well iur the roll-oul of th is curnpret~erisivc, riation-wide agenda. First, thc Ministry of C'apaoi[y Building coordinated n nation-wide bottom-up plmiiing cxercisc iiivolviag a wiJr 1'iingC ot' ministries, thc judiciary, and legislative: branch at the federal level. as well as all o i Ethiopia's nine regions and two city administration; (tie process sought IU d i n e dit: types uf cupx i l y building activities envisaged under PSCAP aid prcpdrc. costed incdium-tcrm iitd antitlid p l a n s for l l lc implcmcnrstion of' thesc rtctivitics in a properly sequenced rnaniier. Second, tl ie Minislry of Finance and Ecconornic Drvelopriient dcsipnarcd P S C M rls ;I f'cdrral spccii-rc p u q ~ s c trtiesfcr, appropriarcd at thc fcdcrid I c ~ c l . tlrcrcby wsurii ig 11i;it PSCAP XSI)U~CCS 10 regions iirc atdcliriond 10 111~' g~i~et%f purposes truxfc' t 's that rcgioiis olrcady r c c t i w from the federal government. Third, the overdl system underpinning PSC.'Al' has beeri detailed across tiers of goveriimciit including ttir: deleguGon of irnplemeiikition rcsponsibililics in line with rnuridutes cis WII tis the dcfinitioii of explicii rulcs of {he gri~ric govcnling acccss, allocotion, and execution iiicluding o siniple forniula to allacaie timc-bound drawing rights ta I'SCAP reswrces ;LC~[ESS regional sirltes, follorvt~l by performancebased disbursements a~ wel l iw niid- iid d - y e a r rwllocatioii o l a slrarc: or drawiirp tigl~ts to perfonncrs. Fourdi. in encouraging

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donors to coinitlit to pooling under LL single design for the Prop-" the Government has worked clostty wi th donor patrrws Encludirig IDA on alignment with the Government's I'inaticial culcndar as well as i t s m c d i m - w i i pliinijitig. annuid budgixiiig, ittid nioiittily SUE-based disbursentcirt procedures. FiTih and finally, the (losemment has devqlopzd *'matrix nianilgetitcnt" structiire in wliich ti-ctcrrtl subproprarns j~rovidr proto1ype.s. cluidliiy assunince, arid support monitoring and evaluation. whilc fcderil and rcgional bcnc'i;ci:wics SCI iinyleinenintion prioriiies mi targets from a menu of subprogrm activi t ies through i'omial l'articipatioii and Pcrformitiw Agrcc.mcnrs.

8. O v e r d I. we vicw thc iiitciisive ptcprarion uiid dcsigri pruccss underpirtriing PSCAP :is u sirung fouridation for lever-uging inuch-needed international assistance and also for rapidly scaling up eifons that are die center of Ethiopia's prospects for ncbieving a wide ranpe ot' social iiiid ccoiioiriic dewlopnieii~ ubjcctives relaied tu pciverty reduction.

9. Ovei.all. YSCAP i s the Goww"enl's priinmy instrurneni for effecting LI far-reaching twsfoii i iatioii i n thc \ ~ y thc StiItc h\ciIrrii[cs povcriy rcduciiuo. AS such, the P rog i l l i s expected to contribute to three key otitcornes across rhc fcdci~il, rcgional. ntid loctil lcvels--rnore effective delivery of urban, ruml, and social services; greatcr e m p o w e r " iit thc grrtssroou lcvel; ;t mort' I'nvcirable invemicnt climate resulting froni improved p~rblic scc~or goveniuiicc itrid rule of' luw, WNYC Ouicomeb are to be xhieved through die scale-up of six public sector capacity building subprograms. \L hich hclp improvc thc predictahility and transparency of rewurcc Flows. rhc inclusiveness of pl:iiining and budgeting, incentives 311d mc)liv;ttiori for staff at all levels, revenue pcrfonnancc and tiscal ;tutunomy, ihc cfticicirc) of public sector opt?rutjc)r)s, arid ( f i t : iranspitreiicp arid accou titnhi I i t) of goscrnmcnt i iistiiurions,

CON CLUS [ON

I[). In conc ius io i~ I would likc to rcilcrtitc tire Go~crr7~ii icnt'~ comrniIinwf IO subs~siirially deepen stake iruisformation through capacity buildirlg in order tu aclitcvc thc key development outcomes envisaged in the SDPIIP, While significant Treasury resources ovcr ita past ~ w o yews Iiave been comniiuecl arid uli l iad Tor PSCAP-related activities ut the iodcrul and rcgional levcls, the ~~~aiinblc. rcsoiirccs to scale up our cfforts arc insufiicieiii to meet our time-bound goals ovcr tlic FY2UO3-2OU9 period and to rediae rbe desired i m p x i un the lives of Ethiopia's citizens :uid their caminunities, Consequently, ~ l i c tiovcrriincrrl views support from IDA fbr our Public Sector Capucity Buildlog larugram t i i r o u g ~ p r o p o ~ c ' r i w port project as il key pillar ot' your institution's support to Ethiopia's pov;t'rty rtduction M p i n o n i i c developmen\ efforts.

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