Document ofThe World Bank

Report No: 2391 0-ET

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 20.7 MILLION (US$26.2 MILLION EQUIVALENT)

TO THE

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

FOR THE

CAPACITY BUILDING FOR DECENTRALIZED SERVICE DELIVERY PROJECT

June 27, 2002

Water and Urban IEthiopia and Sudan Country DepartmentAfrica Regional Office

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CURRENCY EQUIVALENTS(Exchange Rate Effective as of March 1, 2002)

Currency Unit = Ethiopian BirrETB I=US$ 0.12US$ I =ETB 8.5

FISCAL YEARJuly - June

ABBREVIATIONS AND ACRONYMSADLI Agriculture development-led industrializationCAS Country Assistance StrategyCBDSD Capacity Building for Decentralized Service DeliveryCFFA Country Financial Accountability AssessmentCIDA Canadian International Development AgencyCPAR Country Procurement Assessment ReviewCPFA Country Profile of Financial AccountabilityCPPR Country Portfolio Performance ReviewCSRP Civil Service Reform ProgramDFID Department for International DevelopmentEMCP Expenditure Management and Control ProgrammeEMP Environmental Mitigation PlanESRDF Ethiopia Social Rehabilitation and Development FundEU European UnionGOE Government of EthiopiaGPN General Procurement NoticeGTZ Deutsche Gesellschaft fur Technische ZusammenarbeitHRM Human Resources Management ProgrammeIDA International Development AssociationIDC Indefinite Delivery ContractsI-PRSP Interim Poverty Reduction Strategy PaperISS Interim Support StrategyMAB Ministry, Agency and/or BureauMCB Ministry of Capacity BuildingMEFF Macroeconomic Fiscal FrameworkMFA Ministry of Federal AffairsNCB National Competitive BiddingNCBP National Capacity Building ProgramNGO Non-governmental OrganizationOM Operational ManualPEP Public Expenditure ProgramPIP Project Implementation PlanPRSP Poverty Reduction Strategy PaperPSCAP Public Service Delivery Capacity Building ProgramQCBS Quality and Cost Based SelectionSIDA Swedish International Development AgencySOE Statement of ExpendituresUDCBO Urban Development Capacity Building OfficeUNDP United Nations Development ProgramUSAID United States Agency for International Development

Vice President Callisto E. MadavoCountry Director Ishac DiwanSector Manager Alain R. LocussolTask Team Leader Sumila Gulyani

Federal Democratic Republic of Ethiopia

Capacity Building for Decentralized Service Delivery Project

CONTENTS

A. PROJECT DEVELOPMENT OBJECTIVE ............................................................... 21. Project development objective ............................................................... 22. Key performance indicators ............................................................... 2

B STRA TEGIC CONTEXT ............................................................... 21. Sector-related Country Assistance Strategy ............................................................... 22. Main sector issues and Government strategy ............................................................... 33. Sector issues to be addressed by the project and strategic choices ................................................ 6

C. PROJECTDESCRIPTION SUMMARY .............................................................. 81. Project components ............................................................... 82. Key policy and institutional reforms supported by the project ..................................................... 93. Benefits and target population .............................................................. 94. Institutional and implementation arrangements ............................................................... 9

D. PROJECTRATIONALE .............................................................. 101. Project alternatives considered and reasons for rejection ............................................................ 102. Major related projects financed by the Bank and/or other development agencies ...................... 123. Lessons learned and reflected in proposed project design .......................................................... 134. Indications of borrower commitment and ownership .............................................................. 145. Value added of Bank support in this project .............................................................. 14

E. SUMMARYPROJECTANALYSES .............................................................. 141. Economic .............................................................. 142. Financial .............................................................. 153. Technical .............................................................. 154. Institutional .............................................................. 155. Environmental .............................................................. 176. Social .............................................................. 187. Safeguard Policies .............................................................. 19

F SUSTAINABILITYAND RISKS .............................................................. 191. Sustainability .............................................................. 192. Critical Risks .............................................................. 203. Possible Controversial Aspects .............................................................. 20

G. MAINALOAN CONDITIONS .............................................................. 211. Board Conditions .............................................................. 212. Effectiveness Conditions .............................................................. 213. Other .............................................................. 21

H. READINESSFOR IMPLEMENTATION ............................................................ 21

I COMPLIANCE WITH BANK POLICIES ............................................................ 22

ANNEXES

ANNEX 1: PROJECT DESIGN SUMMARY .......................................................... 23ANNEX 2: DETAILED PROJECT DESCRIPTION .......................................................... 2 7ANNEX 3: ESTIMATED PROJECT COSTS .......................................................... 33ANNEX 4: COST BENEFIT ANALYSIS SUMMARY ................. ......................................... 34ANNEX 5: FINANCIAL SUMMARY .......................................................... 35ANNEX 6 (A): PROCUREMENT ARRANGEMENTS ................. ......................................... 36ANNEX 6 (B): FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS ............................... 43ANNEX 7: PROJECT PROCESSING TIMETABLE ........................................................... 48ANNEX 8: DOCUMENTS IN THE PROJECT FILE .......................................................... 49ANNEX 9: STATEMENT OF LOANS AND CREDITS ................. ......................................... 50ANNEX 10: COUNTRY AT A GLANCE .......................................................... 52ANNEX I1: LETrER OF SECTOR POLICY .......................................................... 54

MAP: IBRD NO. 31158

ETHIOPIACapacity Building for Decentralized Service Delivery Project

Project Appraisal Document

Africa Regional OfficeWater and Urban - AFTUl: AFC06

Date: June 27, 2002 Task Team Leader: Sumila GulyaniCountry Manager/Director: Ishac Diwan Sector Manager/Director: Alain LocussolProject ID' P050938 Sector(s): BA-Civil Service Reform, BD-

Decentralization, UM-Urban ManagementLending Instrument: Technical Assistance (TAL) Themes (s): Decentralization and Urban Governance

Poverty Targeted Intervention: X No

Pr oject Financing DataLoan X Credit Grant Guarantee Other

[Specifyl

for Loans/Credits/Others:Total Project Cost [US$ml: 29.2 Co financing IUS$ml:Total Bank Financing (US$m): 26.2Has there been a discussion of the IBRD financial product menu with the N/Aborrower?Borrower: Government of EthiopiaResponsible agency: Ministry of Capacity BuildingAddress: P.O. Box 1082

Addis Ababa, EthiopiaContact Person: Ato Tefera.WaluwaTelephone: 251-1-56-47-78 Fax: 251-1-55-33-88 Email: mocb@telecom.net.etOther Agency(ies): Ministry of FinanceAddress: P.O. Box 1905

Addis Ababa, EthiopiaTelephone: 251-1- 55-20-14 Fax: 251-1-55-13-55 Email: NA

Ministry of Federal AffairsAddress: P.O. Box 5608

Addis Ababa, EthiopiaTelephone: 251-1-15-48-58 Fax: 251-1-51-12-00 Email: mofa@telecom.net.et

Estimated disbursements (Bank FY/US$):

__ FY 2003 2004 2005Annual 7.5 10.0 8.7

Cumulative 7.5 17.5 26.2

Period implementation period: 3 years

Expected effectiveness date: 9/1/02 Expected closing date: 12/31/05

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A. PROJECT DEVELOPMENT OBJECTIVE

1. Project development objective: (see Annex 1)

The proposed Capacity Building for Decentralized Service Delivery (CBDSD) Project aims to enhancedecentralized service delivery performance by initiating long-term public sector capacity building at thefederal, regional, and local levels. Building public sector capacity through institutional reforms, systemsdevelopment, and training would promote effective policy formulation and implementation, particularlyin key sectors such as infrastructure, health, and education.

The proposed project,- envisaged as a first phase of long-term support from the International DevelopmentAssociation (IDA), seeks to enhance service delivery performance through a coordinated program of: (i)implementing civil service reforms, (ii) restructuring and empowering local governments, and (iii)strengthening of the Ministry of Capacity Building (MCB). Over the life of the proposed project, keyreform and capacity building activities will be implemented in selected federal, regional and localgovernment entities;

2. Key performance indicators: (see Annex 1)

* Improved prioritization of public expenditures at the federal level and in participating localgovernments.

* Increased cost-efficiency and financial sustainability in participating federal and regional Ministries,Agencies and Bureaus (MABs), and local governments.

* Improved client satisfaction with services delivered by participating federal and regional MABs andlocal governments.

* 50% of the subprograms in the NCBP are fully financed and under implementation.

B. STRATEGIC CONTEXT

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)

Document number: 21189-ET (Interim-Support Strategy) Date of Board Discussion: 12/05/2000

The 1997 CAS for Ethiopia (Report No. 17009-ET dated August 19, 1997) was set in the context of ageneral atmosphere of peace and stability, the adoption of a Constitution that mandated a federal statesystem centered around ethnically based regions, a decisive shift from the dirigist central planning of theDerg to a market economy, notable success with stabilization and initial round of strictural reformscentered around deregulation and decontrol, and an ongoing debate on the pace and sequencing of secondgeneration of reforms. In the CAS, the Bank's proposed lending and non-lending strategy was dividedinto four clusters: (i) strengthening policy and capacity; (ii) infrastructure building; (iii) accent on leadingsources of growth; and (iv) focus on policy and human development.

The full implementation of the CAS was interrupted by the border conflict that broke out in May 1998.After the ceasefire in June 2000, the Government of Ethiopia (GOE) approached IDA to assist with apost-war recovery program which would address demobilization, emergency humanitarian needs andreconstruction, while stabilizing the economy and restarting the reform agenda. Accordingly an InterimSupport Strategy (ISS) (Report No. 21189-ET) was prepared and discussed by the Board on 12/05/2002.

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It aimed to: (i) address the immediate human, infrastructure and economic emergency and to restore theeconomy to a path of sustainable growth; (ii) tackle weaknesses in the IDA portfolio accumulated duringthe conflict; and (iii) engage in longer term IDA assistance to combat food insecurity, spread ofI.V/AIDS and weaknesses in capacity to deliver essential social services. A new 2002 CAS is under

preparation and it will cover FY03-05 to seamlessly overlap with the ISS. The 2002 CAS will support theGovernment's Interim-Poverty Reduction Strategy Paper (I-PRSP)l and its ongoing consultations for thefull-PRSP.

The Government's I-PRSP states that "reduction of poverty will continue to be the core agenda of thecountry's development." This agenda includes (i) an agriculture development-led industrialization(ADLI) strategy; (ii) judiciary and civil service reform; (iii) decentralization and empowerment; and (iv)capacity building in public and private sectors. The overarching goal of these reforms is to supportprivate sector development and promote efficient delivery of public services. Accordingly, the 2002 CASwiill have four thrust areas: capacity building, decentralization and service delivery, infrastructuredevelopment, and private sector development.

The proposed CBDSD directly supports the capacity building and decentralization pillars of the I-PRSPand the proposed 2002 CAS. Specifically, the CBDSD focuses on improving the capacity and enablingenvironment required for effectively decentralizing service deliveryand improving delivery performanceat the frontline. It will help address institutional constraints to service delivery at federal, regional, andlocal levels through a multifaceted capacity building program. Over its three-year implementation period,the project will focus on a small number of key federal agencies, two to four key regions, and severallocal goverrnents within these regions to design and test institutional change mechanisms as a basis forlonger term reform.

This project is designed as the first phase of a longer term IDA-assisted program to undertake institutionalreforms, develop organizational systems, and deepen the human resource base in order to revive criticalelements of the Government's long-running Civil Service Reform Program, and make democraticdecentralization a reality. As currently designed, the Project would strengthen core technocratic functionsat the federal and regional levels such as fiscal and personnel management, as well as support strategicrcle restructuring-all of which are necessary to ensure an enabling environment for sound policymakingand program implementation. At the same, it would begin to build the capacity of local authorities-thatis, municipalities and woredas-to support program formulation, implementation, and service delivery inways that are demand-responsive, sustainable, and accountable.

2. Main sector issues and Government strategy:

2.1 Ethiopia's public sector reform and capacity building agenda, 1994-Present

During the 1990s, the Ethiopian state underwent a period of unprecedented institutional change andrestructuring, with potentially far-reaching implications for the ways the Government can help promotepoverty reduction and growth. Most notably, the adoption of the 1994 Constitution resulted in thecreation of a federal state system, centered around ethnically-based regions, within which the woredaconstitutes the basic unit of decentralized, democratic government. According to the Constitution,regional authorities not only enjoy vast powers in various aspects of public management (especially,fiscal management), but also shoulder significant new responsibilities in terms of service delivery andgovernance. Even as it established this radically new political and state system, the Government wascognizant of the need for nascent regional and local institutions to be adequately equipped with thenecessary institutional, organization, and human resource endowments to fulfill their new mandates. This

I rhe board date for I-PRSP was Feb. 27, 2001 and the report number is 21769-ET.

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section discusses Ethiopia's emerging public sector reform and capacity building agenda including theevolution and efficacy of the Government strategy since 1994.

First generation efforts focused on strengthening core public management systems: In the mid-I 990s, theregionalization process took place within a public sector context widely acknowledged as beinginstitutionally weak and capacity-poor. A range of constraints in core public management systems wereidentified at the federal and regional levels including a weak legislative framework to guide civil servicemanagement; the absence of a medium-term planning and budgeting framework; ineffective controlsystems on financial and personnel management; inadequate wage incentives and inappropriate gradingsystems; poor capacity for strategic and cabinet-level decision-making; and insufficient focus on modemmanagerial approaches to service delivery. In recognition of these myriad problems, the Governmentembarked on a comprehensive-admittedly complex-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 focusing on strengthening coretechnocratic systems within the public sector. The Program was built on five pillars: (i) ExpenditureControl and Management, (ii) Human Resource Management, (iii) Service Delivery and Quality ofService, (iv) Top Management Systems, and (v) Ethics. Successful reforms (for example, of pay andpersonnel systems, or government accounting) at the federal level were intended to provide a template orprototype for regional authorities.

Second generation efforts aim to deepen democratic decentralization: As the Government attempted toimplement the CSRP at the federal level, it became apparent that Ethiopia's historic governance challengewas more complicated than previously envisaged. The country was seeking to embed a radically newbrand of ethnically-based federalism across a vast, diverse society, while simultaneously delivering abroader menu of basic services to a predominantly rural populace, historically disempowered undersuccessive monarchical and dirigiste governments.

Recent diagnostic work suggests that the regional governments have responded to this challenge largelyby using existing systems of administrative hierarchy to undertake development planning, allocate publicresources, and implement service delivery programs. As a result, local governments, and specificallyworedas, have generally emerged as deconcentrated units in program implementation rather genuine,democratically elected executives in- their own right. In addition to generating various operationalinefficiencies, this form of administrative deconcentration has hindered the development of democraticand accountable local governments, capable of delivering services in a demand-responsive andsustainable manner. In addition, opportunities for involving communities, particularly women, moresystematically in all aspects of service delivery (for example, parental management of schools) have beenunder-exploited.

In ongoing discussions with IDA and other donors, the Government has acknowledged the importance ofstrengthening woreda and municipal governments.by rationalizing administrative structures in regionalbureaus and zonal sections; enabling local governments to take allocative and operational decisions in afinancially sustainable manner; and empowering local communities to hold woreda and municipalauthorities accountable for service delivery. Such efforts to generate bottom-up pressures from and skillin local governments constitute the largely unfinished agenda of "second generation" capacity building,which is critical to deepening democratic decentralization.

Capacity building for public service delivery requires a strategic framework: In 2001, the Governmenttranslated its Capacity Building Strategy and Program Framework into a comprehensive NationalCapacity Building Program (NCBP) for improving institutional and human capacity across 14 sectors (forexample, civil service reform, justice reform, cooperative, private sector, textiles and garment, banking

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sector, urban development and higher education). In responding to the Government's request of fundingfor the NCBP, IDA has suggested that capacity building proposals for civil service reform, urbanmanagement, and district-level decentralization could be usefully, grouped together as part of acoordinated effort to improve public sector capacity. It has also noted that, in the public sector, the likelyimpact of capacity building efforts is maximized when guided by a strategic framework for structural andinstitutional reform. Most recently, the Government and IDA have discussed options for moresystematically linking the unfinished agenda of "first generation" technocratic efforts to "secondgeneration" efforts to deepen democratic decentralization (see below).

2.2 Institutional development inpact and lessons learned

The results of first generation efforts, comprised primarily of the CSRP and its various sub-components,were mixed. The Program did support the development of new legislation (for example, a financialmanagement proclamation, a civil service law, a code of ethics, and a service delivery policy) as well asprocedures and manuals for budgeting, procurement, and some aspects of personnel management.Training in aspects of budget management such as accounting, procurement, PIP preparation alsoprogressed. Diagnostic work in these areas also continued.

While commendable, these initiatives have had only modest impact in relieving the institutional andcapacity constraints within the Ethiopian civil service. In addition, there is little evidence of sustainedimprovement in output performance at the federal or regional levels. Rather, core functions such asmedium-term planning, accounting and auditing, personnel management remain weak. Attempts todevelop an affordable, medium-term public sector pay policy were delayed, and despite a salaryadjustment in January 2002, civil servants-particularly at the lower levels-still receive extremely lowsalaries. Critical to performance improvement, the planned role restructuring across line agencies werenot implemented in part because the necessary reviews of strategic role, legislative mandates,organizational structures, and staffing requirements were compartmentalized into different components ofthe CSRP. These were neither integrated into a process change model nor implemented by line agenciesat the federal or regional level.

Admittedly, the limited impact of the CSRP was due in part to the implementation delay experiencedduring the war with the Eritrea and continual demands on the time of the senior GOE officials. However,several reviews of the Program have also identified lessons related to design and management that caninform "second generation" reform efforts. Four lessons, in particular, are relevant to future attempts bythe GOE and its development partners to improve frontline, service delivery performance in prioritysectors, critical to poverty reduction.

First, the design and sequencing of CSRP activities were heavily focused on the federal level ofgovernment. First generation reforms were intended to prototype technocratic reforms at the federallevel for later adoption by the regions. However, implementation lags suggest that much-neededreforms at the regional level will be delayed even further. The opportunity costs in terms of foregoneimprovements in institutional and service delivery performance at the regional level are considerable.There is therefore need to identify alternative modalities for supporting certain institutional reformsand capacity building activities that can produce short-term results, even as the prototyping of coretechnocratic reforms in federal government proceeds.

Second, the strengthening of core budgeting and administrative systems, as supported under theCSRP, did not automatically lead to improvements in frontline performance. For instance, theService Delivery Component of the Program, which helped develop a policy paper on goodmanagement and service delivery processes, was not adequately linked to the role restructuring, pay,

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and budgeting reforms that are necessary to produce tangible improvements in output performance.Nor was it clear how the policy would benefit sub-national government, where the primaryconstraints on service delivery performance (for example, in infrastructure, health, and education)resulted from incorporating woredas as deconcentrated units of regional bureaus. Since the basicunits of local govemment-woredas and municipalities-bear the ultimate responsibility for servicedelivery, the impact of the core budgetary and administrative reforms under the CSRP depends inlarge part on closer linkages with "bottom-up" efforts to empower and enable local authorities.

Third, ongoing work by the Ministry of Federal Affairs (previously Ministry of Works and UrbanDevelopment) to strengthen local governments have revealed the potential across regions for moreconcerted "bottom-up" efforts to restructure and empower municipalities and woredas. Specifically,MFA has helped certain regions in their efforts to reform the legal and accountability frameworkwithin which municipalities operate, and its work has highlighted the need for restructuring ofmunicipal fnances and streamlining of institutional arrangements that affect service deliveryoperations. As the GOE moves to deepen democratic decentralization in urban and rural areas, localgovernments are poised to gain from far-reaching restructuring and empowerment activities, and inthe process, provide demand-side pressures on regions to focus more deliberately on frontlineperformance.

Fourth and finally, the comprehensive scope of the CSRP and the NCBP seek to address capacitybuilding programs in a holistic manner. However, the CSRP experience suggests that large scale,projectized approaches to public sector capacity building can tax the country's limitedimplementation capacity. In addition, mutually-reinforcing activities that should have beenimplemented in parallel (for example, role restructuring and job re-grading) often followed differentimplementation plans. The experience suggests that the design of public sector capacity buildingefforts should follow a clear notion of the critical path for reform, as well as a sequencing strategythat is fitted to the existing constraints on implementation capacity.

These lessons provide the basis for the key issues to be addressed in a proposed program of IDA supportfor building capacity for public service delivery. The strategic choices that shaped the design of theproposed lending program-the CBDSD Project and the PSCAP-are discussed in the following section.

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

3.1 Key elements of capacity buildingfor public service delivery

Since its inception, the Government-IDA dialogue on capacity building in the public sector hasacknowledged the importance of a multidimensional approach-one that addresses not only traditionalissues of training associated with capacity building, but underlying institutional deficiencies anddisincentives in Ethiopia's public sector. In addition, the Government has acknowledged that the ultimategoal of such efforts is to improve the governance and performance of service delivery in decentralizedsettings. Reviews of Ethiopia's reform efforts and ongoing consultations indicate that service deliveryperformance, particularly in Ethiopia's diverse regions, is hindered by two types of constraints.

The first involves weaknesses in the broader enabling environment, within which planning/prioritizationand implementation takes place (for example, financial management systems, personnel control systems,incentives, and formal accountability mechanisms). Successful approaches to strengthening the enablingenvironment are necessarily systemic in nature, and therefore cut across specific agencies or localgovernment entities. These systemic reforms have been prototyped in large part at the federal level underthe CSRP (for example, the Expenditure Management and Control Programme or EMCP, as well as the

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l[uman Resource Management Programme or HRM). While the prototyping phase of the CSRP hasreached an advanced stage in some areas such as the EMCP, other areas such as HRM and accountabilityrequire further efforts to develop the operating systems necessary to improve governance of publicresource management as well as formal checks and balances on public sector performance. In addition,the CSRP as a whole requires a degree of reformulation in order to ensure a smooth and streamlinedimplementation phase, particularly at the regional level.

T he second set of constraints concerns the mandates, institutional capacity, and demand-responsiveness ofspecific line agencies and local governments. Even with robust expenditure management and personnelsystems, service delivery improvements require line agencies (federal ministries and regional bureaus)and local governments (woredas and municipalities) to undergo a process of performanceimprovement-namely, role restructuring, functional review, and performance benchmarking. Thechallenge for federal and regional authorities in Ethiopia is to develop a framework within which localgovernments and line agencies are empowered-that is, given clear incentives-to introduce performancernanagement. Several other countries in Africa as well as other regions have developed implementationrnodalities by which line agencies and local governments are provided access to capacity building fundsand allowed more flexibility in personnel and budgetary rules in exchange for undertaking performanceimprovement measures. The GOE has expressed its interest in developing this type of demand-driven,qfuid pro quo approach to building capacity for democratic decentralization as well as effective service(lelivery.

3.2 CBDSD Project: Strengthening enabling environment with bottom-up performanceimprovements

The CBDSD Project will provide the first leg of IDA support for components of the National Capacity'Building Programme (NCBP) related to public service delivery. The Project will assist the Governmentin completing the prototyping of core expenditure and personnel management systems as well asaccountability mechanisms intended to improve the public sector enabling environment; help restructurethe CSRP for a "full implementation phase" at all levels of government; and empowering localgovernments and line agencies to carry out restructuring and performance improvement.

The scale and scope of demand (particularly from regions) for capacity building in order to strengthen thepublic sector enabling environment and to empower bureaus and local governments are considerable. Byimplication, a programmatic and longer term approach to IDA assistance should wholesale capacitybuilding at all levels of government, and thereby exploit economies of scale and scope, ensure flexibility,and deliver assistance in a timely fashion. Such an approach would require that systemic as well asagency-specific interventions to be sufficientlyprototyped-under the CBDSD Project-to facilitateeffective implementation and monitoring.

3.3 Public Service Delivery Capacity Building Program (PSCAP): Programmatic supportfordemand-driven performance improvement

As this prototyping process is carried out under the CBDSD project, the preparation of the proposedPublic Service Delivery Capacity Building Program (PSCAP), deliverable in 2003, would identifyfinancing arrangements by which federal, regional, and local institutions can leverage capacity buildingand technical assistance support for the strengthening of public management systems, accountabilityinstitutions and performance improvement efforts. In this way, IDA and other donors would seek tosupport the CSRP, District-Level Decentralization, Urban Management, and ICT components of theNCBP, which are critical for public service delivery. In addition, PSCAP will develop synergies with

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other programs of the NCBP such as those for the Tax Reform and Justice Sector, which favorably impactservice delivery, in order.to maximize the benefits of the Government's holistic approach.

C. PROJECT DESCRIPTION SUMMARY

1. Project components (see Annex 1):

The proposed CBDSD project is to be designed as the first leg of IDA's integrated response to the client'sproposals for assistance in building capacity for improving public service delivery at the federal, regional,and local levels. Specifically, the project will support completion of prototyping of measures tostrengthen the enabling environment; restructuring of the CSRP for its full implementation phase; andempowering local governments and line agencies to carry out restructuring and performanceimprovement.

It is envisaged that overall CBDSD objective will be achieved through the following three components:1. Implementing civil service reforns2. Restructuring and empowering local governments3. Strengthening the Ministry of Capacity Building

Indicative Bank- % ofComponent Sector Costs % of financing Bank-

(US$M) Total (IS$M) financing1. Implementing Civil Service Reforms $13.1 45% 12.1 92%(i) CSRP Coordination and ChangeManagement(ii) Resource Management and Control(iii) Performance and Service DeliveryImprovement(iv) Accountability and Transparency

2. Restructuring and Empowering Local $14.9 51% 13.4 90%Governments(i) Federal & regional policy & analysis TA(ii) Regional TA for deepening decentralization(iii) Local government restructuring & capacitybuilding(iv) Pilot rehabilitation investmnents

3. Strengthening Ministry of Capacity $1.2 4% 0.7 58%Building

Total Project Costs $29.2 100% 26.2 90%Total Financing Required $29.2 100% 26.2 90%

Note: (1) These costs are net of taxes. (2)Of the PPF of US$480,000, US$200,000 is included in Component 1, andUS$280, 000 in Component 2.These components are described in Annex 2.

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2. Key policy and institutional reforms supported by the project:

The CBDSD supports a range of policy and institutional reforms at various levels of government. At thefederal and regional level, the project will support the redesign of the CSRP as well as reforms related toR esource Management and Control and Accountability and Transparency. As far as expendituremanagement is concerned, the Credit will support the approval of the Macroeconomic Fiscal Framework(MEFF) and medium-term Public Expenditure Program (PEP); compliance with the financial calendar;accounts reform including the transition to a double entry, modified cash system; the establishment of asingle treasury account system as well as cash forecasting; passage of UNCITRAL-compliantprocurement legislation; policies related to spectrum management and monitoring. On personnelmnanagement, the Credit seeks to support the development and passage of a medium-term pay andemployment policy designed to improve civil service incentives. It will also facilitate development ofbasic rules for participation of line agencies in the PSIP.

At the sub-national level, the CBDSD supports the GOE's decentralization initiative by encouragingparticipating regional governments to adopt policies and strategies.to strengthen local governments;clarify their revenue and expenditure responsibilities; and establish predictable intergovernmental fiscaltransfer mechanisms. It will also encourage local governments to adopt new systems of publicparticipation that enhance transparency, accountability, and consultation in all aspects of local operations.

3. Benefits and target population:

Given its goal of facilitating the emergence of local governments and federal line agencies that aref,inancially sound and have the ability and incentives to improve service delivery, especially to the poor,this project should benefit a broad cross-section of the public in the long-run. In the short- to medium-i:erm, the target populations include civil servants and their respective agencies at the federal, regional,,md local levels; civil society groups interested in enhancing good governance; public and private traininginstitutions; and providers of local public goods.

Project benefits include (i) improved skills and incentives - both at the individual level and agency-wide-for enhancing performance; (ii) more robust and better managed fiscal and financial systems thatimprove resource predictability, enhance transparency and improve availability of quality data; and (iii)improvements in the financial condition and resource base of local governments and line agencies whichin turn allow them to meet at least minimum service level standards and coverage.

4. Institutional and implementation arrangements:

The MCB is the lead counterpart agency for the CBDSD project, and is also directly responsible for theimplementation of the components for Civil Service Reform. The MFA, through its UDCBO, isresponsible for implementing activities related to urban management under the component for LocalGovernment Restructuring and Empowerment.

MCB has established three units that will together be responsible for meeting the fiduciary requirementsfor the CBDSD as a whole and for the components focusing on Civil Service Reform. The three unitsare: (i) external relations and resource mobilization; (ii) finance and budget; and (iii) monitoring andevaluation.

Arrangementsfor the Civil Service Reform component. The Coordinating Office will serve as the keyimplementing unit for the Civil Service Component. The State Minister for Capacity Building, who isalso the CSRP Coordinator, will be responsible for the overall management and guidance of activities

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under Component 1. Under the ongoing restructuring of CSRP, implementation or liaison units havebeen established within each federal civil service institutions as well as within the Bureaus of CapacityBuilding within regions. These units are responsible for implementation of the reforms as well asmonitoring and evaluation of impact. Component I of the CBDSD Project will rely on the Govemment'simplementation structure to ensure effective and efficient project implementation.

Proposals for assistance under the various sub-components will be prepared and submitted to the ProgramDirector of the CSRP, under the overall guidance of the State Minister for Capacity Building, MCB.Once reviewed, the Program Director will work closely with beneficiary institutions to finalize TORs,select consultants, prepare specifications for goods and equipment. Final proposals will be sent to IDAthrough MCB staff members designated to undertake project management, procurement, anddisbursement activities related to the CBDSD Project.

Arrangements for the Urban Local Government component. As the key implementing agency for theurban local govemment component, the UDCBO has established a four-person technical core team whichincludes a department head, an economist, an engineer and a sociologist with substantial experience inurban management and local government/municipal development issues. In the preparatory phase, thiscore team has been working directly with the regions to provide information about the CBDSD and helpthem prepare and refine their proposals for financing under the Local Government Component.Subsequently, it will be assisting the regions in various aspects of implementation. UDCBO has a pre-established procurement unit under its technical department, and a finance department with financialmanagement systems and manuals that were in used during two previous IDA-financed urbandevelopment projects. A detailed assessment of the financial and procurement systems and capacity ofthe UDCBO was conducted prior to appraisal.

Project proposals developed by the regions, in consultation with local governments where necessary, willbe submitted through the Regional Government to the UDCBO. These proposals will be reviewed by aTechnical Committee and then submitted for further review and final approval to the MFA. Based on theproposals approved, UDCBO will work with the region to finalize TORs, select consultants, and definespecifications for goods required. UDCBO will be responsible for bulk procurement on behalf of theregions.

The UDCBO will act as the secretariat and the implementing agency, but not as an approving body. TheTechnical Committee will be comprised of experts in areas such as local government restructuring andfinance, urban management, civil engineering and environmental analysis. This committee will certifythat applications are technically sound, meet all requirements (of GOE and IDA) and are qualified forfinancing. As noted above, final approval authority rests with the MFA.

D. PROJECT RATIONALE

1. Project alternatives considered and reasons for rejection:

Considerable dialogue has taken place with the Government on its NCBP and specifically, thoseprograms related to capacity building for public service delivery. Discussions have focused on theassistance required to achieve the Government's priority objectives of improved service delivery anddemocratic decentralization. As noted earlier, in-country consultations and reviews of Ethiopia's earlierpublic sector reform and decentralization experience have indicated that capacity building efforts shouldfocus on (i) improving broader enabling environment within which public servants function and servicesare delivered and sustained; and (ii) empowering line agencies and local governments to undertakenvigorous restructuring and performance improvement efforts required for effective decentralized delivery.

I1

The design of the CBDSD has incorporated both sets of capacity building concerns. It also provides thefoundation for the Government's development of a much more substantial capacity building program forimproving public service delivery. Such a program, namely PSCAP, would scale up the prototypes thatare developed and refined under CBDSD.

In addition to the technical rationale for the CBDSD Project and the longer term PSCAP (Sections B andC', IDA support for building capacityfor public service delivery also responds to the broader strategiccontext in which the donor community seeks to assist Ethiopia's development. Given the magnitude ofinstitutional and capacity constraints across the Ethiopian public sector, IDA is seeking to contribute to acciordinated approach to capacity building for technocratic public sector reforms as well asdecentralization. Historically, the IDA's financial support for Ethiopia's civil service reform and capacitybuilding programs has been limited. However, the reasons for the Government's renewed interest inhaving IDA take a lead role in supporting the NCBP are three-fold: (i) IDA's ability to make substantialinvestments over longer periods of time, and also to leverage a predictable flow of donor resources in aprogrammatic manner as envisaged under the NCBP; (ii) its experience in other countries undergoingpublic sector reform and decentralization, and (iii) its analytical resources. Several other donors includingUNDP, the EU, USAID, CIDA, DflD, GTZ, the Government of Italy, and SIDA have been assisting theGovernment in aspects of public sector capacity building. DfiD has contributed to the preparation of theCBDSD project.

Since the end of the 1999-2000 border conflict with Eritrea, Ethiopia has begun to experience aresurgence of donor aid flows in the form of debt relief, budget support, and investment financing ininfrastructure and the social sectors. Given Ethiopia's decentralized framework, absorbing assistance ofthis magnitude implies considerable institutional capacity at the regional and local levels. Moreirnportant, translating external assistance into tangible improvements in well-being among Ethiopia's poorrequires demonstrable improvements in fiduciary and operational performance within regions. Thecapacity building implications of the Government's agenda are especially urgent as regions beginirnplementing the Govenment's policy of block grants to woredas, and in some cases, kebeles. Againstthis backdrop, the CBDSD Project and the larger PSCAP seek to provide timely as well as longer termcapacity building support for improving public service delivery.

Criven these considerations, traditional sector specific operations, e.g. a Public Sector Reform project anda Municipal Infrastructure project, were considered and rejected in favor of the cross-sectoral, verticallyintegrated capacity building approach embodied in the CBDSD design.

12

2. Major related projects financed by IDA and/or other development agencies (completed,ongoing and planned).

Latest Supervision (PSR) Ratings(Bank-financed projects only)

Sector Issue Project Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financedSub-projects for poor communities and Social Rehabilitation & S Spoverty monitoring and analysis Development Fund - ESDRF

(ongoing)ESRDF II (planned)

Education Education Sector S SDevelopment Program(ongoing)

Health Health Sector Development S SProgram (ongoing)

HIV/AIDS Ethiopia Multi-Sectoral U SHIV/AIDS Project - ESMAP(ongoing)

Impact of the war on poor households Emergency Recovery and S Sin Tigray and Afar Rehabilitation (ongoing)Raising poor women's income Women Development S S

InitiativeUrban Market Towns Development S U

Project Cr. 2103-ET, US$40.2million (closed June 1999)

Urban Second Addis Ababa Urban U UDevelopment Project Cr.2161-ET, US$35 million(closed June 1999)

Water supply and sanitation Water Supply Development S Sand Rehabilitation Project(ongoing)

Food security Food Security (planned)LIL-Distance Learning

Other development agencies

DffD Internal and external audit,journalism

EU Public financial managementsupport; decentralization

GTZ Capacity building foreconomic management

SIDA DecentralizationUSAID Budgetary reform;

decentralization

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

13

3. Lessons learned and reflected in proposed project design:

The: following lessons from the experience with public sector reform and efforts to strengthen localgovernments in developed and developing countries have been identified and incorporated in projectdesign:

Lessons from the Ethiopian experience:

* Systemic reforms in Ethiopia need to be tailored to the realities of its federal state system if they areto produce desirable improvements in institutional and service delivery performance within regions.

* Reform programs, such as CSRP, must be based on clear priorities and realistic sequencing thatconforms to implementing capacity.

* Local govemments-woredas and municipalities-are capable of exercising greater allocativeauthority with concomitant efficiency gains.

* Communities can effectively participate in planning, co-management of facilities, and accountabilitysystems. If empowered to be more systematically involved in service delivery, communities couldimprove program implementation, deepen democratic decentralization, and enhance prospects forpoverty reduction.

* CBDSD has been explicitly designed to address previous difficulties in portfolio implementation byincorporating demand driven mechanisms for disbursement based on extensive consultation with allkey regional and local actors. As a result of this design approach, preliminary proposals from allregions have already been received and the aggregate demand for funding exceeds total CBDSDresources by a significant percentage. Therefore, it is expected that CBDSD implementation willmove forward efficiently and that the broader demand already evidenced in the regional proposalswill be met through PSCAP, the detailed design of which is to commence in July.

General lessons:

* Government ownership and commitment is key to institutional reforms.

* Public sector training should be conducted on an agency-wide, demand-driven, and cost-recoverybasis. Historically, entrepren'eurial individuals in the public sector in developing countries have beenable to seek out training opportunities. The binding capacity constraint on frontline performance,however, is training that is iuiline with institutional demands or agency-wide and objectives. Inaddition, various instruments such as matching grant facilities have been developed to ensure thattraining is undertaken with sdme element of cost-recovery.

* Implementation targets should be realistic.

* Intergovernmental "rules of the game" need to be clear, well understood and agreed by all if they areto be effective. Fiscal flows to sub-national levels should be, to the greatest extent possible,consolidated thereby reducin'g transaction costs that over-burden limited local capacities. Donors aswell as central government authorities need to abide by this principle.

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* Financing should follow function. In the process of decentralization, central governments oftenassign responsibilities to local governments without assigning the resources required to accomplishthe task. To be effective, local governments should have access to and control over the financingrequired to meet their mandates.

* Sufficient capacity at central, regional and local levels is necessary for effective decentralization andeffective delivery of local services.

4. Indications of borrower commitment and ownership:

The Government has prepared a comprehensive and detailed NCBP. The Program covers a wide range ofsub-program proposals including those for civil service reform, municipal development, anddecentralization, and these have undergone a detailed internal review process at technical levels. Moreimportantly, GOE has created a new supra-ministry - the Ministry of Capacity Building - to refine andlead this program. In addition, the Government has placed ultimate responsibility for coordinating,restructuring, and monitoring implementation of the CSRP under the State Minister, MCB. This indicatesa high level of commitment to incorporating lessons from the past experience with CSRP as well asholding senior officials accountable for implementation of the reforms.

As part of its Action Plan, the GOE is also planning to introduce - as early as September 2002 - untiedblock grants to woredas. This is envisaged as a first and crucial step toward empowering localgovemments to make their own investment decisions. Regional Governments are moving to review andenact legislation to enable and empower their local governments. For example, Amhara has enactedlegislation recognizing municipalities as autonomous local government units and other regions, such asTigray and Oromia, are following suit. Together these initiatives indicate a very high level of governmentcommitment to capacity building and decentralized service delivery.

5. Value added of Bank support in this project:

IDA will add value to the design of the CBDSD Project by drawing on existing reviews of civil servicereform, decentralization, service delivery processes and the status of local governments in Ethiopia, andleveraging its international experience with public sector capacity building. In addition, IDA's Advisoryand Analytical Assistance (AAA) on public sector and governance institutions in Ethiopia includes its1999 regionalization study, a 2000 review of the CSRP, the 2000 PER, the 2001 rapid assessment ofmunicipal decentralization, and the 2001 woreda study all of which contributed to the design andformulation of CBDSD. Portfolio-wide lessons (for example, from the Ethiopia Social Rehabilitation andDevelopment Fund and the Emergency Recovery Program) related to the development of demand-drivenmodalities for providing assistance, particularly at the local level, were incorporated as well.

E. SUMMARY PROJECT ANALYSES

1. Economic

[ ] Cost-Benefit Analysis: NPV = US$ million; ERR = % (see Annex 4)[ ] Cost Effectiveness Analysis:[X] Other

15

Economic evaluation methodology:

The project will finance only some small-scale pilot rehabilitation investments based onthe demands articulated by selected local governments. Criteria for selection of theserehabilitation investments include preparation of economic and financial justification andanalysis, as part of the proposal or request for financing.

2. Financial

NPV=US$ million; FRR = % (see Annex 4)As noted above, proposals for pilot rehabilitation investments will include financial analyses. The projectcosts and sources of funds are detailed in Annex 4 and 5

Fiscal Impact: The modest level of resources to be provided through this TA project will not have anyappreciable fiscal impact at the macro level in Ethiopia. The project will, however, have a significantimpact on the development of sub-national fiscal systems. In particular, the project should contribute toimproving the capacity of all levels of government to generate and manage fiscal resources as well asstrengthen systems that will allow government agencies to be held accountable by their constituents.

3. Technical

N/A

4. Institutional

4.1 Executing agencies

The implementing agencies for the specific (sub)components are as follows:

Table 4.1: Proposed executing agencies by (sub)component

Component ~~~Proposed ImplementingComponent AeAgency

1. Civil Service Reform MCB

2. Restructuring and Empowering Local MFAGovernments

3. Strengthening MCB MCB

4.2 Project management.

As noted earlier, the MCB is the lead counterpart agency for the CBDSD project, and is also directlyresponsible for the implementation of the components for Civil Service Reform and Strengthening ofMCB. The MFA, through its UDCBO, is responsible for implementing activities under the Urban LocalGovernment Restructuring and Empowerment Component.

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4.3 Procurement Issues:

Given the limited capacity in the regions and in order to exploit economies of scale and scope, the projectwill use Indefinite Delivery Contracts (IDCs) for procuring technical assistance using QCBS selectionmethod. According to IDA Guidelines, these are defined as follows:

"Indefinite Delivery Contract (Price Agreement). These contracts are used when Borrowers need tohave "on call" specialized services to provide advice on a particular activity, the extent and timing ofwhich cannot be defined in advance. These are commonly used to retain "advisers" forimplementation of complex projects (for example, dam panel), expert adjudicators for disputeresolution panels, institutional reforms, procurement advice, technical troubleshooting, and so forth,normally for a period of a year or more. The Borrower and the firm agree on the unit rates to be paidfor the experts, and payments are made on the basis of the time actually used."

Most of the project funds are to be used for consulting services and many of these can be bundledtogether into relatively large IDC packages that can be procured through International CompetitiveBidding (ICB). For example, the local government component can be packaged into three IDCs, worthapproximately about USD 1.5-3.0 million each, with firms being selected or short-listed using the QCBSmethod. For individual contracts below US$100,000, the Qualification selection method will be used.Subsequently, teams of consultants will be mobilized in response to the specific needs of each region andas and when their services are required. As the clients, the regions draft the TORs and decide on theconsultants to be included in the team for their jurisdiction.

The detailed assessment of the procurement capacity of MCB and UDCBO was completed duringappraisal and agreement was reached with GOE to implement the recommendations for procurementefficiency improvements identified by this assessment.

4.4 Financial management issues.

Recent assessments of the financial management systems of the country and project implementingagencies by IDA (CPFA) and EU (Diagnosis of control capacities) show that financial managementsystems in the country are weak in general and that there is lack of trained manpower at all levels, but thecontrol environment is good and there are no accountability issues.

An assessment of the financial management systems for the CBDSD project was conducted in April2002, in accordance with the guidelines issued by the Financial Management Sector Board in June 2001.The results are summarized here and discussed in more detail in Annex 6. One of the implementingagencies, Ministry of Capacity Building (MCB), is new and does not have prior experience inimplementing a donor-financed project. In order to mitigate risk of delays in handling the financialtransactions, it was agreed that MCB will establish an adequate financial management system - includingrecruitment of staff with appropriate qualifications and experience - as a condition of effectiveness. Theother implementing agency, UDBCO, has a good system of financial management and is capable ofhandling the financial transactions that fall under its purview (i.e. under Component 2).

MCB is responsible for maintaining accounting records and preparing consolidated project financialstatements (including the financial transactions of UDBCO) in accordance with internationally acceptedaccounting standards. It is also responsible for getting the consolidated projects accounts audited inaccordance with International Standards on Auditing. Finally, IDA and the Borrower agreed that auditreports would be submitted six months after the end of each fiscal year.

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Environmental:

Environmental Category: FI

5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emergingfrom thisanalysis.

lhe project has been classified as Fl because, under component 2, local governments will act as financialintermediaries receiving project funds to finance pilot investments for the rehabilitation of existinginfrastructures such as roads, drains, markets, schools, water supply and sanitation systems, andslaughterhouses.

The subcomponent for pilot rehabilitation investments in infrastructure aims at enhancing local capacitythrough a learning-by-doing approach and testing the potential for creating larger scale infrastructureinvestment components in follow-on operations to be prepared in FY03 and FY04. Local governmentsbenefiting from this component will be identified during project implementation through a selectionprocess based on capacity and demand related criteria. Specific activities eligible for financing will beselected on a demand-driven basis and will reflect priorities identified by the pilot local governments.Given that the goal of these pilots is to provide on-the-job training in local governments with very weakcapacity, project screening criteria will ensure that these investments are small and that they do not entailany significant environmental and social issues. Although rehabilitation activities to be financed under:his sub-component cannot be identified at this stage, the following steps have been taken to ensure thatthese investments comply with IDA's guidelines on environmental and social issues:

(i) The Operational Manual (OM), delineating the rules and processes for access to funds forinfrastructure rehabilitation, requires that all proposals be accompanied by an environmentalassessment and plan for mitigation measures where necessary. The OM will ensure that thereare: (a) no adverse impacts on the level of soil and water pollution, and (b) no resettlement,no adverse impact on incomes and no impact on agricultural land. In other words,infrastructure rehabilitation projects entailing such impacts will be screened out and will notbe funded under the CBDSD.

(ii) All proposals for financing of rehabilitation projects will be subjected to a thorough reviewby a Technical Committee. The committee will include technical specialists who have theexpertise required to review and advise on environmental assessments and mitigation plans,and ensure that 1Di's safeguard and environmental guidelines are being met.

(iii) The Borrower has prepared and publicly disclosed an Environmental Framework that will:guide selection of projects and ensure that those with major adverse impacts are screened out;create mechanisms for addressing potential environment and social impacts; and delineatehow environmental capacity building requirements are going to be identified and met as partof a larger capacity building program for local governments. This framework incorporatespoints (i) and (ii) above.

As described in Annex 2, under Component 2 of the project, the participating local governments andregions will prepare a needs assessment and proposals for capacity building in various areas. The projectwill provide TA to these goveirnmnents to help them prepare these assessments and proposals and the betterproposals - as determined by a separate Technical Committee - will subsequently also be funded underthe project. Environmental capacity is integral to a well functioning local government, and will beexplicitly covered under these broader capacity building programs prepared by regional and localgovernments.

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5.2 What are the main features of the EM]' and are they adequate?

An environmental framework has been prepared and disclosed. It outlines a screening process, mitigationmeasures, institutional arrangements, and environmental training needs.

5.3 For Category A and B projects, timeline and status of EA:

An environmental framework has been prepared in lieu of an environmental analysis.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draftEA report on the environmental impacts and proposed environment management plan? Describemechanisms of consultation that were used and which groups were consulted?

n/a

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

The environmental framework includes a monitoring plan.

6. Social

6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

For the reasons specified in para 5.1 above, the project would pose no social issues or risk. Therehabilitation investments would be small and would be in built-up areas/settlements. There would be noimpact related to vulnerable groups, indigenous peoples, or cultural property. As noted earlier, theOperational Manual will disallow funding for projects that involve resettlement or entail adverse impactson incomes or agricultural land. The Technical Committee will ensure that these guideline are beingfollowed and that the projects selected for financing comply with IDA's social and safeguard policies.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The key stakeholders in this project are federal, regional and local governments and the pilot agencieswill themselves identify the package of support and training that they receive under the CBDSD.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

n/a.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

n/a

6.5 How will the project monitor performance in terms of social development outcomes?

n/a

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Safeguard Policies

:7. Do any of the following safeguards apply to the project?

Policy ApplicabilityX Environmental Assessment X Yes No

Natural Habitat Yes X NoForestry Yes X NoPest Management Yes X NoCultural Property Yes X NoIndigenous People Yes X NoInvoluntary Resettlement Yes X NoSafety of Dans Yes X NoProject in International Waters Yes X NoProject in Disputed Areas Yes X No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguardpolicies.

*The Borrower has prepared an Environmental Framework that will guide selection of projects and ensurel hat those with major adverse impacts are screened out, and will create mechanisms for addressingpotential environmental and social impacts.

F. SUSTAINABILITY AND RISKS

1. Sustainability

Component I of the proposed CBDSD will utilize existing project management structures establishedunder the Government's National Capacity Building Program during implementation. It is envisaged thatthis approach will channel the benefits of IDA assistance-including process change, institutional change,learning, and capacity building-through existing GOE processes and procedures. Moreover, theapproach will limit problems of mainstreaming that typically arise near the close of investment projects.

Components 2 and 3 require that beneficiaries make prior commitments to sustained institutional reformand organizational change (for example, by meeting eligibility criteria related to financial or institutionalperformance or through providing matching funds) in order to maximize the likely impact of capacitybuilding support from IDA.

Finally, CBDSD represents the first leg of IDA support for public sector capacity building. Projectbenefits and lessons learned aie expected to directly inform the design of a more substantial PublicService Delivery Capacity Building Program, which would inter alia commit IDA to a longer termprogram of capacity building support in Ethiopia.

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column ofAnnex 1):

Risk Risk - Risk Minimization MeasureRating

From Outputs to Objective1. Regions and other line agencies and M Policy dialogue; the restructuring locallocal governments do not adopt the governments and agencies share experiencerestructuring prototypes developed under with others; incentives and funding under thethe project proposed FY 03 Public Service Delivery

Capacity Building Program (PSCAP).2. Trained staff are not retained and M The GOE is implementing several civil serviceeffectively deployed towards improving reforms, including wage reform, to improve thedecentralized service delivery incentives environmentFrom Components to Outputs1. CSRP is not re-structured, and M Intra-governmental workshop, chaired by PM,Performance and Service Delivery to set direction and clarify ministerialImprovement Program is not designed, responsibilities on the CSRPwith clear accountability relationships2. Participating regions, line agencies M Sharing of international experience; incentives,and local govermments are not willing including funding, to encourage reform; expertand able to implement restructuring and advise and support for implementation;performance improvement participation in federally funded training and

capacity building programs3. Participating regions do not remain M Policy dialogue, Federal mandate to commencecommitted to decentralization and do block grants to woredas, Federalnot clarify intergovernmental fiscal and policy/guideline on local government is underlegal framework preparation; demand from constituents of

empowered local governments

Overall Risk Rating MRisk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

Key risk factors affecting sustainability include waning political commitment on the part of federal andregional authorities to the reform agenda and implementation strategy; weak capacity of counterparts,particularly at the managerial levels, to ensure adherence to the implementation timetable; and the impactof exogenous factors such as a resumption of hostilities with Eritrea.

3. Possible Controversial Aspects

None.

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G. MAIN LOAN CONDITIONS

1. Board Conditions (Complete)

The Government would submit to IDA, the Letter of Sector Policy duly signed by the Minister of Financeand Economic Development.

2. Effectiveness Conditions

(a) the Borrower has established the accounting and financial management system for the Project,satisfactory to the Association;

(b) the Borrower has opened the Project Account and has deposited the required initial amount;

(c) the Borrower has adopted the Project Implementation Plan in form and substance satisfactory tothe Association;

(d) the Borrower has prepared the procurement plan for the first year of Project implementation,satisfactory in form and substance to the Association;

(e) the Borrower has appointed to the staff of MCB at least one Procurement Specialist and oneFinancial Management Officer with experience and qualifications satisfactory to the Association;and

(f) the Letter of Undertaking for the implementation of Component 2 of the Project has been enteredinto between MCB and MFA in the form and substance satisfactory to the Association.

3. Other [classify according to covenant types used in the Legal Agreements]

Accounts and Audits: (a) The Government would submit to IDA not later than six months of the end ofeach fiscal year certified copies of the audited financial and an opinion on such statements, records andaccounts and report of such audit by the auditors; and (b) Government to submit quarterly FinancialMonitoring Reports in formats and with content agreed during negotiations. It was agreed that theBorrower would appoint the auditors by no later than May I, 2003.

Monitoring, Review and Reporting: (a) The Government would undertake a Mid-Term Review of theProject no later than January 31, 2004; and (b) submit semi-annual progress reports to IDA.

Implementation: The Government would carry out CBDSDP in accordance with the ProjectImplementation Plan (PIP).

H. READINESS FOR IMPLEMENTATION

[ ] la) The engineering design documents for the first year's activities are complete and ready for thestart of project implementation.

[X ] 1. b) Not applicable.

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[ ] 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

[X ] 3. The Project Implementation Plan has been appraised and found to be realistic and ofsatisfactory quality.

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

I. COMPLIANCE WITH BANK POLICIES

[X] 1. This project complies with all applicable Bank policies.[ ] 2. The following exceptions to Bank policies are recommended for approval. The project complies

with all other applicable Bank policies.

kam Leader | tEPic R F | Ishac Diwan*am Leader etr nager Country Director

23

ANNEX 1: PROJECT DESIGN SUMMARY

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Hierarchy of Key PerformanceObjectives Indicators Data Collection Strategy Critical Assumptions

Sector-related CAS Sector Indicators: Sector/ country reports: (from Goal to BankGoal: Mission)1. Support deepening 1.1. Constitutional and 1.1 Regional proclamations, 1. Resource allocation andcf decentralization legal framework enabling budgets, and fiscal reports program implementation by

local responsibilities and 1.2 Public expenditure local governments is pro-authority reviews poor and the poor are1.2.Increasing regional 1.3 Sector studies involved in the process.and local share ofexpenditures and revenues1.3. Transparent andpredictable transferarrangements1.4. Increased regional andlocal control overpersonnel managementand service deliverydecisions1.5. Enhanced regionaland local accountabilitydownwards to citizens

2. Build public sector 2.1 Improved credibility 2.1 Public official surveys 2. Public servants activelycapacity for service and predictability of 2.2 Public expenditure carry out governmentclelivery at federal, policymaking and reviews efforts to improve access ofregional, and local planning 2.3 Country Financial the poor to essentiallevels 2.2 Enhanced Accountability Assessment services, and enhance their

transparency of 2.4 Governance AAA opportunities for assetexpenditure prioritization creation and voice.2.3 Improved incentiveframework for publicservants at all levels2.4 Rigorous monitoringand evaluation systems, aswell as financialaccountabilitymechanisms

24

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:To enable 1.1 Improved 1.1 Annual budgets, 1. GOE remains conmmittedimprovements in prioritization of public including inter- and intra- to a strategy that combinesdecentralized service expenditures at the federal sectoral priorities, at cross-cutting reforms withdelivery performance level and in participating federal, regional, and local performance improvementby initiating long- local governments levels for line agencies and localterm public sector 1.2 Public Expenditure governments.capacity building Reviews 2. Civil service and localthrough institutional 2. Increased cost- 2.1 Cost efficiency surveys government reforms arereforms, systems efficiency and financial 2.2 Local government and implemented effectivelydevelopment, and sustainability in facility-level budgets and widely across thetraining at the federal, participating federal and 2.3 Public Expenditure country.regional, and local regional MABs and local Reviewslevels governments 2.4 Supervision reports

2.5 Evaluation reports

3. Improved client 3.1 Client and householdsatisfaction with services surveysdelivered by federal and 3.2 Public Expenditureregional MABs and local Reviewsgovernments.4. 50% of the 4.1 Supervision reportssubprograms in the 4.2 Evaluation reportsBorrower's NCBP arefully financed and under_implementation

25

Output from each Output Indicators: Project reports: (from Outputs toComponent: Objective)

1 a. Restructuring and 1.1 Strategic plan and 1. I Supervision reports 1. CSRP and localperformance restructuring review 1.2 Evaluation reports government restructuringiinprovements completed prototypes are scaled upundertaken in select 1.2 Performancea,gencies at federal benchmarks developed 2. Trained staff are retainedlevel and in regions 1.3 Institutional charters and effectively deployed

developed for line towards improvingagencies decentralized service

I lb. Budgeting, 1.4 Budgeting, planning, 1.1 Supervision reports deliveryplanning, accounting, and accounting procedures 1.2 Evaluation reportsanid personnel implementedmrLanagement systems 1.5 Personnel managementdeveloped at federal procedures developed andlevel and in select implementedregions. 1.6 Information systems

installed for financial andpersonnel management

2 a. Restructuring of 2.1 Number of regions 2.1 Local governmentselect local adopt and enact local budget documentsgovernments government legislation 2.2 CFAA

2.2 Guidelines or acts 2.3 Public expenditureclarifying expenditure reviewsresponsibilities, local 2.4 Supervision reportsrevenue base, and 2.5 Evaluation reportsformulae for transfers to

__________________ local governments

2. b. Regional and 2.3 Number of trained 2.6 Quarterly reports fromIclcal staff trained in beneficiaries employed PIU, beneficiary, andciitical skill areas and retained in regional provider institutionsincreased and local agencies 2.7 Supervision reports

2.8 Evaluation reports3 Coordination and 3.1 No. of staff with 3.1 Supervision reportsmn anagement capacity management, 3.2 Evaluation reportsoF MCB increased procurement and planning

skills3.2 No. of staff with

___________________ policy skills

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Project Components Inputs: (budget for each Project reports (from Components tol Sub-components: component) Outputs)

1. Implementing civil $13.1 million 1. Bi-annual monitoring 1. CSRP is re-structured,service reforms reports including and Performance and

management, financial and Service Deliverydisbursement reports Improvement Program is

designed, with clear

2. Restructuring and $ 14.9 million 2. Evaluation of contracts accountability relationshipsempowering local . 2. Participating regions, lineeovernment 3. Audits and evaluation agencies and local3. Strengthening of $1.2 million reports governments are able toMCB implement restructuring and

4. Implementation performance improvementCompletion Report 3. Participating regions

remain committed todecentralization and clarifyintergovernmental fiscaland legal framework

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ANNEX 2: DETAILED PROJECT DESCRrTION

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Br Component:

Component 1. Implementing Civil Service Reforms (US$13.1 million)

This Component seeks to complete the prototyping of CSRP activities and support the launch of the fullimiplementation phase of the CSRP at the federal, regional, and local levels. As a basis for fullimplementation, the Government has acknowledged the need for stronger coordination and changem;magement, high-level commitmnent, redesign of the CSRP architecture (reformulating the original fivepillars of Expenditure Management, and Control; Human Resource Management, Service Delivery,Ethics, and Top Management Systems), and the development of a process change modality that providesan incentive for carrying out restructuring and performance improvement across ministries, agencies, andbureaus (MABs) at the federal and regional levels.

In addition, certain areas of the original CSRP, which are critical to service delivery performance (forexample, human resource management, automation of financial management systems, accountabilitysystems), have lagged and require immediate support to complete prototyping at the federal level. Also,key elements of a robust performance improvement strategy were lacking in the original CSRP conceptand require rapid developing in preparation for a more vigorous implementation phase withinregions.Pursuant to the rapid implementation of CSRP, the Component will support the followingcapacity building initiatives:

PROTOTYPING PHASE IMPLEMENTATION PHASE

Expenditure an dManagementL.atn nand Cenir ug mn~,

Human ResourmeI Mmaaagmeni

bl-------t > 2. F Control 4. AcCOIL.ntSiIte

[ Service ra toagemtent a-d trmnsA qc)

T Ethics

TGManagement| Syittems lt

CA1RP Coordination and Change Management. Following the reorganization of Government in 2001,responsibility for the coordination and overhaul of the CSRP has been given to a new State Minister inthe newly established Ministry of Capacity Building (MCB). In addition to establishing these newcoordination arrangements, the Government is establishing clear accountabilities for CSRPirniplementation among heads of ministries and agencies across the civil service. Reporting arrangementsin all civil service institutions at the federal and regional levels are being established to ensure regularmonitoring of CSRP's progress.

The sub-component will therefore provide technical assistance and capacity building support to the newCS'RP Coordinating Office in the MCB including short and long-term advisory support on the design and

28

roll out of the full implementation phase of CSRP. It will also finance local and international training forkey civil servants in public sector reform issues; study tours to assess various approaches to public sectorreform and decentralization in developing and OECD countries; and dissemination of CSRP-relatedmaterials.

Resource Management and Control. The Resource Management and Control activities of CSRP involvestrengthening expenditure as well as personnel management and control systems-originally supportedunder the Expenditure Management and Control, and Human Resource Management pillars of theprototyping phase of CSRP. While several aspects of Resource Management and Control have reachedan advanced stage of protoyping (for example, the accounting, budgeting, and planning reforms with thesupportof USAID, EU, and UNDP), other areas require additional assistance before the launch of the fullimplementation phase.

This sub-component will therefore help complete the prototyping of budgetary and personnelmanagement systems. Specifically, it will support the roll-out of the Budget Information System (BIS)and the interim Budget, Disbursement, and Accounts System (as a basis for the development of IFMIS)across federal institutions and in regional finance bureaus. Taken together the roll out of BIS and BDAsystems at the federal level will provide an important transitional step to the development of a fullyIntegrated Financial Management Information System (IFMIS). In addition, the sub-component willfinance training in procurement at the regional and federal levels; and strengthening of existing treasuryoperations and support for the cash management project. In addition, prototyping of human resourcemanagement systems will be completed through the provision of advisory support for job classificationand grading, and the development of a medium-term pay and employment policy; training in the newperfornance appraisal system for federal and regional officials; short-term support for automation ofpersonnel records and filing; and the development of a Human Resource Information System (HRMIS) atthe federal level.

Performance and Service Delivery Improvement.As a basis for the full implementation phase of CSRP, the MCB is developing a Performance and ServiceDelivery Improvement Program (PSIP) that will provide an incentive for ministries, agencies, andbureaus (MAB) to carry out restructuring and performance improvement measures in exchange forfocused capacity building support. Specifically, PSIP would require a standard set of prior actions fromMABs such as a review of legislative mandate, role, functions, and accountability relationships; ananalysis of organizational performance and agreement on indicators; and the development of animplementation plan for restructuring, capacity building, and performance improvement within an agreedupon timetable. Once such criteria were met, an MAB would be able to access resources available tosupport capacity building necessary to realize its performance objectives.

This sub-component will support the development of a basic framework for PSIP along with resources forits implementation in a total of ten MABs including five federal bodies such as the Ministry of FederalAffairs (MFA), MOFED, the Federal Civil Service Commission, and Ministry of Capacity Building, andfive regional bodies such as the Bureau of Finance and Economic Development and the Bureau of Worksand Urban Development in one region. The experience of participating MABs will be reviewed andlessons incorporated to refine the PSIP modality, and define an operational manual for the roll out ofPSIP at all levels of government.

Accountability and Transparency. During the full implementation phase of CSRP, it is envisaged thatAccountability and Transparency activities would involve strengthening mechanisms for fiduciaryaccountability (such as external audit, parliamentary oversight, and the development of the accountingand auditing profession) as well as the promotion of monitoring of operational performance includingclient satisfaction, budget execution and cost-efficiency at all levels of government. This also includesinnovative mechanisms of community and civil society participation in public sector performance.

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This sub-component of the Credit will help complete the prototyping of Accountability and Transparencyactivities under the CSRP. Specifically, it will support the development of the accounting and auditingprofessions; and the promotion of various techniques for monitoring and evaluating (M&E) public sectorperformance in line with the requirements of the National Service Delivery Policy and the NationalCharter on Citizens Rights and Responsibilities. Several approaches will be promoted such asexpenditure tracking surveys, cost efficiency studies, service delivery report cards, as well as governancesurveys. After an initial testing phase, the sub-component will help develop an operational manual toguide the management of a Performance Tracking Facility that scales up support, on a demand-drivenbasis, the strengthening of M&E by MABs, local governments, citizen groups, and civil society.

Component 2. Restructuring and Empowering Local Government (US$14.9 million)

The main objective of this component is to start'and facilitate the process of building local governmentsthat are financially sound and have the ability and incentives to improve service delivery, especially to thepoor. This component will address three key constraints to the provision of services at the local level:finance, capacity and an unclear mandate for local authorities. Specifically, it will support:

* technical assistance to regional and local governments in the process of establishing and/orimproving the legislative, fiscal, administrative and institutional frameworks that determine theirmandates, their financial base, and the incentives for improving performance;

* training of regional and local staff* technical assistance for restructuring of local government agencies to enhance capacity in

delivering basic physical services such as water supply, sanitation, drainage, access roads andbasic social services such as primary health and education;

* pilot investments for infrastructure rehabilitation in selected local governments to facilitatelearning-by-doing and to test the feasibility of a larger scale infrastructure investment componentsin the proposed follow-on operations, specifically the FY03 PSCAP and the FY04 LocalInfrastructure and Service Delivery Project.

The assistance will be structured as follows:

(i) Federal and regionalpolicy and analysis TA. A broad regional TA program, available to allregions and key federal agencies, focusing on policy and design of strategies for strengthening localgovernments. This subcomponent will also provide financial support and TA for facilitatingimplementation and coordination of various activities under the component to the relevant federal andregional agencies.

(ii) Regional TAfor deepening decentralization. A TA program targeted on 2-4 regions that arerelatively more advanced in their decentralization process and are committed to deepening theprocess. The TA will support creation of enabling frameworks - legislative, administrative, fiscal andinstitutional - at the regional level for local governments; a special emphasis will be placed onclarification of intergovernmental fiscal relations. Under this subcomponent, financing will also beavailable for training of regional and local government staff in basic skill areas. Finally, these regionswill identify a set of pilot local governments which will be eligible for additional financing for localgovernment restructuring and capacity building (see below).

(iii) Local government restructuring and capacity building. This sub-component will focus onbuilding capacity of a set of pilot local governments (municipalities and woredas), within the targetedregions, to deliver services in an efficient, accountable and financially sustainable manner. The ideais to select more than one local governments in each of the 2-4 targeted regions, to achieve broaderimpact. It is expected that these pilots will provide lessons and/or models to encourage all regions to

30

adopt broader and large-scale programs for building local government capacity for enhanced servicedelivery.

(iv) Pilot investments for infrastructure rehabilitation. This is envisaged as a modest fund availableto the pilot local governments for financing rehabilitation of existing infrastructure, essentially tofacilitate learning-by-doing and to test the potential for creating a larger scale infrastructureinvestment components in follow-on operations to be prepared in FY03 and FY04.

Activities eligibleforfunding

The component will provide assistance in activities in the following broad areas: (i) legislative and policyreform at the regional level; (ii) review and enhancement of intergovernmental fiscal relations, especiallythe framework governing regional, zonal and local relations; (iii) capacity building and training activitiesfor regional and local governments, with an emphasis on building operational and agency-wide skills infront line agencies; (iv) restructuring of local governments in the selected/targeted regions; and (v) pilotrehabilitation investments in some of the selected woredas and municipalities. Examples of activities thatthe project will fund include:

* drafting of regional-level legislation and implementation guidelines for enabling or empoweringlocal governments

* review and restructuring of roles and responsibilities of local governments* improving the intergovernmental fiscal framework to increase the amount, reliability and control

over funds that are transferred to and managed by local governments* enhancing fiscal performance of local governments (budgeting, enhancing own-source revenues,

expenditure management etc.)* providing on-the-job or other short-term training to local government agencies and staff

(including training in basic skills such as bookkeeping/accounting and in areas such as financialmanagement, project planning and implementation, land information and management, contractsadministration, operation and management of infrastructure etc.)

* training of newly elected local government councils* strengthening human resource or personnel systems at the local level through the introduction of

performance incentives and/or incorporation of innovative changes introduced through the CSRPat the federal level

* pilot rehabilitation investments in selected local government jurisdictions

Access criteria at the regional and local levels

Access to project funds will be based on a combination of supply-side requirements (essentially, capacityand commitment) and an articulation of demand. Specifically, regional and local governments that meetcertain minimum capacity-related criteria and demonstrate commitment to reform will be eligible toaccess project resources. Selection of activities and projects will be demand-driven - that is, eligible localgovernments will themselves identify the priority tasks to be funded by the project and will provide co-financing as an indicator of their demand. The "rules of access" to the financing available under the foursub-components are presented in detail in the Operational Manual (OM). The section below outlines thetypes of access criteria, and thereby the principles, codified in the OM.

(i) All regions would be eligible for the broad TA program. Access to this package of assistancewould be based on regional council resolutions that demonstrate commitment to entering into aserious process of decentralizing policy formulation and implementation. The OM delineates therelevant rules and processes.

31

(ii) The key criteria for selecting the 2-4 target regions are that they should be relatively advanced intheir decentralization process, should be committed to deepening that process, and should havecertain minimum institutional and financial capacity. Access criteria - presented in the OM - hence,include indicators such as:

a) Appropriate regional legislation fully establishing local government, including municipalities;b) Resolutions enacted by duly elected regional and local government councils confirming

commitment to participate in the project and to enact reforms identified through the capacitybuilding process, including-where necessary-initial restructuring of local governments tohire qualified and well-compensated technical and managerial staff; and

c) Identification of a regional steering committee including an appropriate mix of elected andappointed officials from participating local and regional entities.

(iii) The criteria for selecting pilot local governments for restructuring within the targeted regions -presented in the OM - include:

a) Evidence of local government's ability for fiscal and financial management, includingstatements of account for at least two preceding years;

b) Commitment toward implementation of local government restructuring plans; andc) Evidence that the local government has technical employees who can manage basic service

delivery.

Restructuring plans that are reviewed and approved by appropriate screening committees will beeligible for additional financing to support implementation of the restructuring plan, includingpurchase of durable goods and specialized training for local government staff specified in theapproved plan.

(iv) Selection criteria for pilot rehabilitation investments are presented in the OM. The pilots willfocus on rehabilitation of infrastructure such as roads, drains, water supply and sanitation systems,markets, slaughterhouses, schools and clinics. In addition to criteria under (iii) above, access to thepilot rehabilitation investment fund will be governed by the following types of indicators:

a) Submission of capital investment plans, including explicit and credible arrangements foroperation and maintenance of the proposed investments;

b) Evidence that the proposed investments have been identified through a thorough process ofconsultation with local communities; and

c) Analysis of the economic benefits, financial viability and environmental and social impacts,if any, of the proposed investments.

Trainingfor regional and local government staff

Under subcomponent 2, financing will be available for "bulk" training of regional and local governmentstaff in basic skills such as bookkeeping/accounting, planning and management. The options ormodalities for providing such training support under the CBDSD include direct contracting through pre-qualified regional institutions, matching grants, and scholarships to be availed by individuals atinstitutions of their choice. The options for delivering the training are currently under study and anassessment of the supply side of trAining in selected regions is also underway. The results of these studieswill be used to develop an Operational Manual (OM) which will delineate the rules for accessing trainingfuinds.

Fin,ncing will also be available for more specialized training for staff in local governments that are beingrestructured. The training will be based on needs identified in the approved restructuring plans and is

32

likely to include areas such as land information and management systems, contracts administration, andoperation and management of infrastructure.

Component 3. Strengthening of Ministry of Capacity Building (US$1.2 million)

This component will provide financing to strengthen the Ministry of Capacity Building (MCB) as the leadcoordinating agency for the development and implementation of National Capacity Building Program(NCBP), and especially sub-programs related to public service delivery, as well as those related to privatesector development, rural development, higher education and civil society. As a new ministry with aconsiderable mandate, the MCB is currently in the process of articulating its role, developing national-level programs and strategies, and recruiting and realigning staff and other resources.

This component will support the MCB by financing the following kind of assistance: (i) TA, especiallyinternational experts, to assist with refinement of their programs and strategies based on internationalexperience and best practice; (ii) study tours, particularly to other countries in the region; (iii) hiring ofconsultants to assist with certain critical systems and functions; (iv) procurement of certain equipment;and (v) short-term and on-the-job training for staff.

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ANNEX 3: ESTIMATED PROJECT COSTS

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Project Cost By Component Local Foreign Total.US $million US $million US $million

1. Implementing civil service reforms 2.2 9.5 11.72. Empowering and Restructuring Local Govt. 5.6 7.4 13.03. Strengthening MCB 0.6 0.5 1.1Total Baseline Cost 8.4 17.4 25.8Physical Contingencies 0.7 1.5 2.2Price Contingencies 0.3 0.9 1.2

Total Project CostsI 9.4 19.8 29.2

Total Financing Required 9.4 19.8 29.2

Project Cost By Category Local Foreign TotalUS$million US$million US$million

Subprojects 8.5 4.2 22.7Goods 0.4 2.8 3.2;Services 0.2 1.4 1.6Training 0.3 0.9 1.2_PPF 0.5 0.5

Total Project Costs 9.4 19.8 29.2

Total Financing Required 9.4 19.8 29.2

ANote: All costs are net of indirect taxes

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ANNEx 4: COST BENEFIT ANALYSIS SuMMARY

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Not applicable

35

ANNEX 5: FINANCIAL SUMMARY

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Years Ending

IMPLEMENTATION PERIOD

Year 1 Year 2 Year 32002-03 2003-04 2004-05 Total

Total Financing RequiredProject CostsInvestment Costs 7.9 10.7 9.8 28.4

Recurrent Costs 0.3 0.3 0.2 0.8Total Project Costs 8.2 11.0 10.0 29.2

Total Financing 8.2 11.0 10.0 29.2

FinancingIDA 7.5 10.0 8.7 26.2Government 0.7 1.0 1.3 3.0

Total Project Financing 8.2 11.0 10.0 29.2

36

ANNEX 6 (A): PROCUREMENT ARRANGEMENTS

ETHIOPIA: Capacity Building for Decentralized Service Delivery

General

A Country Procurement Assessment Review (CPAR) was conducted in August 1998. As per the findingsof the CPAR various activities have been commenced by the GOE to improve the procurementenvironment. The key actions carried out to date include (i) GOE has redrafted its financial andprocurement directives; (ii) the Procurement Manual has been prepared; (iii) a department has beenestablished under the Ministry of Finance and Economic development to coordinate the reform programand monitor procurement activities; (iv) a procurement tacking system has been established; and (v)training has been provided to MoF and other government staff on procurement. In general, the EthiopianLaw and regulations do not conflict with IDA guidelines. A second CPAR has commenced and expectedto be completed by June 2002.

The various activities under the procurement reform program are expected to create a conduciveenvironment that would facilitate the implementation of the project.

Use of Bank Guidelines

All contracts under IDA finance for civil works and goods will be procured in. accordance with IDA'sGuidelinesfor Procurement under IBRD Loans and IDA Credits (January 1995, lastly revised in January1999). The IDA's Standard Bidding Documents for Goods and Works, the Standard Pre-qualificationDocument and the Standard Bid Evaluation Forms shall be used.

Procurement for consultant services will take place in accordance with the IDA's Guidelines for theSelection and Employment of Consultants by World Bank Borrowers (January 1997, lastly revised inJanuary 1999). IDA's Standard Request for Proposals will be used and Forms of Contracts as needed(lump-sum, time-based, and/or simplified contracts for short-term assignments and individualconsultants) as well as the Sample Form of Evaluation Report for the Selection of Consultants.

Advertising

General Procurement Notice (GPN) will be prepared and issued in the United Nations DevelopmentBusiness listing for all goods and works contracts above US$200,000 and large contracts for consultantsservices (above US$200,000 equivalent) to obtain expressions of interest and to draw-up a pool of solidcandidate firms from which to compile the short list. Sufficient time will be allowed (minimum of 30days) before preparing the short list, and (c) the GPN will be updated annually for those contracts still tobe let.

Related pre-qualification or bidding documents, as applicable, will not be released and the short list forconsultant services will not be prepared - before eight weeks after the GPN has been published. The GPNwill be updated annually for those contracts still outstanding. A GPN will also be issued in the nationalpress or official gazette for contracts to be let under NCB. Specific Procurement Notices (SPNs) forgoods and works will be advertised in the national press of wide circulation, and internationally for largecontracts (ICB). Sufficient time will be allowed to obtain the bid documents.

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.1. PROCUREMENT CAPACITY

The Ministry of Capacity Building being a newly established ministry has very limited experience inprocurement as an organization. There is a procurement officer who is presently handling theprocurement works in the ministry. In order to enhance the capacity of the ministry additional keyprocurement staff with adequate qualification and experience shall be employed. A detail job descriptionswhich defines the duties and responsibilities of all staffs involved in the procurement process shall bedeveloped and adopted.

Trhe Urban Development Capacity Building Office (UDCBO) that is under the Ministry of Federal Affairshas been handling IDA financed projects and has the experience and capacity to handle procurementactivities. However, the procurement officer who has been handling most of the procurement activitieshas left the office due to the completion of the previous IDA financed project. Consequently, theprocurement officer position is presently vacant and a new staff has to be employed. It would beadvantageous if UDCBO could re-employ the procurement officer. The roles and responsibilities of thevarious implementing agencies are outlined in the PIP

In order to build the procurement management capability of the MCB and UDCBO and clearly define theroles of the various beneficiaries of the project the following actions will be taken.

* A procurement manual which would form part of the Operation Manual that provides a generalinstruction on all procurement activities will be developed and adopted. The manual shall provideinformation on (i) implementation arrangements (procurement authority and decision makingprocess) (ii) procurement procedures, (ii) applicable procurement methods (iii) monitoringsystem, (iv) payment procedures and other key procurement functions.

* A procurement data management system will be developed and adopted. The system will insurethat appropriate data are maintained at various levels and the central office has comprehensiveinformation on all procurement activities.

* Orientation will be given to all staff involved in procurement on the procurement proceduresapplicable to the project and use of the procurement manual.

* Specialized training in procurement and specifically IDA procurement procedures would beprovided to key staff of MCB and UDCBO.

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Procurement Plan

Procurement plan for the first year of the project will be prepared prior to effectiveness. However sincethe project is demand driven it would not be possible to clearly develop a detailed plan for all activities.Therefore the plan will include a detailed information on the activities that can be identified at the start ofthe project and present indicative information on the other types of activities that are likely to be financed.

The procurement plan will form a part of the PIP. The PIP would solicit the participation of allstakeholders, set out the procurement plans, assess the local counterpart fund requirements, specifyresponsibilities for commitment and implementation, and identify the risks that need to be controlled.Since the project is demand driven it will not be possible to identify all activities of the project. Thereforethe procurement packages will be identified during project execution and will be carried out inaccordance with procedures acceptable to IDA and described in the operations manual.

Procurement Implementation Arrangements

The Ministry of Capacity Building- specifically, its Program, Finance and Budget Unit - will beresponsible for overall monitoring and coordination of procurement activities of the CBDSD project.Procurement of the project will be managed by (i) MCB, Procurement Division (MCB/PD) which isunder the Program, Finance and Budget Unit, and (ii) Ministry of Federal Affairs, Urban DevelopmentCapacity Building Office (UDCBO).

MCB/PD would be responsible for all procurement activities under the (i) civil service reforms, and (ii)strengthening the Ministry of Capacity Building components. UDCBO would be responsible for therestructuring and empowering local governments component.

For each of their respective components MCB/PD and UDCBO would be responsible for preparation ofbidding documents, bid evaluation and award, contract monitoring and management. The TenderCommittee of MCB which has been established at MCB would be responsible for (i) reviewing of tenderdocuments, (ii) tender opening, and (iii) review of evaluation reports and award of contract for worksbeing managed by MCB. UDCBO also has a Tender Committee with responsibilities similar to the oneat MCB.

Procurement of Goods

Contracts for similar works and goods will be grouped into bid packages of US$ 100,000 or more, so thatthey can be launched by NCB or ICB in order to obtain more favorable prices. Goods estimated to costequal or more than US$200,000 equivalent per contract, would be procured through InternationalCompetitive Bidding.

Goods estimated to cost less than US$200,000 equivalent per contract, up to an aggregate amount not toexceed US$ 1.0 million, may be procured by National Competitive Bidding (NCB) procedures, acceptableto IDA. Goods estimated to cost less than US$50,000 for which the items cannot be grouped into bulkprocurement and for readily available off-the-shelf goods may be procured by comparing price quotationsobtained from at least three suppliers. All furniture may be procured using National Shopping. The valueper contracts for the procurement of furniture shall not exceed US$30,000.

National And International Shopping

National and International Shopping, solicitations will be issued in writing to at least three reputablesuppliers (it may be better to approach five or six suppliers because not all three suppliers may respond,

39

so that at least three competitive quotations are received.) The solicitations should (a) includespecifications, and if goods are not immediately available, the delivery time; (b) give the estimated cost,including cost of inland transportation and insurance; (c) be opened at the same time for evaluation; and(d) in the case of International Shopping quotations, be solicited from at least three suppliers in twodifferent countries.

.Procurement through UNAgencies

Goods with a contract value not exceeding US$100,000 may be purchased from UN agency (IAPSO).

,Direct Contracting:

Goods which must be purchased from the original supplier to be compatible with existing equipment, areof a proprietary nature or must be procured from a particular supplier as a condition of a performanceguarantee and costing US$50,000.00 equivalent or less in the aggregate, may, with the Association's prioragreement, be procured in accordance with the provisions of paragraph 3.7 of the Guidelines.

'Procurement of Works

,Civil Works estimated to cost less than to US$500,000 per contract may be procured using NationalCompetitive Bidding procedures.

Domestic preference for local contractors shall be applicable for ICB contracts only in accordance withthe definitions in the Guidelines for the procurement of Goods and Works (paragraph 2.54 and Appendix2 of the Guidelines.

Procurement of Small Works

Works estimated to cost less than US$30,000 equivalent per contract, up to an aggregate amount not toexceed US$200,000 equivalent, may be procured under lump-sum, fixed-price contracts awarded on thebasis of quotations obtained from three (3) qualified domestic contractors in response to a writteninvitation. The invitation shall include a detailed description of the works, including basic specifications,the required completion date, a basic form of agreement acceptable to the Association, and relevantdrawings, where applicable. The award shall be made to the contractor who offers the lowest pricequotation for the required work, and who has the experience and resources to complete the contractsuccessfully.

Records of award decisions will be kept for Bank supervision missions and audits and shoppingrequirements should be reflected in the procurement section of the PIP.

Consultants' Services

Quality- and Cost-based Selection

Consultant's services shall be procured by using Quality and Cost Based Selection (QCBS) Methodexcept as otherwise provided in the following paragraphs. The short list of consultants for servicesestimated to cost less than US$100,000 equivalent per contract, may entirely consist of nationalconsultants in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines.

Indefinite Delivery Contract (IDC) procured by using QCBS method may be used for large contractsinvolving technical Assistance taking into consideration the capacity limitation of the Regional offices.

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Other Proceduresfor the Selection of Consultants

Quality Based Selection

Consultant Service for complex and highly specialized services, assignments with high downstreamimpact and assignments that can be carried out in substantially different ways may be procured undercontracts awarded in accordance with the provisions of paragraphs 3.2 of the Consultant Guidelines.

Least-cost Selection. Services for audit and other similar services estimated to cost less than US$50,000equivalent per contract may be procured under contracts awarded using least-cost selection method inaccordance with the provisions of paragraphs 3.1 and 3.6 of the Consultant Guidelines.

Selection based on Consultants Qualification. Services for very small assignments estimated to cost US$50,000 for which the need for preparing and evaluating competitive proposals is not justified may beprocured under contracts awarded in accordance with the provisions of paragraphs 3.7 of the ConsultantGuidelines.

Single Source Selection: Services for tasks that meet the requirements of paragraphs 3.8 to 3.11 of theConsultants' Guidelines may be awarded using Single Source Selection method.

Individual Consultants. Services estimated to cost less than USD$50,000 equivalent per contract fortasks for which a team of Consultants are not required and meet all the requirements set forth in paragraph5.01 of the Consultant Guidelines, shall be procured under contracts awarded to individual consultants inaccordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines.

Procurement Planning

Prior to commencing any procurement activity for Goods, Works and Services, the proposed procurementplan shall be presented to IDA for its review and approval. The proposed plan for the selection ofconsultants shall be reviewed in accordance with the provisions of paragraph I of Appendix I to theConsultant Guidelines.

Prior Review

IDA's prior review procedures would apply to all purchases for which the contract value is equivalent orin excess of US$100,000 for goods and works. Notwithstanding, the first two procurement packages forgoods, works and services, irrespective of their values, will be subject to prior review.

Contracts for employment of Consulting firms estimated to cost the equivalent of US$200,000 or moreand contracts for the employment of individual consultants estimated to cost the equivalent of US$50,000or more, will be subject to review in accordance with paragraphs I and 2 of Appendix 1 of the ConsultantGuidelines.

Terms of Reference for all consultancy services will be subject to prior review.

Post Review

With respect to each contract not subject to prior review post review shall be conducted on a minimum of25% of the contracts selectively, during project implementation in accordance with the procedures setforth in paragraph 4 of Appendix I to the Guidelines.

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Procurement Methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement Method'

Expenditure Category ICB NCB Other2 N.B.F. TotalCost

1. Subprojects 6.2 1.1 15.4 22.7(5.6) (0.9) (13.5) (20.0)

2. Goods 2.7 0.5 3.2(2.7) (0.3) (3.0)

3. Services 1.6 1.6(1.6) (1.6)

4. Training 1.2 1.2(1. 1) (1. 1)

5. PPF 0.48 0.48(0.48) (0.48)

Total 8.9 1.6 18.7 29.2(8.3) (1.2) (16.2) (26.2)

1, Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies2' Includes civil works and goods to be procured through national shopping, consulting services, services

of contracted staff of the project management office, training, technical assistance services, andincremental operating costs related to (i) managing the project, and (ii) re-lending project funds to localgovernment units.

N.B.F. = Not IDA-Financed (includes government expenditures)

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'Expenditure Category Contract Value Procurement Contracts Subject to

Threshold (US$) Method Prior Review (US$)1. Works less than $500,000 NCB All contracts above $200,000 and

the First 2 contracts irrespective ofthe value for each implementingAgency.

2. Goods $100,000 and over ICB All contracts above $200,000 andless than $100,000 NCB, LAPSO the first 2 contracts irrespective of

the value for each implementingless than $30,000 Shopping Agency.

3. Services $100,000 and over QCBS All contracts above $200,000 andFirms less than $100,000 CQ the

less than $30,000 LCS first two contracts for eachIndividuals implementing Agency, irrespective

$50,000 and over IC of valueless than 50,000 IC All

First two contracts

Total value of contracts subject to prior review:Note: Regardless of threshold, IDA would require to review all TORs.

Overall Procurement Risk Assessment:HIighAverageLow

Frequency of procurement supervision missions proposed: One every 6 month(s) (includes specialprocurement supervision for post-review/audits)

43

ANNEX 6(B) FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Summary of the Financial Management Assessment

A Country Financial Accountability Assessment (CFAA) for Ethiopia has not yet been conducted, but isexpected to be conipleted during the fiscal year 2003. There are, however, at least three otherassessments that provide an insight into the key issues regarding the financial management systems,including audits and controls, in the country.

A first assessment focusing on the Country Profile of Financial Accountability (CPFA) was conducted byIDA in June 1998. The conclusion of the assessment was that financial management is in general veryweak, system development levels are low and the expertise to carry out tasks and management skills arespread very thinly. However, there is a high degree of budgetary discipline in the country and there is noproblem of unauthorized expenditures and government arrears.

A second assessment (which is still at provisional stage) focused on the financial control capacities in thecountry and was conducted by consultants sponsored by the EU. The assessment revealed that controlsdo exist but not necessarily comply with those prescribed by the relevant proclamations and directives. Italso showed that the controls over financing are strong and found no evidenice of overspending of thebudget. The report mentioned that most of the problems are primarily related to the shortage of trainedmanpower at all levels and put forward 23 recommendations for consideration by the government.

A third assessment was the Country Portfolio Performance Review (CPPR) conducted by IDA during theIiscal year 2001. The CPPR's conclusion was that the financial management systems of most of theP'roject Implementation Units are weak and late submission of audit reports is a chronic problem in thecountry.

The above assessments clearly indicate that, at the country level, the financial management systems areweak and that this is mainly due to lack of trained manpower. However, the control environment isstrong and there is no evidence of accountability problems.

Strengths and Weaknesses

The country's discipline in executing budget and compliance with the existing government regulations isthe major strength in implementing this project. Line ministries and regional governments, which directlyor indirectly are involved in implementing some of the components under the CBDSD, are strictlyfollowing-up the budgetary discipline and regular government reporting mechanism.

Significant Weaknesses ResolutionsLack of trained manpower in the area of financial Increase the pay scale and develop a career plan formanagement and high turnover of staff civil servants; these issues are being addressed

under the Government's on-going CSRP programThe project is mainly implemented by a new Under the project, the capacity of the MCB withministry, which does not have previous experience strengthened - specifically, the MCB will hirein implementing donor-funded projects. This may qualified staff and adopt an adequate financiallead to delays in processing financial transactions. management system as a condition of effectiveness.

Also, IDA will be supervising financialmanagement under the project on a regular basis.

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Flow of funds

IDA, from the Credit Account, will transfer money to the Special Account maintained by MCB in theNational Bank of Ethiopia. Expenditures incurred for project eligible expenditures may be paid from theSAs. If the amount involved is more than 20% of the SA advances, payments may be made directly fromthe credit account. MCB from the SA will transfer the required initial advance to UDBCO local currencyaccount to be opened at a commercial bank acceptable to IDA and subsequent replenishments on the basisof financial reports. MCB will also open a local currency account at a commercial bank acceptable toIDA to be used for the counterpart fund.

Staffing

The MCB Finance and Budget Directorate should be staffed with adequate and trained people, who arecapable of handling and managing the project financial resources. The staffng of MCB will be aneffectiveness condition. The existing staff at UDCBO are well qualified to handle the project financialtransactions.

Accounting policies and procedures

The accounting policies and procedures to be designed by MCB should be able to produce reliable,relevant and timely information for informed decision making and monitoring. UDCBO has its ownaccounting polices and procedures, which are inline with Generally Accepted Accounting Principles. Ithas also a financial management manual, which explain the process of accounting and reporting. Theestablishment of the accounting and financial management system for the Project satisfactory to theAssociation would be a condition of effectiveness.

Internal Control

Internal control comprises the whole systems of control, financial or otherwise, established bymanagement in order to (a) carry out the project activities in an orderly and efficient manner, (b) ensureadherence to policies and procedures and (c) safeguard the assets of the project and secure as far aspossible the completeness and accuracy of the financial and other records.

MCB is expected to design and install internal control systems, which will help the management of theproject in achieving the project objectives in orderly and efficient manner. Thus, the main focus of theinternal control is placed on the following:

-Segregation of duties-Physical control of assets-Authorization and approval-Clear channels of command-Arithmetic and accounting accuracy-Integrity and performance of staff at all levels-Supervision

UDCBO has good system internal control systems in place.

45

External Audit

Th. annual consolidated project financial statements of the project (MCB is responsible to produce aconsolidated project financial statements for the project as a whole), the movement in the special account(SA) and Statements of Expenditures (SOEs) will be audited by an external auditor acceptable to IDA inaccordance with International Standards on Auditing. The annual audited financial statements, along withthe management letter, will be submitted to IDA not later than six months after the end of the fiscal year.

Since the Federal Auditor General is responsible for auditing all government funds, it will conduct theaudit or assign other external auditor to the project. The terms of reference for the external auditors willbe developed immediately after effectiveness. It was agreed that the Borrower would appoint the auditorsby no later than June 7, 2003.

Reporting and monitoring

MCB will establish adequate accounting and reporting systems, which will produce accurate and reliableinformation regarding project resources and expenditures. The systems should provide reliable record andreport all assets and liabilities and financial transactions of the project and sufficient financial informationfor managing and monitoring activities. The accounting and reporting systems will, among other things,include the preparation of a financial management manual, design of good internal control systems andappointment of qualified personnel. MCB is responsible to keep the accounts of the project as a wholeand is responsible to produce consolidated project financial statements, includin~g the financialtransactions of UDBCO. MCB will produce quarterly Financial Monitoring Reports (FMRs) and submitthe same to IDA 45 days after the end of each quarter. The FMRs will include financial, physical progressand procurement information. At a minimum, the financial reports should include the sources and uses offunds, expenditures by main expenditure classifications, beginning and ending cash balances and othersupporting schedules. The formats of the FMRs will be agreed during negotiation.

Impact of procurement arrangements

Most of the procurement will be on consultancy services and training. These types of procurement willuse the Special Accounts on regular basis and hence the use of SOEs frequently.

Disbursement Arrangements

The proposed IDA credit of US$26.2 million would be disbursed over three years from FY2003-FY2005.The annual estimated disbursements are indicated in a table on the first page of this Project AppraisalDocument. The Project Completion Date is June 30, 2005 and the Project Closing Date is December 31,2005. The proposed allocation of loan proceeds is shown in Table C.

46

Table C: Allocation of Loan Proceeds

Expenditure Category USA million Financing Percentage

Goods 3.0 100% of foreign expenditures and 85% of localexpenditures

Consultants' Services 1.6 100% of foreign expenditures and 85% of localCnlas s.6 expenditures

Training 1.1 100%

Subprojects 17.4 90% of amounts disbursed

Refunding of Project Preparation 0.5 Amount due pursuant to Section 2.02(c) of theAdvance Agreement

Unallocated 2.6

Total Project Costs (IDA) 26.2

Total (IIA) 26.2

Uses of Statement of Expenditures (SOEs)

Disbursements made on the basis of SOEs will be as follows: (a) for goods and consulting firms on allcontracts less than US$100,000; (b) for individual consultants on all contracts less than US$50,000; (c)for local training and workshops on all contracts regardless of the amount; and (d) Subprojects. Theborrower will retain all the Supporting documentation for SOEs, including completion reports andcertificates. The supporting documents will be made available to IDA during project supervision and beaudited annually by independent auditors acceptable to the Association. Disbursements for expendituresabove these thresholds will be made against presentation of full documentation relating to thoseexpenditures. During the project launch workshop, there will be a session on proper preparation ofwithdrawal applications, including the preparation and submission of required supporting documents.

SpecialAccount

To facilitate disbursements against eligible expenditures under the Credit, MCB will establish SpecialAccount (SA) in the National Bank of Ethiopia. The special account will be denominated in United Statesdollars. The authorized allocation for the Special Account will be US$2,500,000. Upon effectiveness,IDA will deposit an initial deposit up to US$1,250,000 into the Special Account. Once the totaldisbursements from the Credit account, including commitments, have reached an aggregate amount ofSDR 3,000,000, the initial allocation may be increased up to the authorized allocations. Replenishmentsof funds from the IDA loan account to the Special Account will be made on evidence of satisfactoryutilization of the advance, reflected in the SOEs and/or on full documentation for payments above SOEthresholds. MCB will submit replenishment applications at least once in a month. If ineligibleexpenditures are found to have been made from the Special Account, the Borrower will be obliged torefund the same. If the Special Account remains inactive for more than six months, the Borrower may berequested to refund to IDA the outstanding balance of the Special Account and amounts of unaccountedexpenditures paid from the account. The Special Account will be audited annually by independentauditors acceptable to the IDA.

47

Counterpartfund

T he Government of Ethiopia will open a local currency accounts in the National Bank of Ethiopia andwill deposit Birr 6,500,000 (US$770,000 equivalent) for the implementation of the first project year andsubsequent deposit at the beginning of the project year based on the annual budget of the project.

Action Plan

Action to be taken Expected completion date Responsible bodyI Preparation of a financial

management manual describing-theflow of funds, accounting, reportingand auditing arrangements by MCB Before effectiveness Borrower

2 Appointment of key accounting_ lofficers at MCB Before effectiveness Borrower

Financial Covenants

MCB shall maintain adequate financial management system and prepare consolidated project financialstatements in accordance with International Accounting Standards. MCB shall submit audited projectfinancial statements latest six months after the close of the fiscal year. The Borrower shall prepare theFMR which would be submitted to the Association not later than 45 days after the end of the firstcalendar quarter after the Effective Date, covering the period from the incurrence of the first expenditureunder the Project through the end of such first calendar quarter; thereafter. Each FMR shall be furnishedto the Association not later than 45 days after each subsequent calendar quarter, and shall cover suchcalendar quarter. The Borrower will also submit additional financial reports as required by IDA.

Supervision plan

C'onsidering the nature of the project, the IDA's supervision mission should be as regular as possible.E]ach year, there should be at least two main supervision missions and other two interim supervisionmissions by the country office staff.

48

ANNEX 7: PROJECT PROCESSING TIMETABLE

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Project Schedule Planned Actual

Time taken to prepare the project (months) 8 8

First Bank mission (identification) October 15, 2001 October 15, 2001

Appraisal mission departure April 15, 2002 April 19, 2002

Negotiations May 1, 2002 May 1, 2002

Planned Date of Effectiveness September 1, 2002

Prepared by:

Preparation Assistance:

Bank staff who worked on the project included:

Name Bank Unit SpecialtySumila Gulyani AFTUI Task Team LeaderDavid DeGroot AFTUI Senior Urban SpecialistYitbarek Tessema AFTU I Operations OfficerNavin Girishankar AFTI2 Senior Public Sector SpecialistRowena Martinez AFTU I Operations OfficerEshetu Yimer AFTQK Financial Management SpecialistSamuel Haile Selassie AFTQK Procurement SpecialistSteve Gaginis LOAG2 Disbursement OfficerSolange Alliali LEGAF Senior CounselJames Hicks Consultant Local Government SpecialistPerla San Juan AFTU1 Program AssistantYeshi Gizaw AFCO6 Team AssistantPeer ReviewersChristine Kessides TUDUR Economic AdvisorMichael Stevens AFTPR Lead Public Sector Development Specialist

49

ANNEx 8: DOCUMENTS IN THE PROJECT FILE

ETHIOPIA: Capacity Building for Decentralized Service Delivery

A. Project Implementation PlanRevised draft prior to Board Presentation (July, 2003)

B. Bank Staff AssessmentsFinancial Management AssessmentProcurement Assessment

C. Other

50

ANNEX 9: STATEMENT OF LOANS AND CREDITS

ETHIOPIA: Capacity Building for Decentralized Service Delivery

As of 5t0612002 Difference between

expected and actual

Original Amount In US$ Millions disbursements

Project ID Project Name FY IBRD IDA GRANT Cancel. Undisb. Orig. Frn Rev d

No. of closed projects: 63

P000733 Ag. Researc & Train 1998 60 36.41 25.0

P035147 Conserv.& Sustain. Use of Medic. Plants 2001 1.9 1.67 -0.1

P052315 Conservation of Medional Plants 2001 2.6 2.41 -0.1

P057770 Cultural Heritage 2002 5 5.14

P073196 Demobilization and Reintegration Project 2001 170.6 69.06 4.4

P000732 Education Sector Investment 1998 100 32.13 26.9

P067084 Emergency ReoDvery and Rehab. Project 2001 230 181.66 116

P000736 Et Energy II 1998 200 88.39 59.4

P069886 Ethiopia Multisectoral HIV/AIDS Project 2001 59.7 45.80 4.5

P089083 Global Distance Leaming 2001 4.9 4.86 1.2

P000756 Health Sector 1999 100 53.87 46.8

P000753 Nat Fertilizer Proj 1995 164 0.08 15.14 -21.3

P000752 National Seeds Project 1995 22 4.19 3.89 10.0

P000734 Road Rehabilitabon 1993 96 14.11 20.5 12.7

P000755 Road Sec. Dev. Prog. 1998 309.2 157.03 165.2 63.4

P000771 Social Rehab (ESRDF I) 1996 120 11.48 18.28 43.8 11.9

P000764 Water Supply Dev & Reh 1996 35.7 8.18 13

P050342 Women's Development Initiatives Project 2001 5 4.40. 0.7

Overall result Result 1684.7 1.9 15.75 742.43 515.5 88.0

ActiveClosed Projects Total

ProJects

Total Disbursed (IBRD and IDA): 832.48 1,831.89 2,864.37

of which has been repaid: 0.00 338.89 338.89

Total Undisbursed (IBRD and IDA): 740.76 0 740.76

51

Statement of IFC's

Held and Disbursed Portfolio

As of May 6, 2002

(In US Dollars Millions)

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

0

Approvals Pending Commitment

Loan Equity Quasi Partic

52

ANNEX 10: COUNTRY AT A GLANCE

ETHIOPIA: Capacity Building for Decentralized Service Delivery

Ethiopia at a glance 9118101

Sub-POVERTY and SOCIAL Saharan Low-

Ethiopia Africa Income Development diamond'2000Population, mid-year (millions) 64.3 659 2,459 Life expectancyGNI per capita (Atlas method, US$) 100 480 420GNI (Atlas method, USS billions) 6.7 313 1,030

Average annual growth, 1594400

Population (I%) 2.6 2.6 1.9 GNILabor force (IX) 2.3 2.6 2.4 GNI Gross

per - primaryMoat recent estimate (latest year available, 1994-00) capita , ' enrollment

Poverty (% of population below national poverty line)Urban population (X oftotalpopulation) 18 34 32Life expectancy at birth (years) 43 47 59Infant mortality (per 1,000 live births) 107 92 77Child malnutrition (% of children under 5) .. . .. Access to improved water sourceAccess to an improved water source (X ofpopulation) .. 55 76Illiteracy (X ofpopulation age 15+) 62 38 38Gross primary enrollment (X ofschool-age population) 43 78 96 Ethiopia

Male 55 85 102 Low-income groupFemale 31 71 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratios'

GDP (USS billions) .. 86 6.5 6.4Gross domestic Investment/GDP . 118 16 0 14 3Exports of goods and serviceslGDP . 7.8 14 1 154 4TradeGross domestic savings/GDP .. 7.2 1.2 -1.0 TGross nabonal savings/GDP .. 9.0 8 0 8 9

Current account balance/GDP .. -2.8 -8.1 4.4 Domestic Interest payments/GDP .. 0.6 1.3 1.3 vin g InvestmentTotal deb/GDP .. 1004 85.7 859 sTotal debt service/exports 7.6 34.9 61.9 54.0Present value of debVGDP .. . .. 37 5Present value of debt/exports .. . .. 239.3

Indebtedness1980-90 199040 1999 2000 2000-04

(average annual growth)GDP 1.1 4.7 6.5 5.3 6.8 EthiopiaGDP per capita -1.9 2.4 4.0 2.8 4.5 Low-income groupExports of goods and services 2.4 9.5 -2 6 23.6 6 5

STRUCTURE of the ECONOMY1980 1990 1999 2000 Growth of Investment and GDP (%)

(% of GDP) 20Agriculture .. 493 52.3 52.3Industry .. 12,7 11.1 11.1

Manufacturing . 7.8 70 7.0 o0 ,Services 38.0 36.5 36.5 -o0 97 N 99Private consumptlon .. 74,3 80.1 76.7 20General govemment consumption .. 18.5 18.7 24.4 GDI _ GOPImports of goods and services 12.4 29.0 30.7 - -G-P

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(average annual grotwh)oAgriculture 0.2 21 3.8 1.9 40Industry 0.4 61 12.9 3.0

Manufacturing -0.9 65 17.7 4 2 2 _Services 3.1 7.1 7.8 9.5

Private consumption 0.2 2.9 3.1 -2.0 95 se 07 GoGeneral government consumption 4 5 9 2 37.3 33 2 -20Gross domestic investment 2.1 9.4 134 -6.2 Exports - ImportsImports of goods and services 1.5 6.4 18 4 6.3

Note. 2000 data are preliminary estimates.

*The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

_ _ _ __ _ ._ _____ . _ . _ r ~, ~. ~ _ z.~ s.z .- ~~ .- ~ -S --- 7- _ --

53

Ethiopia

PRICES and GOVERNMENT FINANCE1980 190 1999 2000 Inflatlon (%)

Domestic prices6% change) Is Consumer prices 4.5 5.2 3.9 4.2 o0Implicit GDP deflator .. 3.5 15 1.4 5

Government flnance J(% of GDP Inndudes curent grants) - ss es 98 99 00Current revenue .. 17.7 17.8 18.3 10Current budget balance .. -3.9 -3.0 -8.2 - GDP deflator -e-CPiOverall surplus/defict .. -12.0 -12.1 -14.8

TRADE

(US$ nWillons) 1980 1990 1999 2000 Export and Import levels (USS nill.)

Total exports (fob) 459 366 484 486 2,000Coffee 196 281 262Leather and leather products 64 32 35 1.500

ManufacturesTotal Imports (clf) 692 881 1,558 1,611 1, .0

Food 73 100 116 9*0_

Fuelandenergy 109 111 213Capital goods .. 340 643 755

Export price index (1995=100) .. 77 78 84 94 95 Be 97 se oImport price Index (1995=100) .. 91 92 97 *Exports U ImportsTerms of trade (19953100) .. 85 84 68

BALANCE of PAYMENTS

(US$ mi/Ions) 1980 1990 1999 2000 Current account balance to GDP (%)Exports of goods and services 569 672 915 984 oImports of goods and services 782 1.069 1,878 1,962Resource balance -213 -397 -963 -978 -2

Net Income 7 -67 -52 -60 -4Net currant transfers 80 220 494 691

Current account balance -126 -244 -521 -346

Financing Kems (not) 86 196 500 .Changes In net reserves 40 48 21 .. -10

Memo:Reserves Inciuding gold (USS millions) 262 55 434 348Conversion rate (DEC, /ocaLUS$) 2.1 2.1 7.5 8.1

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(USS mimilons) ComposIUon of 2000 debt (US$ mill.)Total debt outstanding and disbursed 824 8,630 5,544 5.481

IBRD 56 27 0 0 F:117 G 77IDA 249 824 1,739 1,779

Total debt service 45 236 585 540 ,r B 1,779lBRD 10 9 0 0 179IDA 2 10 31 34

E: 2,09BComposition of net resource flows

Official grants 124 604Offlical credtors 67 279 -274 -277Private creditors 26 -57 -7 -10 C: aForeign direct Investment 0 12 .. ..

Portrolloequity 0 0 .. .. D: 1,324

World Bank programCommKments 0 79 160 0 A -IBRD E -BliateralDisbursements 28 74 148 137 B-IDA D-OwermruttWlateral F-PrivatePrincipalrmpayments 4 11 19 21 C-IMF G-Short-termNetflows 24 63 129 116Interest payments 8 8 12 13Nettransfers 16 55 117 103

Development Economics 9/18/01

54

ANNEX 11: LETTER OF SECTOR POLICY

ETHIOPIA: Capacity Building for Decentralized Service Delivery

-1

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ThLe Federal Democratic Republic of EthiopiaVlnMtry of Finaance and Ecoanomic DevelopEteuent * ) 2 IiLt- Z;

Date

. Calisto MadavoV ?resident for Africa

/ re Wle World Bank

Dear Mr. Madavo.

ReLetter of Sector Polcy

The purpose of this letter is to inform the Board of Directors of the World Bank ofthe Govenment of Ethiopia's sectoral policy wi regard to capacity building anddecentralization. The Government's policy famewwork in this regard is of relevancenot only to the Capacity Buildig for Decentralized Service Delivery (CBDSD)project, scheduled for Board presetation on June 18, 2002, but also to theGovernment's broader ezgagemem with the Bank as an external supporter ofEthiopia's development program.

With rgard to capacity building, Government's policy is clear. By virtue of TheReorganizaion of the Executive Organs of the Federal Democratic Republic ofFthiopia Proclamation No. 256/ 2001, the Ministry of Capacity Building (MCB) wasceated. The creation of MCB is a culmination of an internal process of evaluationin which the Ba*k was a key external participant during meedngs with the PrimeMinister in 1999 and 2001. MCB is establshed to guide the formulation,implemer"ation, monitoring, and cvaluation of capacity building progamnunes at thenational leveL This mandate of MCB extends to the National Capacity BuildingProgram (NCBP) that addresses the public sector, the priate sector and civil societyard NGOs and segments into 14 key areas in which capacity must be built in orderfor democratzation and economic development to accelekate in Ethiopia. Most ofthe documents describing plans to build capacity in each of these key arwas wereprovided to the Wordl Bank in as far back as 2000. Tlhe mnital phase of the'NCBP isbeing firplemented over a threeyear pemod. The 14 key areas include:

1. Technical, Vocational Education, & Training-Agricultural Program

2. Technical, Vocational Education, & Training-Non- Agricuural Program

3. Hi Eduadtion Reform Program4. Civil Senice Reform Progam.5. Justice System Reforn Program

Z0A- 71.£.bh 4-nATel. 65 2400 r' ~Bx1906 I4.13 66fl55I 14196P. 0. -13ox ~Fax 16655196 Addis Ababa - Ethiopia

zo0d TO8SLtPOT0O Oi i:; I 8i B I W08-4 E8':~ OZ200?-Nnlf-LF

?I.IN17 Pkj"h'12 Ad7+ <,.#i)+C Ref. No,The Federal DetLoeratic Republic of Ethiopia

Ministry of Flnance and Ecorziomic Developmaeut *- r SDate

6. Tax System Refonn Program7. District Level Decentralization Program8. Urbn Mnagemet Capacity Building Program9. Co-operatives Capacity Building Prograun10. Private Sector Development Program11. Tetiles and Gaments Industry Capacity Building

Program12. Construction Sector Capacity Building Program13. Information and Communication Technology

Capacity Building Program14. Civic Societies and NGOs Capacity Building

Program

The NCBP has been designed as a holistic prgram that addresses the entirespectrm of capacity buildig requirements in Ethiopia. Government has aleadyinitiated delivery in a number of key areas (agricultural extension, civil servicereform, tax system refzm, justice system refonn etc.) and is in the process ofsuring extenal support for the entire program. The policy of govenunent is thatfunding for the NCBP sbould be budgetay in nature, providing maximum flexibilityto GOlE m assignmg resources to progrums and sub-programs as needed. Progranresources will be albcated based on performnce in meeting objectives, and MCB'srole is to coordinate and monitor implementation through the involved federal,regional and local agencies and civil society, including NGOs and the private sector.

An important ross sectoral element of the NCBP is stengthening the capacity of alllevels of the public sector, the private sector, and civil society and NGOs to deliver,operate and manta inastrue and servies required for growth: In diis respect,GOE has adopted an important new policy focus upon building the capacity of sub-regmnal local governane units (particularly woredas and mnnicipalities) to facilitatedemoratially derlized service delivery. The Govemnent is already initiatingan intergovenmuental fiscal block grant system for woredas country wide, providingresoures for all 556 of these governance units to begin building capacity to deliverservces demanded by lwal comn unities on a sustainable and accountable basis.

ln addition, the Goverment recognizes the need to irmprove the governance andbuild the managemet capacity of cities and towns in the country throughrevitalizing and enabling m cipal institutions. Currently, 927 towns of diffeentsize and more than 300 mumcipalities of different categories exist in EthiopiaHowever, as mnicipal govermens were largely ignored over many years, theircGsaFit to deliver infiat and services to residents at present is by far limited.

£0W. 56 104 Ox O1905 ?4 13 dU 5 I 96NToE. 552400 0 BoxFax 516,146 Addis Ababa - Ethiopia

£O'd TO0887ZTO i O I WIJ-d 61': OF ZO-Nnz~-~z

O&*+e* x4.4'T 4-fhZflpe 4t,'1A.h *&Wc

P71f4W frhS"C A"7+ 0nLA+C Ref. No.

The Federal Democratic Republic of EthiopialUftry of Finance and Ecomuomi'c Developmlent * Z/

Date

Recopizing the constains posed by existing municipal institutional capacity aswell as alerted by the ipid growth of urban population and increasing prevalence ofpoverty, the Goverment is working to put in place proper policy and opationalmeasures. The lead agency enrusted with the task of realing this goal is the newlycreated Ministry of Federal Affairs. The Govemmen has also created under theMinistry of Federal Affairs the Urban Management Capacity Building ProgramOffice to serve as a focal point and coordinate implementation of the urbanmanme nt capacity building program. The process of building municipalmanagcment capacity involves a sequenced process in each of the country's 9regions including: a) legislative and policy reform; b) inplementation of requiredguidelie and systems; c) resucturing of the local govemments themselves; and, d)optimizing own-source revenue bases withi a clear intergovernmental fiscal system.

Clearly. therefore, the Government's sectoral policy agenda with regard to nationalcapacity building, and decenraliion is ambitious, realistically though, and wideranging. Tbe Governmt believes that the World Bank is an important internationalinstitton in tenns of experienc with these critical issues and looks frward,tberefore, to a rapidly growing cooperatve partnership to build the capacity ofEthopia's human resources and governance systems.

With best re ards. -

Cc-~~~~~~~~~~

Minist of Capacity Building S-

dkAh ~~~~~~4.hA M nTel. 52400 P.O. Box 10 Fax 56 135.55 14 96 Addis Ababa - Ethiopia

I

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Report No.: 23910 ETType: PAD