Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL CREDIT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Sustainable Development Unit South Asia Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL CREDIT IN THE AMOUNT OF SDR 27.8 MILLION (US$42 MILLION EQUIVALENT) TO THE PEOPLE S REPUBLIC OF BANGLADESH FOR A MUNICIPAL SERVICES PROJECT May 26,2010 Report No: BD This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective April 30,2010) Currency Unit = Taka (Tk) Tk = US$1 US$ = SDRl FISCAL YEAR July 1 - June 30 AAA ADP BMDF FDR FM LGED MLG MOF MSP MSU O&M PPA PRMF TA ULB ABBREVIATIONS AND ACRONYMS Analytical and Advisory Activity Annual Development Program Bangladesh Municipal Development Fund Flood Damage Rehabilitation Financial Management Local Government Engineering Department, MLG Ministry of Local Government, Rural Development and Cooperatives Ministry of Finance Municipal Services Project Municipal Support Unit, LGED Operation and Maintenance Public Procurement Act, 2006 Procurement Risk Mitigation Framework Technical Assistance Urban Local Bodies Vice President: Country Director: Sector Manager: Task Team Leader: Isabel Guerrero Ellen Goldstein William Kingdom Songsu Choi, Zahed Khan

3 FOR OFFICIAL USE ONLY PROJECT PAPER Table of Contents Project Paper Data Sheet I. Introduction Proposed Changes... Appraisal Summary... Background and Rationale for Additional Financing IV Annexes... Project Description Results Framework and Monitoring Indicators This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. 11

4 PRCNECTPAPERDATASHEET Date: May 26,2010 Country: Bangladesh Project Name: Municipal Services Original Project ID: PO AF Project ID: P Borrower: Government of Bangladesh Responsible agency: Bangladesh Municipal Development Fund (BMDF) & Local Government Engineering Department (LGED) Team Leader: Songsu Choi, Zahed Khan Sector Director: John H. Stein Country Director: Ellen A. Goldstein Environmental Category: B O W rating: N/A Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board? o Yes X No o Yes o No o Yes XNo Revised project development objectives/outcome: Not applicable I Does the project trigger any new safeguard policies? No For Additional Financing [ ] Loan [ XI Credit [ ] Grant For Loans/Credits/Grants : Total Bank financing (US$m.): 42.0 Proposed terms: 40 years maturity including 10 years grace Financing Plan (US$m.) (AF) Source Total BorrowerRecipient (Participating Municipalities) 4.0 IDA Total 46.0 Financing Plan (us$m.) (Original project + AF) Source Total BorrowerRecipient 15.4 TDA -New rota

5 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional credit in an amount of SDR 27.8 million (US42 million equivalent) to the Municipal Services Project (Credit No BD). 2. The proposed additional credit would help finance the scaling up of improvements in urban infrastructure and the municipal financial and management capacity. The Project has so far financed the rehabilitation or construction of urban infrastructure in about 13 0 municipalities (and the repair and rehabilitation of flood-damaged infrastructure in 195 towns), as well as a capacity strengthening program of 92 municipalities. These activities have been carried out well and resulted in significant benefits as well as strong demand for additional support. The proposed additional credit would help extend the partial financing of urban infrastructure improvements to some 170 towns, ' and extend the municipal capacity strengthening program to about 142 municipalities, out of 3 15 urban local bodies (ULBs) of Bangladesh. Further, the additional financing would support the development of a next generation of urban improvement programs. 3. The proposed additional financing would be the second one to help scale up the core components of the Project. In recognition of the good early implementation record under the Project, an additional financing of $25 million was approved in 2008 to help rehabilitate the damages to urban infrastructure as a part of the Emergency 2007 Flood Restoration and Recovery Assistance Program. II. Background and Rationale for Additional Financing 4. Bangladesh has been urbanizing rapidly since Independence. The urban population has doubled since 1990, now representing about 26% of the national total population. The number of municipalities has nearly tripled from 110 in 1991 to 3 16 now. The earlier urban growth, driven mainly by rural displacement by social and agricultural transformation, was even faster and overwhelmed the limited fiscal and managerial capacity of the government, resulting in rapid deterioration of living conditions and the environment for urban residents. 5. The Municipal Services Project (MSP) was conceived in this situation with the objective to improve urban environment, infrastructure and services, and to that end, to (a) strengthen the institutional capacity of selected municipalities and city corporations; (b) improve resource allocation and fiscal discipline; and (c) support governmental efforts to reduce urban poverty and improve the environmental conditions of urban communities. 6. The credit of SDR 100 million (then equivalent to US$ million, actual disbursement of US$ million) approved in March 1999 financed the following components: (a) Urban infrastructure construction and rehabilitation, planned and implemented by municipalities, financed through the Bangladesh Municipal Development Fund (BMDF); (b) Urban infrastructure construction and rehabilitation in about 20 municipalities planned and carried out before BMDF's establishment; (c) Rehabilitation of urban infrastructure damaged by floods; and 1

6 (d) Institutional Development for creation and operation of BMDF and a Municipal Support Unit (MSU) under the Local Government Engineering Department (LGED). 7. LGED has been responsible for preparing the project and implementing the components (b), (c), and part of (d) above. In view of its demonstrated implementation competence, $15 million of the credit was reallocated from the BMDF component (a) of the Project, along with $1 1 million from another project, to the flood damage rehabilitation (FDR) component (c) after the 2004 floods. After another severe flood in 2007, the Project was allocated an additional credit of SDR15.8 million (now,equivalent to US$24.5 million, Cr BD) for FDR works. 8. The creation and development of BMDF has been an important aim of the Project, to improve the efficiency and sustainability of municipal investments. Its establishment - jointly by the Ministry of Finance and the Ministry of Local Government, Rural Development and Cooperatives - was delayed by more than three years, resulting in a significant delay in the entire project as well as the reallocation of the credit to the FDR mentioned above. Since then, however, it has developed into a competent project appraisal and management entity, supporting urban infrastructure investments in 11 1 municipalities so far, including over 200 km of drains, over 160 km of water supply lines, 23 bus and truck terminals, and over 100 public toilets. The subproject financing consists of 10% by the beneficiary municipality, and the rest by the IDA credit of which 10% is repaid to BMDF over 20 years. 9. For institutional development of municipalities the Project also supported the creation and operation of MSU, a unit within LGED. It has provided technical assistance and training for the development of management information systems and revenue enhancement measures in 133 municipalities including four City Corporations so far, including 41 municipalities, TA for which has been financed recently by Asian Development Bank. The capacity building measures supported include: computerization and improved management of Holding Tax bills and records, municipal accounts, water supply bills and records, Trade License records; development of Infrastructure Inventory and preparation of base maps; and support for community mobilization. 10. While the Project implementation started out slowly, the overall Implementation Progress (IP) has become satisfactory and progress towards achievement of the Development Objective (DO) has also been rated satisfactory. There are no problem flags and all key credit covenants are complied with. The closing date was extended along with the additional credit for the 2007 FDR, to June 30, All credit has been disbursed except US$4.07 million of the credit for the 2007 FDR by the end of In general, Bangladesh municipalities generate little own revenues (less than $4 per capita) and depend entirely upon central government grants or programs for the meager infrastructure investments (about $7 per capita). Practices adopted under the Project for municipal institutional and infrastructure development represent significant improvements: greater authority and responsibility of the municipalities in selecting and implementing the investments with matching operational and financial plans, substantial self- and loan-financing requirements, improved project evaluation and management, improved municipal management and revenue systems. Extending these advances remains an important challenge, along with the evolution of policy frameworks for local governance and urban development. The Bank Group is currently assisting the Government for developing these policy frameworks, and part of the additional financing proposed here would be allocated to the development of an improved urban investment and capacity building program. 2

7 12. In the meanwhile, it would be highly beneficial to continue the Project s successful program of infrastructure and capacity building support, for which there is a large unmet demand. While several bilateral agencies as well as the Asian Development Bank are providing considerable aid for urban development, their programs are targeted to a small number of preselected municipalities Proposed Changes 13. The Project s development objectives, project design, and implementation arrangements would remain unchanged, except some tightening up of fiduciary controls as detailed in the next Section. The main proposed changes consist of the scaling up of the urban infrastructure and capacity building programs as follows: 14. In addition to the extension of the support for the 40 newly participating municipalities, the BMDF proposes to provide follow-up financing to 16 municipalities which have made a particulariy good use of the first financing and can carry out hrther investments. MSU would also provide continued trouble-shooting to the 133 municipalities which have received the package of capacity building supports. Component Urban infrastructure financing through BMDF BMDF project management Urban infrastructure investment by LGED Flood damage rehabilitation* Support for municipal capacity building Other Technical Assistance Incremental Operating cost (LGED & BMDF) Total Existing Additional Total Credit * Financing

8 IV. Appraisal Summary Institution a1 15. The Project is being executed by participating municipalities through two central agencies, LGED and the BMDF. The former is a Department under the Ministry of Local Government, Rural Development and Cooperatives (MLG), and the latter is a governmentowned company under the Ministry of Finance. The Board of Directors of the BMDF is chaired by the Secretary of the Local Government Division of the MLG and includes members representing the Ministry of Finance and the ULBs. These executing agencies have developed and demonstrated their effectiveness in implementing the respective parts of the Project, and will continue to carry out the same responsibilities with the additional financing. LGED will carry out the additional component - technical assistance for development of an improved urban infrastructure and capacity development program. 16. Consistent with the Project's focus on developing the municipal capacity, the participating municipalities would be required to prepare and carry out an adequate Financial and Operating Plan as a condition of the infrastructure financing. Economic Analysis 17. An analysis of a sample of subprojects at the time of the initial project appraisal demonstrated an average economic rate of return of 26.4%. While similar analysis has not been performed for the new batch of the subprojects proposed, it is expected that similarly high economic return would continue since the substantial under-provision of public infrastructure persists, especially in the municipalities receiving BMDF financing for the first time, whereas the demand has increased with the growth of population and incomes. Procurement 18. Procurement for the proposed additional financing would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (Revised October 2006 and May 2010); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (Revised October 2006 and May 201 0), and the provisions stipulated in the Financing Agreement. Within the overall context of Bank's Guidelines, local procurement of goods (less than US$300,000 per contract), works (less than US$5,000,000 per contract) and services (firms for less than US$200,000 per contract for which the shortlist entirely consists of national consultants and individual consultants for less than US$50,000 per contract) will follow the Government's Public Procurement Act 2006 (PPA), with the following exceptions applicable to national competitive bidding (goods and works): (a) post bidding negotiations shall not be allowed with the lowest evaluated or any other bidder; (b) bids should be submitted and opened in public in one location immediately after the deadline for submission; (c) rebidding shall not be carried out, except with the Association's prior agreement; (d) lottery in award of contracts shall not be allowed; (e) bidders' qualification / experience requirement shall be mandatory;

9 (f) bids shall not be invited on the basis of percentage above or below the estimated cost and contract award shall be based on the lowest evaluated bid price of compliant bid from eligible and qualified bidder; and (g) single stage two envelope procurement system shall not be allowed. 19. In case of any conflict between the Bank Guidelines and the PPA or ambiguous or confusing interpretation in their provisions, the Bank Guidelines and the Association s interpretation shall prevail. 20. For each contract to be financed by the additional financing, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and timeframe are agreed between the implementing agency and the Bank in the Procurement Plan. The Procurement Plan will be updated as required to reflect the actual project implementation needs and institutional capacity. The following key arrangements have been put in place and prove effective to improve 21. governance in procurement activities and mitigate the procurement associated risks: i. Implement the Procurement Risk Mitigation Framework (PRMF) including quarterly report on procurement performance indicators. There are 45 procurement performance indicators including Fraud & Corruption (F&C); and ii. Service of a full time procurement officer under BMDF with sound knowledge in national and international procurement. 22. In addition, the following measures will be carried out before the first procurement starts: i. Each participating municipality shall have a procurement focal person with appropriate training on national procurement; ind ii. BMDF will retain the services of a consultant team including at least one procurement specialist, who shall participate as a member in each bid evaluation committee. Financia1 Management 23. FM capacity and systems: The project under additional financing will be implemented by the two agencies - LGED and BMDF - that have been implementing the original project. The financial management (FM) arrangements used in the original project, which are satisfactory, will be used under the additional financing with strengthened internal control on field level transactions. LGED has been using the project-based FM systems, while BMDF has been using its entity FM systems for financial management of the project. Use of computerized accounting systems by both agencies provided greater assurance on the timeliness and accuracy of financial reporting. During implementation to date, the financial management teams of both the agencies have acquired significant experience in IDA procedures and requirements. 24. FM systems of the municipalities: Many municipalities which the project has been supporting for institutional strengthening still have some deficiencies in Financial Management capacity and systems. Computerized accounting system, implemented by MSU with consultants and support to strengthen FM capacity and monitoring in selected municipalities, has not yet 5

10 delivered the expected results. The municipalities would require authority to fill in the vacant FM positions and the Local Government Division s approval to maintain accounts under the double-entry system and directives to use computerized accounting system implemented by MSU. Internal control system on municipal revenue collection to achieve sustainability has not progressed as expected. Monitoring and evaluation of service delivery and implementation by the municipalities needs continued strengthening. Scope of audit will be extended with adequate provision of audit fees to include municipal audits on a sample basis. 25. Disbursements and Flow of Funds: IDA funds will continue to be channeled through the existing Dollar Special Account (DOSA) of LGED and Convertible Taka Special Account (CONTASA) of BMDF being operated under the original Credit. LGED will continue to use report-based disbursement; in addition, BMDF will also use report-based disbursement in place of the currently used transactions-based disbursement. 26. Audit: Audit arrangement in place for the original credit will be applicable for additional financing. BMDF has been submitting the external audit reports of the entity covering the project transactions within the due dates. However there was scope of improvement in the entity audited financial statements in terms of providing analytical information on project transactions and balances. Audit reports for the LGED portion were received on time from the Government auditor. Such audit reports contained findings of weak internal controls on field level transactions. This weakness would not affect additional financing which would not finance LGED only for technical assistance managed centrally. 27. FM Risks: From the fiduciary perspective, the overall FM risk for the Additional Financing is assessed as Substantial. This is composed of high inherent risk at country level and substantial to moderate control risks at the project level. Safeguards 28. The activities under the proposed additional financing will not trigger any new safeguard policy or change the environmental category of the project. The framework for environmental and social safeguards has proven effective, with appropriate revisions, during the course of the Project implementation. To reflect the evolution of the Bank s safeguard policies and the increased role of the municipalities in urban infrastructure subproject preparation and implementation, the social impact management framework was updated and revised in August 2007 and the environmental impact management framework in April These will continue to apply under the additional financing. No exception to any Bank policies is required. 6

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14 Bangladesh: Municipal Services Proiect - Additional Financing (Cr BD) Project Description Annex 2 1. The Municipal Services Project (MSP) is being implemented to support urban infrastructure as well as municipal capacity building in over 150 municipalities through the following main components (with initial allocation of the credit total $138.6 million): (a) Urban infrastructure construction and rehabilitation, planned and implemented by municipalities, financed through the Bangladesh Municipal Development Fund (BMDF) - $70 million; (b) Urban infrastructure construction and rehabilitation in about 20 municipalities planned and carried out before BMDF s establishment - $40.1 million; (c) Rehabilitation of urban infrastructure damaged by floods - $16.2 million; (d) Institutional Development for creation and operation of BMDF and a Municipal Support Unit under the Local Government Engineering Department (LGED) - $12.3 million. 2. LGED was responsible for preparing the project and also implementing the latter three components, and it has established a strong track record of implementation from the project beginning in BMDF was established as a new company under the Ministry of Local Government, Rural Development and Cooperatives (LGED s parent ministry) and the Ministry of Finance, but after a long (3-year) delay. As a result, when major flood damages occurred in 2004, LGED was asked to expand its urban flood damage rehabilitation (FDR) work taking $15 million from the BMDF component, as well as another $1 1 million under another project. 3. Urban Infrastructure Financing. After the initial delay, however, BMDF has been performing well, introducing improvements in the selection, design, and management of infrastructure investments. It has fully disbursed the credit of $55 million to 11 1 municipalities, and it has a pipeline of subprojects in 56 municipalities (33 of which would be first-time beneficiaries) which it has appraised. These, listed in Table A2.1 below, include construction or upgrading of roads, water production and distribution facilities, pump house, drains, street lighting, kitchen markets, community centers, office buildings and slaughter houses. Each of the subprojects is expected to be completed within a year. With some adjustments of details, this pipeline would be the main target of the proposed additional financing ($36 million). The financing parameters will remain the same: 10% of the costs financed by the beneficiary municipality; of the rest financed with the IDA credit through BMDF, 15% would be repaid to BMDF over 20 years or less including up to 3 years grace. 4. The additional credit would also finance the consultant services and training for BMDF for subproject supervision and assistance, at an estimated cost of $1.5 million; and BMDF incremental operating cost of up to $1 50,

15 Table A2.1 Bangladesh: Municipal Services Project - Additional Financing Urban Infrastructure Subprojects *OHT=Over Head Tank, PH=Pump House, R=Road, D=Drain, KM=Kitchen Market, CC=Community Centre, SL=Street Light, WS=Water Supply, PL=Pipe Line, PT=Production Tubewell, OB=Office Building, SH=Slaughter House. 11

16 5. Municipal capacity building component of the project was implemented by the LGED through its Municipal Support Units (MSUs) located at its headquarters and in six regions. The MSU undertook the implementation of its four minimum program activities: computerization and improved management of tax records and water billing, computerization and improved reporting of accounts records, inventory assessment and mapping of municipal infrastructure, and community mobilization support to municipalities. The MSU has provided relevant training along with the requisite hardware to municipal officials and staff, and has covered 133 municipalities satisfactorily. Many of these municipalities, for example, have attained 90% collection of holdings tax. These activities will be continued and extended to at least 50 more towns, as well as continued trouble shooting support for others. Detailed costs of these additional activities are as follows: Consultant and other services: $1,000,000 Computers and other equipment Incremental operating costs of MSU $4 70, 000 $370,000 Total $1,840, Preparing an improved program of urban infrastructure and institutional development. It is necessary to improve the sustainability, efficiency and equity of urban investment and institutional development in the face of the continued growth in number, population and economy of Bangladeshi cities and hence demand for municipal services and infrastructure. Therefore it is proposed that studies and consultation are carried out to develop an improved program of urban infrastructure and institutional development, better integrated with the evolving policy framework of local governance, public finance, and urban development. This program could then become the basis of projects to be funded by the Bank group or other agencies. The proposed technical assistance to develop such as program is outlined below: Obiective and Approach: To prepare a program of urban infrastructure and institutional development over a medium term ( ) to remove critical impediments to the quality of the life and productive activities in municipalities of Bangladesh, which is financially, socially, and environmentally sustainable and feasible. Given the limited resources, potential interventions have to be evaluated on the basis of demonstrated developmental needs, demand, and financing feasibility, including participatory processes, new financing measures such as beneficiary financing, new local assessments, and the private financing. Scope and Outputs: The TA will consist of the following related tasks: A. Establishing an improved framework for selecting, designing, and implementing priority interventions for municipal development; B. Preparing overall infrastructure and institutional development programs for different types of urban development situations in a sample of about municipalities; C. Assistance for preparing detailed plans for infrastructure and institutional development subprojects in about 25 cities and towns for initial implementation, according to the framework set out in A and B. 12

17 - A. Framework Development, to establish a set of criteria, methodology, procedures and guidelines to evaluate, plan, and implement municipal infrastructure and institutional development programs. It will focus on evaluating options for sustainable and efficient financing including the right blend of local, national, beneficiary, and private financing; institutional options to balance the need to develop local autonomy and capacity against the need to ensure efficiency; and establishing guidelines for the development programming and subproject planning (TA packages B and C below), and evaluating and financing the subprojects. This will be based on the assessment of various types existing programs in terms of financial envelope and sustainability, legal and policy framework, institutional set-up, stakeholder participation, results on the ground, etc. The programs to be examined will include: municipalities own programs, Block Grant provisions of the central government, Annual Development Program, and various development projects and programs like the Municipal Services Project, Urban Governance and Infrastructure Improvement Project, Urban Partnership and the Poverty Reduction Project, and existing or potential publicprivate partnership. These reviews will draw on the national-level information as well as the local information generated under Package B described below. This will also draw on international models and experiences. This Package will be carried out from about August 2010 to about May 2011 at a cost of about $300,000. A preliminary version of the framework will be developed by about December 2010, along with the recommend sample of 25 cities, and finalized by May incorporating the findings and experiences under Package B. - B. Urban Development Assessment and Programming will produce assessment of urban development, improvement needs, and potential resources, and a strategic municipal development plan for the medium term ( ) for a sample of about 25 municipalities representing Divisions, different sizes, and different growth profiles. This will involve the following activities, broadly in accordance with the preliminary framework produced under Package A above but also suggesting modifications to the latter: (a) Analyze the demographic and economic profile of the city and its development over the period ; (b) Identify inventory of core public facilities including water supply, roads, public transportation, drainage, parks, markets, transportation terminals, community centers; assessment of their operation and maintenance; (c) Assess other municipal services such as registration and civil defense; (d) Compare the infrastructure and service levels with similar cities in the country; (e) Evaluate demand for facilities and services based on contingent valuation and participatory consultation including interested investors; (f) Assess available public financial resources including local revenues, national grants, external aids and their prospects; 13

18 + (g) Assess the potential for beneficiary or investor financing, user charges, and self-assessment; (h) Assess urban plans, and their realism; past, on-going, and planned projects; (i) Review the on-going and recent past municipal development investment and capacity building activities, including the different types of programs identified above as well as the minimum program of the Municipal Support Unit (MSU), focusing on their effectiveness; and (j) Identification and evaluation of high priority investment and institutional development measures, their approximate costs and benefits, financing options, and sequence. The work will be carried out in two parallel consultant packages, at an approximate cost of about $350,000 each, one for the eastern part of the country - Dhaka, Chittagong, and Sylhet Divisions - and another for the western part - Rangpur, Rajshahi, Khulna, and Barisal Divisions, from about December to about September C. Subproject Preparation Assistance to prepare feasibility study and designs for infrastructure investments and institutional development activities for about 20 cities and towns (not necessarily the same as the sample above), in accordance with the principles and criteria developed under Packages A and By at a cost of about $450,000 each for about 20 municipalities (not necessarily the same as under Package B) in the eastern and western parts of the country, from about June 2011 to February The existing Project Management Unit for the entire project, under LGED, will manage the TA in collaboration with BMDF and other relevant ministries. The additional financing would include its incremental operating cost of $230,000. Financing 8. The additional financing credit by expenditure category is shown below: (1) Civil works for Urban Infrastructure Investment $36,000,000 (2) Goods (for municipal capacity building) $ 470,000 (3) Services and Training $ 4,400,000 a. BMDF $1,500,000 b. LGED $2,900,000 (4) Incremental operating costs $ 750,000 a. BMDF $ 150,000 b. LGED $ 600,000 (5) Unallocated $ 380,000 Total $42,000, The credit will finance 90% of the first category, civil works for urban infrastructure investments, and 100% of the other expenditures including local taxes. The credit for categories (l), (3)a, and (4)a is earmarked for BMDF; credit for the categories (2), (3)b, and (4)b earmarked for LGED. 14