Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Report No. PID10650 Nigeria-Community and Local Government Development... Project Africa Regional Office Decentralization NGPE74105 FEDERAL GOVERNMENT OF NIGERIA Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Implementing Agency Environment Category Date PID Prepared July 13, 2001 Projected Appraisal Date May 20, 2002 Projected Board Date July 31, 2002 Address STATES AND LOCAL GOVERNMENT AFFAIRS OFFICE, THE PRESIDENCY. Address: Radio House, Herbert Macaulay Way (South), P.M.B. 279, Garki - Abuja Contact Person: Mr. C. C. Cornel Obi, Director States Affairs Department Tel: , B 1. Country and Sector Background Institutional weakness of states and local governments. The decades of the 1970s though the 1990s saw a continuous increase in the number of states - from 19 in 1976 to 36 in As a result, state diversity is very high with respect to any variable considered - cultural and ethnic characteristics, population size and density, wealth and resources, or administrative capacity. The lack of overall capacity is particularly obvious in states that have been created more recently.similarly, the number of Local Government Authorities (LGAs) has increased significantly since independence. At present there are 774 LGAs in Nigeria, an average of 21 per state. The functions, structure, composition and finance of local government are determined by state law within the parameters set forth in the Fourth Schedule of the 1999 Constitution. Each LGA conforms to a fairly standard organizational structure with six main departments: general administration, finance, education, health and social welfare, works and housing, and agriculture and natural resources. Salary scales of local government staff are tied to that of civil service of the state within which they serve, with same pay and allowances. As part of the preparation of the Micro-watershed and Environmental Management Project (MEMP), a diagnostic of LGA institutional capacity in six states was carried out in August 2000 using structured interviews with LGAs, communities and states. It emerged that LGA capacity was highly variable within and across states. There was general consensus that administrative capacity was weak in: (i) budget formulation, execution and reporting; (ii) participation and planning; (iii) project implementation capacity; and (iv) personnel and administration. It is probable that LGAs currently constitute the weakest tier of government in the federal system. Unclear assignment of responsibility for service delivery among levels of government. The respective responsibilities of federal, state and local

2 government are set forth in the 1999 Constitution. The Constitution gives the states and Local Government Authorities the joint responsibility for delivery of services to the population. The Constitution also assigns specific responsibilities to local governments, classified as "exclusive" or "mandatory" local government functions, e.g. establishment and maintenance of cemeteries, markets, motor parks, public conveniences, local roads, drains, recreation facilities, vital registration, homes for the destitute and the infirm, etc. However, many crucial activities must be operated concurrently with the state governments. e.g. provision/maintenance of primary education, agricultural extension, rural/semi-urban water supply, street lighting, drainage, public housing, public utilities, town and country planning, sewage, the development of agriculture and natural resources, the provision/maintenance of health services and development planning. State's do have the power to deconcentrate services to the local government level, but do not do so systematically. The confusion in the respective mandates and responsibilities of the two levels creates inefficiencies. Unequal capacity sometimes forces the state level to discharge responsibilities that are theoretically within the realm of responsibility of the LGAs. The relationship between states and local governments is also determined by a given state's autonomy from the federal government, as well as the federal guidelines concerning the eligible uses of federal funds at the state and local levels. Unreliable revenue base. A common factor for all states is their lack of an appropriate revenue base. They are therefore dependent on the resources transferred from the federal government and face capacity constraints in implementing their development agenda. Between 1993 and 1997, federal revenue constituted on average over 77 percent of state government revenues and over 92 percent of local government revenues. The resources transferred by the federal government to state and local government are formula-based. During the same period, federal government spending amounted to percent of total public sector expenditure, while expenditures from the state and local governments accounted for the remaining 25 to 32 percent. Budgeting at state and LGA levels is a general area of weakness. Weak civil service capacity. The public service in each state comprises of four separate schemes of service, each with its own state board: the state civil service which is recruited by the state civil service commission, the local government civil service which is recruited by the state local government service commission, secondary school teachers who are recruited by the state secondary school board, and primary school teachers recruited by the state primary education review board. Policy implementation is dependent on a functioning civil service, but the civil service at the state level is fraught with weaknesses. The state administration is perceived as hierarchical and centralized, a legacy from the extended period of military rule. This structure is regarded as too rigid to allow for performance based services or transparency. Moreover, the organizational structure of ministries and the civil service is overly complex: horizontally by overlaps between ministries, divisions, departments etc. and vertically, by a mismatch of functional structures between the federal government, state government and the LGAs, and by an absence of quality counterparts at the lower levels. When a structure is regarded as not functioning, a new structure is created to replace it, which leaves in place the former dysfunctional structure. This tendency may be an effort to create additional sources of rents, and highlights the difficulty to reform. Infrastructure deficiencies and limited access to funding for - 2 -

3 investment. A recent review by the World Bank (State and Local Governance in Nigeria, 2001) noted that staffing at state and local government levels is often in excess of requirements. Furthermore the current wage bill (following a hike in salaries which took effect in 2000) of both states and local governments is so high that very little is left for capital investments.a negligible amount of periodic and routine maintenance of existing infrastructure and a lack of investment to ensure future growth have resulted in a breakdown of infrastructure and service delivery in most Nigerian local governments. Physical infrastructure in Nigerian cities and rural areas is generally poor, and much worse in low-income settlements, exacerbating poverty due to a lack of access to basic services. LGAs generally do not raise enough own source revenues to adequately finance recurrent expenditures required to maintain existing assets. They are therefore wholly dependant on transfers from the federation account and also transfers from states. In recent years, federal transfers have been more reliable because of the increased oil revenues. However, the transfers are high subject to revenues in the federation account which, in turn, are largely dependant on the world market price for petroleum. State transfers to LGAs are highly unpredictable and many do not transfer their statutory allocation to LGAs. Asa result, LGAs do not have the technical, managerial or financial resources to plan and manage their growth or to support the development of communities under their jurisdiction. Government Strategy with respect to CDD. Consistent with the third pillar of the JISU, one of the key elements in the Government's anti-poverty strategy is to empower local government to provide economic and social services to local communities, while at the same time empowering communities to demand such services from their government. Nigeria has accepted to adopt the CDD approach as an attempt to pursue this strategy. This proposed project thus constitutes the Bank's response to the Government's strategic choice. 2. Objectives To establish a viable, sustainable and transparent institutional mechanism for transferring investment resources to local governments and communities, in order to enable them to finance their own development priorities. 3. Rationale for Bank's Involvement The value added of the Bank's intervention rests on the following:(i) The multi-sector dialogue established with the Government through the JISU;(ii) the Bank's global experience in institutional reform projects;(iii) the proposed project's strategic focus on poverty reduction; (iv) the Bank's ability to work with both the federal and state levels;(v) the existence of Bank sector-specific operations that can help induce local demand for investments, thus promoting the project's financing mechanism among LGAs and communities. 4. Description Project components are as follows:(i) Community identified and implemented infrastructure investments. A large share of the credit will fund direct investments at the community level for the establishment and/or rehabilitation of key local infrastructure (associated with social or communal services). Communities will be required to establish Community Associations (CA), each with an elected Executive Committee. Through participatory process, communities will identify their priority -3 -

4 investment needs (i.e. a range of micro-projects) within a budget envelop of Naira 4 million (approx. USD 40,000). Communities will be required to contribute an aggregate of 10 percent towards the cost of the micro-projects in the form of in-kind labor, cash, or material. The CA submit these proposals directly to the responsible state-level CLGDP Project Unit, or to the Local Government Authority (LGA) of jurisdiction, depending on the LGA's capacity (see Component (iii) below). Broad-based community participation in project selection, as well as a matching contribution from communities will constitute prerequisites for participation in the project. Additional eligibility criteria for micro-projects would include: (i) evidence of a transparent proposal development process; (ii) technical feasibility; (iii) consistency with existing LGA and State development plans; and, (iv) appropriate arrangements to ensure sustainability. Once a community proposal has been approved, the Executive Committee of the Community Association will establish Works Committees (i.e. user groups) to implement the project. Project resources will be transferred, in tranches, directly into Community Association back accounts. The Executive Committee will be responsible for local procurement of goods and services in accordance with project guidelines. (ii) LGA implemented infrastructure investments. The project will finance investments or rehabilitation of urban and rural local government infrastructure. Sub-project proposals from participating LGAs will be funded through the same common financing platform as the micro-projects in Component 1. However, resources will be managed exclusively by LGAs on behalf of the stakeholder rural and urban communities they represent, following a transparent and participatory sub-project proposal development process. LGAs will be required to contribute a percentage of the cost of investments as counterpart contribution. As in Component 1, the sector range of eligible investments is expected to be broad, including, among others, water supply, roads, footpaths, drainage, power reticulation, private and public sanitation facilities, solid waste management, street lighting, abattoirs, markets, schools, and clinics. To ensure sustainable delivery of services, LGAs - under the organizational guidance of the State CLGDP Project Unit - will be required to: (i) adopt technical standards for infrastructure that result in affordable recurrent expenditures for O&M, based on communities selecting options they are willing to help pay for; (ii) make sector investments in a manner that is consistent with other projects in the sector, particularly with respect to user charges and fees, taking into account sector best practice; and (iii) include on the appraisal/ evaluation team for each sub-project staff from the cognizant state technical Ministry, as a further guarantee of sub-project technical quality and sustainability.(iii) Institutional capacity-building. The successful implementation of Components 1 and 2 will require a significant investment in LGA and Community-level capacity-building. Two separate sub-components will address the capacity-building needs of - respectively - LGAs and communities. Both sub-components will be managed in each participating state by the State CLGDP Project Unit. Capacity-building for LGAs: The overall capacity of LGAs in participating States will be benchmarked against a set of "second-generation" indicators of Local Governance Capacity. Based on the results of the benchmarking assessment, LGAs will be placed in one of three performance categories (red, amber, green, indicating -respectively - weak, neutral/average and positive capacity). All LGAs will be given the opportunity to be periodically re-assessed and possibly "advance" to a higher performance category later - 4 -

5 into the project. The indicators, which will be confirmed/amended in the course of project preparation and incorporated into the PAD as an annex, are organized into the following tentative groupings: (i) state governance environment faced by the LGA; (ii) budget formulation, execution and reporting; (iii) participation and planning; (iv) project implementation capacity; and (v) personnel and administration. The benchmarking exercise will determine the degree of responsibility that will be assigned to each LGA in the evaluation/approval of proposals under Component 1 (i.e., limited, greater or near total) and in the execution of Component 2 (i.e., financial reporting requirements to the State CLGDP Project Unit). The results of the assessment will also produce, indicator by indicator, the LGA's short and medium-term institutional and financial capacity-building plan to be financed under this sub-component.capacity-building for Communities: Other IDA-supported projects such as the Micro-watershed and Environmental Management Project (MEMP) and the Universal Basic Education (UBE) project will, through their own implementation arrangements, facilitate a participatory process that enables communities to determine their own priorities (within a specified budget envelop) and develop a multi-sectoral implementation plan and proposal. State CLGDP Project Units (when appropriate in collaboration with the better-performing LGAs) will be responsible for the definition of well-targeted capacity-building programs for groups of Community Associations (in particular, their Executive Committees), addressing, among others, the following areas: (i) basic financial and procurement management for micro-project implementation; (ii) monitoring and reporting on micro-project implementation and expenditures; and, (iii) general record-keeping (iv) Project Management. At the federal level, the Office of State and Local Government Affairs will have overall responsibility for monitoring project implementation. It will also be responsible for identifying training programs for local governments. In each participating state, a State CLGDP Project Management Unit will be established in the Bureau of Local Government Affairs (or equivalent). It will be responsible for organizing the benchmarking assessment of LGAs, identifying training programs for local government, overall financial management of CLGDP project resources, monitoring and evaluation. An integrated and computerized state-level Management Information System will be established to track financial flows to communities and local governments. The MIS for this project will be integrated with the MISs of other IDA-supported projects that are operating in the same state. This will ensure that all relevant actors have access to the same information on micro-projects financed at the community level and subprojects financed at the LGA level.(v) Development Communication. This cross-cutting component is essential to the transparent and effective direct financing of investments in communities. The development communication initiatives will seek to create and sustain a dynamic information network of strategic alliances among the various levels of stakeholders. These initiatives will also seek to modify stakeholder behavior and attitudes on issues relating to all sectors targeted by the proposed project. There will be a clear emphasis on raising awareness on the cause-and effect sequences relating to all sector interventions as well as on capturing synergies between the CLGDP project and other IDA-financed sector-specific projects in education, urban development, micro-watershed, environmental management, etc. 1. Community identified and implemented infrastructure investments 2. LGA implemented infrastructure investments - 5 -

6 3. Institutional capacity-building 4. Project Management 5. Development Communication. 5. Financing Total ( US$m) BORROWER IDA Total Project Cost Implementation Proposed implementation arrangements are tentative at this stage, and will be subject to extensive discussion with all tiers of government in the course of project preparation. The chart below, nonetheless, provides an overview of institutional arrangements that could generate the demand-driven incentives for investments inherent in CDD best practice, but consistent with the constitutional and legal prerogatives of the three tiers of government.at the Federal level: The focal agency at the federal level (Office of States and Local Government Affairs), in consultation with Federal Ministry of Finance, will be responsible for the selection of states based on accessibility criteria, in addition to reporting progress and monitoring and evaluation of the CLGDP.At the State level: The CLGDP financing mechanism at the state level would be established in the Bureau of Local Government Affairs or any other appropriate unit. Apart from disbursement and management of funds, this unit will be responsible for ensuring that sub-project proposals or integrated multisectoral sub-project proposals are reviewed and integrated with the plans of appropriate line ministries in the states, to ensure sustainability of investments and are in agreement with national policies. The state CLGDP Project Unit would be responsible for benchmarking LGAs into performance categories to be agreed upon during project preparation, evaluating their performance annually, managing capacity building activities for LGAs and communities for CLGDP activities, and finally, the establishment and management of a management information system (MIS).At the Local Government level: LGAs will be responsible for checking sub-project proposals from communities, reviewing expenditure receipts from communities, and submitting them to the State CLGDP Project Unit, with a request for release of a second round of funds. LGAs will also develop subproject proposals in partnership with their communities, and request funds. At the Community level: Communities, working through their elected Executive Committees, user groups, or works committees, will, identify, propose, implement and manage subprojects. They will need to register the association with the local government and open a bank account in a local commercial bank.tentative Implementation Arrangements 7. Sustainability Sustainability of project investments will be promoted at several levels:a. Under components 1 and 2, each micro- or sub-project will be the result of a participatory inter-governmental effort with built-in incentives for each stakeholder: Just as the communities will need to provide high-quality proposals that will stand a chance to be approved, likewise LGAs will have an incentive to demonstrate that they can exercise an ever-increasing role in decisions regarding the allocation of funds; finally, states will be held accountable for disbursements and for the - 6 -

7 project's overall progress indicators.b. State Technical Ministries will help create positive synergies between sector-wide federal strategies (determined by line ministries) and state-level operations (the project's financing mechanism). This will help prevent a severe disconnect between Federal development objectives and sub-national investments, while at the same time preserving the demand-driven approach central to CDD operations. The Bank will be able to contribute in this regard, through the supervision of its sector-specific operations in poverty reduction, urban development, education, etc.c. Thanks to the decentralized, state-level management structure (State CLGDP Project Units) proposed for this operation, project resources will become incorporated in the states' budgets, and will be computed as transfers. This should help ensure ownership and responsibility on the part of the state, since the decision to enter the project may have involved sacrifices elsewhere in the budget. Similarly, investments made by LGAs and communities will be incorporated into their budgets, forcing them into equity choices.d. The State CLGDP Project Units will be housed with the State Bureau for Local Government Affairs (or equivalent) to ensure local ownership and prevent the emergence of "islands of excellence". e. The MIS system(s) will provide a solid basis to determine - at mid-term review - the likely degree of micro- and sub-project sustainability beyond the project's life span, leaving time for remedial measures if necessary. 8. Lessons learned from past operations in the country/sector In the design of this operation, lessons were drawn from three relevant sectors in which the Bank has acquired extensive operational experience, in Africa and elsewhere. These are: (i) urban development; (ii) decentralization; and (iii) social investment funds.urban development. Key lessons from over two decades of international experience with community-based urban projects include the following: (i) political commitment to improving the lives of the urban poor is fundamental for operations to be effective, especially in the scale-up phase; (ii) a programmatic approach, as opposed to a traditional project approach, is needed to scale-up activities; (iii) governments can afford to improve the lives of the urban poor by providing basic services, provided that appropriate and affordable standards for infrastructure are developed and adopted; (iv) project designs should be simple; (iv) capacity-building activities are essential for both communities and local governments. The key lessons identified by the Nigerians in relation to Bank urban projects during the period is that ownership of investments by communities is critical and best ensured through community involvement and fostered through strong partnerships between local governments and the communities themselves. Lessons learned by IDA through the same projects highlight the need to ensure effective implementation arrangements that minimize political interference and overcome bureaucratic delays over decisions for contract awards and payment authorizations. They also highlight the need to develop appropriate design standards for infrastructure that are workable, sustainable and replicable. This would help scale-up interventions in poor communities, contributing to the LGA's overall development prospects.decentralization. Current trends in this sector validate the proposed project's design based on a community driven approach. In fact, building on the experience acquired through social investment funds, recent decentralization projects (e.g., the Bolivia Decentralization Programmatic Structural Adjustment Credit - PSAC ) have incorporated several elements of best practice in CDD. Born as a - 7 -

8 "traditional" decentralization operation, focusing on the institutional development of local governments from a public sector reform perspective (adjustments in intergovernmental fiscal relations, central government-managed credit facilities for regional and local government development, etc.), the Bolivia project now envisages a greater role for free LGA- and Community Associations. These will in fact identify investments, monitor compliance with Bank and national technical and financial requirements, and - in some cases - provide technical assistance to remote communities with weaker capacity by mobilizing human resources from more developed areas, thus potentially generating savings on high-cost consultant contracts. It is early to determine whether the Bank's decentralization projects will subsume CDD approaches systematically, but there are clear indications that CDD - as an approach - is addressing the issues of long-term ownership (with regard to both physical investment and technical assistance components) in a new and attractive way, following the frequent failures of government, or LGA, centered sustainability measures of earlier decentralization projects. Social Investment Funds/Poverty Alleviation. A Bank review of poverty programs in Nigeria shows that when communities are involved in the design and implementation of programs, these are more likely to succeed. In addition, as is the case in urban projects, communities have shown that they have the potential to contribute and "tax" their members if necessary, in order to meet their own needs. For example, some communities are able to levy small "taxes" on their members to provide educational scholarships. Others have provided furniture and in-kind contributions to repair primary schools. Since many communities lack experience with donor funded community-based activities, there is a need to keep procedures simple to facilitate community-based implementation. There is now considerable analysis available on what has worked and not worked in social funds. A Nigerian team from the Poverty Alleviation Program Development Committee (PAPDC) of the National Planning Commission (NPC) visited the Zambia social fund project in 1995 and the Malawi social fund project in 1996 to learn from the process of design and implementation of social funds in the two countries. The lessons gathered from these visits were used to prepare the government's poverty reduction strategy document, i.e. the "Community Action Program for Poverty Alleviation" (CAPPA). The strategy document emphasizes community-initiated, designed, implemented and managed interventions. The document also highlights the facilitating and supportive role of local level public institutions and agencies as well as the coordinating and monitoring role of central public administration. The role of NGOs and Civil society in community-based interventions was also clearly detailed in the CAPPA document. 9. Program of Targeted Intervention (PTI) Y 10. Environment Aspects (including any public consultation) Issues Preliminary Issues. Some issues have emerged, but further research and analysis will be required in the course of project preparation. Because activities will be demand-driven, it is not possible to determine the project's environmental impact a priori. The guidelines for the environmental screening of sub- and micro-projects will be developed in close consultation with the Nigerians in the course of project preparation. During the preparation of a related sector project (Micro-Watershed and Environmental Management Program - MEMP), the - 8 -

9 capacity of all three levels of Government - federal, state, and local - to conduct quality environmental impact assessments and monitor compliance with guidelines was investigated and found to be extremely weak. Most state environmental protection agencies had no training in commissioning environmental assessments (EAs) or monitoring compliance. Capacity at the level of LGAs was estimated to be even weaker. Capacity-building. Community Associations and local governments will need to take a leading role in incorporating environmental considerations in their investment proposals and will be supported to that end through targeted capacity-building under the Micro-watershed and Environmental Management Project (MEMP). The MEMP will also provide support to the federal, state and local level agencies as they review and revise environmental policies and regulations, particularly those relating to environmental safeguards. The MEMP's capacity building towards improved EAs will provide training for states to draft terms of reference, review EAs, produce environmental management plans and monitor compliance during the sub- or micro-project cycle. Training will also be provided to LGAs to monitor compliance. Simple checklists will be produced so that communities can think through cause and effect relations and environmental mitigation measures before they prepare their proposals for funding. 11. Contact Point: Task Manager Talib B. K. Esmail The World Bank 1818 H Street, NW Washington D.C Telephone: Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending September 15,