Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT

Transcription

1 Document of The World Bank FOR OFFICIAL USE ONLY Report No: ET PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 66.9 MILLION (US$ 100 MILLION EQUIVALENT) TO THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR A PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT March 25,2004 Public Sector Reform and Capacity Building Unit Country Department 2 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mav not be otherwise disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as March 25,2004) Currency Unit: = Ethiopian Birr ETB 1.0 = US$ US$ 1.0 = ETB 8.63 FISCAL YEAR July 8 - July 7 ABBREVIATIONS AND ACRONYMS AfDB BCB BOFED CAS CAD CFU CIDA CPR COMESA CSRP DCI DCA DLDP DfID EA EC ECuA EMCP FIRA ICB ICT IDA IEC IMF IT JSRP KfW GOE LIG GTZ MAB MDG M&E MFA MOFED MOJ MOR NCB African Development Bank Regional Bureau of Capacity Building Regional Bureau of Finance and Economic Development Country Assistance Strategy Central Accounts Department Counterpart Funds Unit Canadian International Development Agency Council of Peoples Representatives Community of Eastern and South Africa Civil Service Reform Program Development Corporation of Ireland Development Credit Agreement District Level Decentralization Program Department for International Development Executing Agency European Commission Ethiopian Customs Authority Expenditure Management and Control Activities Federal Inland Revenue Authority International Competitive Bidding Information and Communication Technologies International Development Association Information, Education and Communication International Monetary Fund Information Technology Justice System Reform Program Kreditanstalt fuer Wiederaufbau Government of Ethiopia Proposed Local Investment Grant Program German Technical Cooperation Ministries, Agencies, and Bureaus Millennium Development Goals Monitoring and Evaluation Ministry of Federal Affairs Ministry of Finance and Economic Development Ministry of Justice Ministry of Revenue National Competitive Bidding

3 NCBP OFAG PPD PRSC PSCAP PIP SDP SIDA SIL SDPRP TA TD TSRP UMCBP UNDP USAID WTO FOR OFFICIAL USE ONLY National Capacity Building Program Office of the Federal Auditor General Planning and Programming Directorate Poverty Reduction Support Credit Public Sector Capacity Building Program Program Implementation Plan Sector Development Program Swedish International Development Agency Sector Investment Loan Ethiopia s Sustainable Development and Poverty R ducti Technical Assistance Treasury Department Tax Systems Reform Program Urban Management Capacity Building Program United Nations Development Program United States Agency for International Development World Trade Organization n Program Vice President : Callisto Madavo Country Director : Ishac Diwan Acting Sector Manager : Guenter Heidenhof Task Team Leader : Navin Girishankar The core World Bank team involved in the preparation of the operation was led by Navin Girishankar (Sr. Public Sector Specialist) and included Shenaz Ahmed (Program Assistant), Elsa Araya (Operations Analyst), Deepak Bhatia (Manager), Reynaldo Castro (Consultant), David DeGroot (Sr. Local Government Specialist), Steve Gaginis (Financial Officer), Prasad C. Mohan (Sr. Communications Specialist), Brighton Musungwa (Sr. Financial Management Specialist), Edith Ruguru Mwenda (Sr. Counsel), Samuel Haile Selassie (Sr. Procurement Specialist), David Savage (Sr. Municipal Development Specialist), Vivek Srivastava (Sr. Public Sector Specialist), Eshetu Yimer (Sr. Financial Management Specialist). In addition, a larger World Bank and multi-donor team contributed during the preparation of this multi-sector operation. A complete list of these team members is provided in Annex 7. The Quality Assurancepeer Review Team for the operation (including participants in the Quality Enhancement Review) included Herbert Acquay, Arvil Van Adams, Vidoje Brajovic, Michael Engelshalk, Larry Hannah, Jim Hicks, Rogati Kayani, Junaid Ahmad, Ali Hashim, and Anand Rajaram. The team would like to dedicate its efforts to the memory of Jit Bahadur Gill, Sector Manager (AFTPR), who passed suddenly during project preparation. Mr. Gills guidance, support, and appreciation of the client s needs proved invaluable to preparation. His presence as a colleague andfriend will be sorely missed by the Bank and Government teams. I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 ETHIOPIA PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT CONTENTS A. Project Development Objective Project development objective... 2 *. 2. Key performance indicators... 2 B. Strategic Context Sector-related Country Assistance Strategy (CAS) goal supported by the project Main sector issues and Government strategy Sector issues to be addressed by the project and strategic choices C. Project Description Summary Project components Key policy and institutional reforms supported by the project Benefits and target population Institutional and implementation arrangements D. Project Rationale Project alternatives considered and reasons for rejection Major related projects financed by the Bank and/or other development agencies Lessons learned and reflected in the project design Indications of borrower commitment and ownership Value added of Bank support in this project E. Summary Project Analysis Economic Financial Technical Institutional Environmental Social Safeguard Policies F. Sustainability and Risks Sustainability Critical risks Possible controversial aspects G. Main Credit Conditions Effectiveness conditions Financial and other covenants H. Readiness of Implementation I. Compliance with Bank Policies... 49

6 ANNEXES a Project Design Summary Detailed Project Description Estimated Project Costs Cost Benefit Analysis Summary Financial Summary Financial Management Assessment Technical Annex Procurement and Disbursement Arrangements Project Processing Schedule Documents in the Project File Key Features of Resource Allocation and Management under PSCAP Harmonization Issues for Bilateral Donors... : Statement of Loans and Credits Country at a Glance Letter of Sectoral Policy MAP: IBRD NO

7 ETHIOPIA PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT Project Appraisal Document Date: March 25,2004 Country Director: Ishac Diwan Project ID: PO74020 Lending Instrument: Specific hvestment Loan (SIL) Africa Regional Office AFTPR Team Leader: Navin Girishankar Acting Sector Managermirector: Guenter Heidenhof Sector(s): BA-Civil Service Reform, BD-Decentralization, BF-Public Financial Management, BI-Institutional Development, B J-Judicial Reform Theme(s): Public Sector Poverty Targeted Intervention: N Program Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Project Cost (US$m): $397.8 Co-financing: None Total Bank Financing (US$m): $10 Proposed Terms (IDA): Standard Credit Commitment Fee: -0.50% Grace Period (years): 10 years Years To Maturity: 40 years Commitment Fee: 0.50% Service Charge: 0.75% Financing Plan (US$m): Source Local Foreign Total BORROWER IDA CIDA SIDA Other Donors Total: O FY2005 FY2006 FY2007 Annual Cumulative Disbursement profile 10% 22% 30% FY2008 FY % 17% Project implementation period: FY Expected effectiveness date: July 8,2004 Expected closing date: July 7,2009

8 -2- A. Project Development Objective 1. Project development objective The objective of the Public Sector Capacity Building Program (PSCAP) Support Project is to improve the scale, efficiency, and responsiveness of public service delivery at the federal, regional, and local level; to empower citizens to participate more effectively in shaping their own development; and to promote good governance and accountability. This objective will be achieved by scaling up Ethiopia s ongoing capacity building and institutional transformation efforts in six priority areas under PSCAP-(i) Civil Service Reform; (ii) District-Level Decentralization; (iii) Urban Management Capacity Building; (iv) Tax Systems Reform; (v) Justice System Reform; (vi) Information and Communications Technology. 2. Key performance indicators While specific output indicators across contributing subprograms are provided in the logical framework, the key performance indicators for PSCAP overall (and therefore, the Bank s Support Project) are provided below: Expected impact on institutional quality 1. Increased predictability and adequacy of financial resources. flows (in-year and across years) Reduced budget variance Reduced federal-regional and regional-local fiscal gaps and prioritization processes. Established practice of participatory budgeting and 2. Greater inclusiveness and transparency of planning public reporting on budgets and performance at all levels Regular involvement of civil society in planning and policymaking, budgeting, and review processes 3. Enhanced revenue performance and fiscal autonomy Increased own revenues and unconditional transfers as a share of total expenditures at sub-national levels Increased tax effort at all levels 4.. Enhanced incentive environment for public servants (gender disaggregated) Increased average civil service salary as percentage of living wage Private-public wage comparison Wage decompression ratios 5. Improved quality and efficiency of operations. Improved service levels in terms of access, responsiveness and cost efficiency in priority sectors Reduced unit costs and processing time for essential rural, urban, social, and legal services in priority sectors 6. Improved transparency and accountability Reduced incidence of corruption and arbitrariness in rule. enforcement (as judged by economic agents) Increased access to justice, recourse and redress Enhanced independence of the judiciary Increased access to government information Contributing. PSCAP Subprograms Civil Service Reform Tax Systems Reform.. w. All Subprograms. All Civil Service Reform District-Level Decentralization Urban Management Capacity Building Tax Systems Reform District-Level Decentralization Urban Management Capacity Building Tax Systems Reform ICT Civil Service Reform. District-Level Decentralization Urban Management Capacity Building Subprograms

9 -3- B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project Document number: n>a/r Date of latest CAS discussion: April 17,2003 Capacity building across the public, private, civil society, and higher education sectors constitutes a key pillar of Ethiopia s poverty reduction strategy, the Sustainable Development and Poverty Reduction Program (SDPRP). In supporting Ethiopia s SDPRP, the Bank s Country Assistance Strategy has designated public sector capacity building a critical underpinning to the achievement of three high-level objectives: pro-poor growth through improved provision of productivity-enhancing services including rural and urban land development and management, agricultural extension, and infrastructure; improved human development outcomes through improved decentralized delivery of social services such as health, education, and water; good governance through strengthening of public financial management systems, deepening democratic decentralization in woredas and municipalities, and implementing comprehensive legal and judicial reform. Accordingly, the Bank s support for PSCAP serves as one of three multi-sectoral programmatic instruments within the CAS (figure 1). The second instrument is the Poverty Reduction Support Credit (PRSC) series, which provides annual balance of payments support for the Government s budget as a whole, including the general purpose transfers or subsidies that finance service delivery in regions. The third is a Local Investment Grant (LIG) Program intended to help finance the capital requirements of decentralized delivery across key sectors. Figure 1. The role of PSCAP and other multi-sectoral instruments in the CAS Poverty Reduction Support Credits * Provides predictable budget SUQQO~~ through serial credits Finances inter olio the federal-regional revenue shares including the recurrent service delivery needs of regional and sub-regional authorities a & a n m Local Investment Grant Program Provides performance oriented transfers for multiscctaral service delivery investment needs a1 the local level Based on successful PSCAP impiementation

10 -4- The Bank s PSCAP Support Project complements the budget and decentralized fiscal support operations in three ways. First, the capacity building support under PSCAP is acknowledged as a key requirement for effective implementation of the PRSCs and LIG inter alia by capacitating the federal, regional, and local levels to better utilize additional fiscal resources provided to meet their recurrent and capital needs. For the LIG in particular, access to investment support for woredas and municipalities should be conditioned in part on satisfactory completion of basic local level capacity building activities under PSCAP. Second, as noted in the CAS document, support for PSCAP is based on IDA S strategic decision to help the Government clarify the rules of the game for large scale capacity building support, and thereby strengthen Ethiopia s intergovernmental fiscal system by introducing a performance-oriented capacity building transfer alongside the equity-oriented federal-regional general purpose subsidy (enhanced year-to-year through PRSCs). Third, the bottom-up PSCAP planning process-by which federal and regional institutions make formal commitments to institutional reform and capacity building targetsprovides a robust mechanism to ensure that refinements to the SDPRP matrix constitute a realistic aggregation of regional and local commitments. In so doing, the PSCAP planning and budgeting processes helps provide the Government-Donor dialogue around PRSCs with an increasingly subnational perspective on public sector reform issues critical to poverty reduction (for example, fiscal decentralization or urban land management). Other operations in the CAS that are intended to complement the PSCAP Support Project are the proposed Information and Communications Technologies Assisted Development Project (ICTAD), which will inter alia help develop the regulatory and coordination framework for ITbased applications, as well as the proposed Rural Capacity Building Project, which is intended to help develop vocational and technical skills for the agricultural sector, improve the delivery of agricultural services, and strengthen agricultural research systems. Analytical underpinnings of PSCAP. A rich body of analytical work in the Bank s country program underpins support for PSCAP. These include a series of annual Public Expenditure Reviews dating back to the mid-1990s that reviewed progress of expenditure management reforms (especially the 2000,2001, and 2002 reports); the 1999 Regionalization Study; the 2000 review of the Civil Service Reform Program (CSRP); a 2001 Rapid Assessment of Municipalities; the 2001 Woreda Studies series. More recently, the Bank and several other donors jointly supported the preparation of the 2003 Country Financial Accountability Assessment, and the 2003 Country Procurement Assessment Report along with action plans. Regional visits during the FY contributed to three Regional PSCAP Technical Notes on civil service reform, municipal development, and decentralization in Amhara, Oromiya, and Tigray. Background papers have also been prepared on monitoring and evaluation methodology as well as options for the design of intergovernmental fiscal transfers as inputs to PSCAP preparation. In addition to ongoing analyses of performance management and information technology initiatives in Ethiopia, the Bank s forward looking analytical agenda includes a Legal and Judicial Assessment and a flagship, multi-donor financed Institutional Governance Review on public sector transformation, both of which are under preparation and should contribute to Government s thinking on how best to utilize PSCAP resources over the medium-run. Joint Budget and Aid Management Reviews as well as Intergovernmental Fiduciary Assessments are also envisaged as part of the annual SDPRP review cycle, and are designed to foster robust Government-donor and intergovernmental dialogue on public expenditure analysis and fiscal management. Documentation on these reviews are included in the project files and are posted, where appropriate, on the following website: worldbank.ordethiouia/uscau.htm.

11 2. Main sector issues and Government strategy Following the fall of the Derg regime in the early 1990s, the EPRDF-coalition Government embarked on a long term strategy of state transformation characterized by bold attempts to implement multiple reforms in parallel; the massive scale-up of institutional development efforts across tiers of government; and the deliberate expansion of the scope of public sector capacity building initiatives. Spanning nearly a decade, Ethiopia s transformation agenda has evolved over three phases in response to growing awareness that pervasive deficits in capacity have hampered the ability of the state to secure the fundamentals of poverty reduction and democratic development such as responsive service delivery, citizen empowerment, and good governance. 2.1 Regionalization and public sector modernization in the mid- to late-1990s During the 1990s, Ethiopia embarked on a series of unprecedented institutional reforms designed to establish a durable federal state system and further its democratic transition. The first phase of the Government s state transformation strategy, launched in 1995, involved the creation of a federal state structure based on ethnically delineated regional states responsible for a broad range of the country s political, economic, and social objectives including the delivery of essential public services. In accordance with the 1994 Constitution, the Government formally established an intergovernmental fiscal system and initiated the annual transfer of a formula-driven general purpose grant or subsidy to regions, consistent with its policy of balanced regional progress. It also undertook a significant redeployment of civil service staff to newly empowered regional executives. As a result, by the late 1990s, staffing levels in regional administrations reached over 320,000, while the size of the federal civil service reached 43,000. Even as it established a radically new decentralized political and state system, the Government acknowledged the deep institutional constraints on basic functions such as policymaking, service delivery, and regulation. Core public management systems at the federal and regional levels were hampered by outdated civil service legislation and working systems; the absence of a mediumterm planning and budgeting framework; ineffective financial and personnel management controls; inadequate civil service wages and inappropriate grading systems; poor capacity for strategic and cabinet-level decision-making; and insufficient focus on modern managerial approaches to service delivery. In recognition of these constraints, the Government embarked on a comprehensive Civil Service Reform Program (CSRP) in Indicative of Ethiopia s first generation capacity building efforts, the CSRP sought to build a fair, transparent, efficient, effective, and ethical civil service primarily by creating enabling legislation, developing operating systems, and training staff in five areas: (i) Expenditure Control and Management, (ii) Human Resource Management, (iii) Service Delivery, (iv) Top Management Systems, and (v) Ethics. Successful efforts (for example, budgeting, planning, and accounting reforms) at the federal level were intended to provide prototypes for regional authorities. The first phase CSRP was implemented over the period, albeit with intermittent lags due to poor coordination, particularly during the Ethio-Eritrean border conflict. The results of these efforts were mixed. Notable achievements included the development of new legislation (for example, a financial management proclamation, a civil service law, a code of ethics, complaintshandling procedures, and a service delivery policy) as well as operating systems for budgeting, procurement, and some aspects of personnel management such as salary surveys and records management. Development of prototypes for expenditure management including a new budget

12 -6- classification system, a macro-economic fiscal framework and medium-term planning system, a double entry modified cash accounting system, and procurement reforms were also important achievements. Diagnostic work in these areas also progressed. While commendable, these initiatives have had only modest impact in relieving the institutional and capacity constraints within the Ethiopian civil service. There was little evidence of sustained improvement in output performance at the federal or regional levels. Core functions such as medium-term planning, accounting and auditing, and personnel management remain weak. Attempts to develop an affordable, medium-term public sector pay policy were also delayed, and civil servants-despite an across-the-board salary increase in 2001-continued to receive low salaries. Operational efficiency across federal ministries and regional bureaus remained poor. Furthermore, lags in the prototyping phase at the federal level forestalled CSRP implementation in regions and woredas. The considerable opportunity costs in terms of foregone improvements in institutional and service delivery performance at the regional and local levels were widely acknowledged. Complementary tax policy and administration reforms were also undertaken in line with the Government s objectives of improving revenue performance to reduce aid dependency and adequately finance the expanding development agenda. The passage and implementation of a Value-Added Tax, as well as the implementation of a Taxpayer Identification Number (TIN) system proceeded. Early efforts in the justice system including the strengthening of court administration and the reform of the penal code and family law sought to deepen implementation of the 1994 Constitution. Weaknesses in the design of reform initiatives such as an overly top-down approach, inexperience with managing national and international consultants, and funding gaps limited the impact of this first phase of transformation. Implementation delays resulted from the inordinate demands that the border conflict placed on the time of senior officials. Nevertheless, the Government s generally pragmatic approach to implementing an ambitious regionalization and civil service reform agenda established Ethiopia as a serious state reformer by the late 1990s 2.2 National capacity building during the post-conflict years By late 1999, Ethiopia s early public sector reform experience had significantly deepened its leadership s appreciation of the role of institutional capacity building in securing the economic and political fundamentals of sustainable poverty reduction. During the conflict period and its immediate aftermath, the Government undertook-in many cases, with the support of donors-a range of in-depth diagnostics and reviews to systematically identify the factors that hindered public sector efficiency, grassroots empowerment, and accountability. These factors, described below, spanned all branches and tiers of government, and helped shaped the scope and scale of the second phase of state transformation. Ineficiencies resulted from unpredictable Jinancial management, poor incentives, lack of a strategic or performance orientation. Unpredictable resource flows have undermined the allocative and operational efficiency the public sector at the federal, regional, and local levels in Ethiopia. The 2003 CFAA identified many of the critical challenges in public financial management that remain at all levels. At the federal level, there is a widely acknowledged need to ensure compliance with the financial calendar; strengthen political ownership of the macroeconomic fiscal framework and its indicative planning figures as a basis for integrated, medium term planning; revitalize federal level efforts to develop a Public Expenditure Program or Medium Term Expenditure Framework (including the proper integration of planning and finance functions in the newly merged MOFED); strengthen internal and external audit systems; improve budget monitoring and fiscal reporting; reconcile fiscal and monetary accounts; and

13 -7- reducing the federal accounts and audit backlogs. Continued leadership of MOFED and coordination with the MCB on these issues will be a key factor in the success of Ethiopia s overall public sector transformation program. Within regions, fiscal decentralization has placed additional pressures on bureaus and woredas to bring their accounts up-to-date, roll out of the new chart of accounts and accounting procedures, develop planning modalities, and strengthen other critical functions such as procurement and auditing. Similar efforts in urban jurisdictions remain part of the unfinished business of municipal reform across four major reforming regions as well as Addis Ababa and Dire Dawa City Administrations. Revenue performance remained weak across tiers of government in part due to insufficient tax autonomy and poor administration. The incentive framework for personnel also needs to be reformed, given the current needs of the civil service. In terms of modernizing personnel management, the Government has sought to introduce a performance management system through the development of a Results-Oriented Performance Evaluation or ROPE system that seeks to link individual performance with outputs laid out in institution-wide strategic plans. However, the underlying problems of poor incentives across levels of government remain. Attempts to develop an affordable, medium-term public sector pay policy were also delayed, and civil servants at all levels-despite an across-the-board salary increase in 2001-continue to receive low salaries. Personnel rules for woredas including procedures for hiring, firing, transfer, and promotion remain unclear. In municipalities, which sit outside the core civil service system, the Government has identified the need to develop a distinct set of rules for setting wages, hiring and firing municipal workers. Of particular concern is the sustainability of capacity building investments particularly in urban management and ICT, without complementary efforts to retain workers through adequate pay. Anecdotal evidence indicates increasing incidence of migrating talent to the private and NGO sectors, or abroad. The functions, systems, structures, and work practices of ministries, agencies, and bureaus (MABs) at the federal and regional levels were generally not aligned with Government s medium-term development priorities and resource constraints. The efficiency and quality of government operations-particularly in strategically important areas such as business licensing, investment promotion, customs, public procurement, and land management-were widely acknowledged to be poor, with the exception of a few islands of performance. In many cases, business processes and work organization were not appropriately automated to enable civil servants to function in a client-oriented, efficient, or transparent manner. Empowerment required greater fiscal and administrative autonomy for woredas and municipalities. Despite the success of regionalization in the mid-1 990s, woredas or districts enjoyed little fiscal or administrative autonomy to respond to the local needs of their constituencies. For instance, local level planning and prioritization processes-while consultative-were typically short-circuited by zonal officials, who would vet woreda levels plans in line with regional priorities. Project and program implementation were also burdened by overly centralized procedures for procurement of goods and services, and management of frontline personnel. The resulting inefficiencies were further exacerbated by endemic staffing and skills shortages, unclear accountability relationships, and inadequate organizational structures. By 2001, woredas were still deconcentrated units of regions rather than genuine, democratically elected executives in their own right. In addition, municipal governments were not adequately integrated into the larger legal and accountability framework of regional governance, and therefore, have been limited-in providing essential services to their residents-by their ability to raise own-source revenues. Personnel shortages have also hampered municipal performance. Ethiopia s woredas share jurisdictions

14 -8- with municipalities, and require further harmonization of intergovernmental fiscal arrangements to effectively meet service delivery needs of local communities. Weak checks and balances on the executive limited accountability, recourse and redress. The SDPRP emphasizes the centrality of the judiciary and legislative oversight institutions in ensuring the effective implementation of the constitution including expanding the writ of democratic and human rights, as well as the establishment of the legal and regulatory framework for private sector development. Significant institutional weaknesses and capacity deficits are acknowledged across Ethiopia s justice system including in areas such as lawmaking, law execution and enforcement, the functioning of courts, and the development of the legal professional. Specifically, while progress has been made in reforming laws such as the family, penal, and commercial codes, preparation of the federal administrative procedure, the stock market, the notary public, and the vital events registration laws constitute elements of Ethiopia s unfinished law reform agenda in Institutional constraints continued to hinder the Ministry of Justice and regional justice bureaus from carrying out their basic tasks as they relate to providing legal advice and contributing to law execution and enforcement; ensuring the necessary incentives and training for staff (lawyers and administrative staff); modernizing efficient filing and case management systems; and establishing expectations in terms of operational performance. Weaknesses in the vertical and horizontal independence of the judiciary resulted from lack of transparency in the selection of judges, unclear organizational structures in the courts, outdated systems and procedures, shortages in trained judges and support staff, and lack of basic infrastructure and facilities. A lack of adequate budgetary resources have also hindered the emergence of a well-functioning judiciary, particularly in first instance courts in the federal system and woreda courts in the regions. Access to justice continues to be limited by supply-side constraints (for example, increasing representation and legal aid, reducing the costs of access, simplifying court documents, establishing alternative dispute resolution mechanisms), and demand-side constraints (for example, increased awareness of constitutional and legal rights, education of the poor about options for recourse and redress). The legal profession remains weak with few qualified lawyers and judges across tiers of government. Ethiopia s homegrown response of national capacity building. Following political reforms in 2001, the Government responded with the launch of a comprehensive homegrown National Capacity Building Program (NCBP) as a multi-sectoral, intergovernmental program response to the capacity building demands of rapid transformation. The national capacity building framework envisages as capacity building system that (i) ensures efficiency and sustainability; (ii) supports the comprehensive development of human resources, organizations, systems and processes as a means of achieving the country s development goals; (iii) affords flexible implementation modalities in order to accommodate the dynamics of institutional change. A super-ministry, the Ministry of Capacity Building, was established in 2001 to provide policy direction, coordination amongst other partner institutions (for example, the Ministries of Finance and Economic Development, Revenue, and Federal Affairs), as well as monitoring and oversight of capacity building efforts. The Ministry, along with its counterpart regional bureaus and woreda offices, is tasked with programming and financing fourteen capacity building subprograms that support the dual SDPRP goals of state and structural transformation (Box 1). Six of these fourteen subprograms directly involve the public sector and comprise (i) a woreda (district level) decentralization program that rapidly transferred delivery responsibilities with substantial fiscal and administrative authority to rural jurisdictions; (ii) municipal reform efforts designed to restructure and empower urban centers; (iii) reformulated civil service reforms focused increasingly on strengthening the public sector fiduciary framework and service delivery

15 -9- Box 1: Ethiopia s National Capacity Building Program (NCBP) 1. Civil service reform 2. Justice reform 3. Tax reform 4. District-level decentralization 5. Urban management 6. Information and communication technology 7. Cooperatives 8. Private sector 9. Textiles and garments 10. Construction sector 11. Agricultural training of vocational and technical levels 12. Industrial training of vocational and technical levels 13. Higher education 14. Civil Society results on the ground; (iv) bold nation-wide initiatives to enhance connectivity and develop e- government applications such as the woreda- and school-net projects; (v) efforts to strengthen formal checks and balances and accountability mechanisms through reform of the justice system including the courts, law making and law enforcement institutions, and the legislative process; and (vi) an ongoing tax systems reform program that continues to align tax policy and administration at the federal and regional level with the demands of Ethiopia s evolving macrofiscal policies. In FY and FY , the Government-through its Ministry of Capacity Building, Bureaus of Capacity Building, and other lead institutions-advanced the implementation of all six subprograms. Considerable domestic resources-etb million in FY alone-were mobilized through the federal budget to carry out public sector capacity building activities. Progress-to-date is detailed in the first Annual Progress Report on the SDPRP and summarized below along with the Government s forward looking strategy in each area. Civil service reform. Since September 2001, a reorganization of Government and the launch of its NCBP has given new impetus to the CSRP. The Government has moved quickly to prepare the CSRP for its full implementation across regions and levels of government. Noteworthy initial steps include the establishment of focal points responsible for implementation of reforms across tiers of government; a series of workshops undertaken to sensitize the political leadership and civil servants across the country; and the launch of a special program of Performance and Service Delivery Improvement in priority Ministries, Agencies, and Bureaus (MABs) designed to deepen the implementation of performance management. In addition, the CSRP CO is strengthening coordination and change management (from line ministries, regional bureaus, woredas and municipalities); completing prototyping in human resource and expenditure management, and preparing the CSRP for nation-wide scale-up. This approach should promote civil service performance in terms of financial and human resource management, responsiveness to citizens needs, strategic prioritization of public resources, efficiency of program implementation, and enhanced accountability. Woreda or district level decentralization. Within the past year, the Government has moved quickly to remedy these constraints at the woreda level. A radical fiscal and administrative district level decentralization agenda-based on far-reaching constitutional reforms in four regions-has been pursued since the start of FY Decentralization has involved the transfer of a significant portion of the regional subsidies (in some cases, between 60 and

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

17 Justice system reform. While the comprehensive Justice Systems Reform Program is still under development, the Government continued to pursue reform efforts over the period including a nation-wide baseline assessment of the full range of justice systems institutions, law revision and law reform activities; a second phase of court administration reform including records and case management; the establishment of a judicial in-service training institution; and the roll-out of training for judges. Information technology solutions for e-government. Several PSCAP subprograms including CSRP, DLDP, UMCBP, and TSRP sought to implement IT-based applications as part of Ethiopia s broader public sector modernization efforts. While these early applications development efforts continued during the period, the major initiative of the Government in was the design and implementation of large scale woreda- and school-based V-SAT networks to provide the backbone for a range of educational and public sector applications. As follow-up to these efforts, the Government has also continued with work on strategic and policy development; training of senior and technical personnel; and upgrading and improvement of facilities. Despite their rapidly expanding scope and scale, Ethiopia s public sector capacity building efforts through 2003 have been largely supported by fragmented donor projects and financed in an ad hoc manner. In many cases, direct capacity building support provided to regions has been offset in the general purpose transfers. In addition, concerns related to the degree of transparency in the implementation of capacity building, problems in effectively leveraging global knowledge, as well as the bias towards intensive off-site training activities need to be addressed. Finally, the financing requirements of scaling up each of these above-mentioned subprograms indicated that Treasury resources alone would not suffice; significant external assistance would be required. The experience with multiple reform efforts undertaken in parallel demonstrated the importance of exploiting the synergies between subprograms described above; using a flexible mechanism of support that could respond to the rapidly evolving needs of various subprograms; empowering regions and local authorities in setting priorities and achieving results; harmonizing donor support around a single design; and improving coordination across branches and tiers of government. 2.3 Scaling up state transformation in 2003 and beyond In May 2003, the Government responded to above-mentioned challenges by launching the third and most ambitious phase of its state transformation agenda. Specifically, the MCB announced its intention to rapidly scale up support for the six core public sector reform programs as subprograms under a consolidated five-year federal program called the Public Sector Capacity Building Program or PSCAP. The Government s vision, reflected in its national program document for the PSCAP, was based on three pillars+) simultaneous, nation-wide implementation of six subprograms, sequenced in line with regional and local priorities, (ii) alignment of program support with Ethiopia s public financial management and intergovernmental system, and (iii) harmonization of the fiscal, fiduciary, and reporting requirements of various donors around a Sector-Wide Approach (SWAP). In the months that followed, several bilateral donors, in close collaboration with IDA, have responded favorably with commitments to support the SWAP approach and the pooling of funds around a single design solution including CIDA, SIDA, and EC along with anticipated support from DCI, DfID, KfW, and the Netherlands. Non-pooling donors that have committed to leverage support to the SWAP include AfDB, France, Germany, Italy, UNDP, and USAID. The bilateral perspective on the Program was conveyed to the Government through an issues note on

18 - 12- harmonization, which was prepared by representatives of donor agencies that participated in the joint donor appraisal of the Government s program (Annex 10). 3. Sector issues to be addressed by the project and strategic choices Sector-Wide Approach. In accordance with the requirements of a Sector-Wide Approach, Bank support to the Government s PSCAP will address the full range of sector issues across the six public sector capacity building subprograms of PSCAP in a holistic and integrated manner. The main exception involves activities precluded under the Bank s Articles, such as police, prosecutions, and prisons, which other participating bilateral donors will seek to support. Salient Design Features. In line with its vision for PSCAP, Government has defined the following features of program design: Designation of PSCAP as a federal specific purpose transfer program, appropriated at the federal level and therefore not subject to offsets in regional subsidies; Incorporation of donor commitments under PSCAP within the Government s overall macroeconomic fiscal framework and therefore, the overall vertical division of revenues between federal and regional levels; Alignment of donor procedures with Government s rolling medium-term planning, annual budgeting, and monthly SOE-based disbursement procedures; Explicit identification of rules of the game governing access, allocation, and execution including an established vertical division of resources between federal and regional levels, and a simple formula to horizontal division of time-bound drawing rights to PSCAP resources across regional states, followed by performance-based disbursements as well as mid- and end-year reallocation of a share of drawing rights to performers (Box 2 and Annex 9); Regular bottom-up regional, and eventually woreda and municipal planning of capacity building activities within assigned medium-term and annualized resource envelopes; Pooling of donor resources around a single design in line with SWAP guidelines; Development of matrix management structure, in which federal subprograms provide the prototypes, technical advice, quality assurance, and technical recommendations on approvals of plans, and regions set prioritize resources and implementation activities based on a menu of subprogram activities through medium term and annual plans. Implications for intergovernmental fiscal relations. Two broad intergovernmental issues related to PSCAP design are worthy of special mention. First, the establishment of this program marks an important step forward in the evolution of Ethiopia s intergovernmental fiscal system. As a federal specific-purpose program, it provides the legal basis for PSCAP transfers to be appropriated federally, and therefore, enables regions to draw down external assistance without being subject to offsets in their general purpose transfers. PSCAP also complements the largely equity-oriented general purpose (or the subsidy ) and food security transfers to regions with a performance-oriented capacity building transfer to help sub-national authorities achieve their institutional transformation goals. Second, support provided under PSCAP is intended to rapidly build up the basic regional and local capacities needed to effectively manage the fiscal additionality generated (i) at the regional level, through the 22% p.a. average increase in subsidy transfers over the past three years, and at the local level, through the regional-to-woreda block grants and lump sum, agency fee, and project-based capital transfers to municipalities, instituted in the four largest regions over the past

19 two years. In the current fiscal year, the woreda block grant constituted 45% of total regional expenditures in Tigray, 5 1% in Amhara, 47% in Oromiya, and 81% in S N regions. Even as capacity building catches up to Ethiopia s fast moving fiscal decentralization agenda, Government is planning to further develop capital funding mechanisms for local jurisdictions to meet their investment service delivery needs. In order to provide additional incentives for effective demand at the local government level for capacity building under PSCAP and to ensure the sustainability of intergovernmental fiscal arrangements, Government should condition access to fiscal support for investment on the completion of a specified sequence of capacity building activities under PSCAP subprograms. Such an approach is under implementation in municipalities on a pilot basis under IDA S ongoing Capaciq Building for Decentralized Service Delivery (CBDSD) Project and is planned for scale-up under the proposed LIG in the future.

20 - 14- Box 2: Drawing rights and how they apply to Ethiopia s PSCAP To ensure that sub-national authorities participating in a specific purpose federal program are sufficiently motivated to perform, access to program resources must be a fair and transparent, predictable, and performance-oriented. An established approach to designing programs in this manner is to provide regions with drawing rights. Elements of the approach are described below. Understanding drawing rights. Drawing rights are typically assigned-on the basis of a formula-to access a defined quantity of finance over a fixed period of time upon meeting key eligibility criteria such as the submission and approval of relevant medium-term strategies and plans. Once assigned, an initial disbursement against the plan is made, and then additional disbursements are made periodically as each implementing agency submits progress reports. Such an approach provides implementing agencies with assurance that predictable funding is available, but does not unnecessarily tie up funding or cash balances with those agencies and sub-national authorities or regions that are not performing per plan. Periodic redistribution of unutilized drawing rights provides further performance incentives. Why drawing rights-additional to general purpose transfers-should be assigned within the macro-fiscal envelope. Specific-purpose transfers that provide fiscal additionality to sub-national authorities need to be placed within the context of macro-fiscal fundamentals. Planned expenditures under such transfers should be reflected within the Government s overall macroeconomic fiscal framework, medium term expenditure plans, and proposed vertical division of revenues. For example, in Ethiopia, this would require incorporation of external and Treasury commitments to PSCAP within the Macro-Economic Fiscal Framework (MEFF), and alignment of PSCAP planning with the Government s financial calendar, budget classification system, and other financial regulations. How funds flows can be effectively designed. The flow of funds under large federal specific purpose programs should be simple. Based on the agreed allocation formula, the federal government releases funding to regions (as a significant portion of the annual rights allocated), which in turn release funds to local authorities (a portion upfront, and the balance as periodic reimbursement). Periodically the regions should review local government implementation and expenditure performance, and the federal government should similarly review state performance. In the event that any implementing agencies are not performing, their unutilized rights should be subject to reallocation into a performance pool and then to better performers in need of additional funding. Reallocation should be limited to a maximum percentage-for example, 50% of the unutilized drawing rights-in order to provide a significant incentive for good performance, but not unduly penalizing under-performers that may, due to circumstances beyond their immediate control, encounter implementation hurdles. How funds should be released against allocated rights. Once rights are allocated and eligibility criteria met, periodic releases are made to regions by the federal government. All initial releases are made against approved plans. Subsequent releases are made against documented performance and satisfactory expenditures from two periods prior to disbursement. For example, disbursement in Period 4 will depend on meeting output targets in Period 2. How a mandatory minimum level of capacity building should be defined for eligible institutions. All sub-national authorities receiving such transfers should commit to and complete the minimum required capacity building activities-or the first in a sequence of basic human resource, systemic, and logistical activities such as the establishment of local government structures or hiring of a core staff complement-necessary to utilize these transfers in a responsible manner. For those regions or local governments that do not have this minimum requirement in place at the outset, the first application of transfers should be to acquire and implant that capacity. The minimum requirements will vary among implementing agencies. For example, in decentralizing settings, most woredas in Ethiopia will probably require less staff and systems than most urban centers, but these minimum mandatory requirements need to be defined and met as a condition for resource utilization.

21 -15- C. Project Description Summary 1. Project components 1.1 How PSCAP s two components work The Bank s Support Project is fully aligned with the basic design of the Government s PSCAP. As such, it supports the scale-up of ongoing institutional transformation and capacity building activities through two components-one federal, and the other regional. Activities planned under these two components will be drawn from a menu of eligible expenditures consisting of PSCAP s six subprograms and mandatory program support (Figure 2). Drawing on this menu, each component is (i) planned based on annualized five-year drawing rights; (ii) adjusted semiannually and annually; and (iii) reflected in participation and performance agreements with commitments. to deliver on specific capacity building outputs. Component 1-Federal PSCAP: This component supports federal level activities across each of the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component is required to include basic program support activities to ensure. effective implementation. Component 2-Regional PSCAP: This component constitutes the bulk of the Program and is designed to empower regions to adapt and implement national reform and capacity building priorities envisaged under PSCAP s six subprograms in a manner that is efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms will be fully leveraged through this component. Regions will also shift resources year-to-year and in-year from poor performing to higher performing subprogram activities. This component is also required to include basic program support activities to ensure effective implementation. During the preparation process, a 20%-80% vertical division of PSCAP resources (including Treasury and anticipated donor resources) was established between federal and regional components over the five-year life of the program. Resources assigned for the regional component were further divided horizontally across regional states on the basis of the equityoriented regional subsidy formula. Financing provided under the Bank s Support Project shall be fully aligned with this approach to allocating PSCAP resources in order to ensure predictability and transparency of the drawing rights ceilings within which PSCAP component plans are articulated. It is envisaged that refinement of this allocation methodology may be required-on the basis of periodic reviews-over the course of program implementation. 1.2 Building PSCAF components from activity menus The objectives and specific menus of activities that fall within each subprogram of PSCAP are explained below. Selected and planned on an annual basis, these activity menus of capacity building activities (comprising combinations of technical assistance and consultancy services, goods. and equipment, and training) are building blocks for the two components described above. Subprogram 1-Civil service reform. The objective of this subprogram is to promote the development of an efficieht, effective, transparent, accountable, ethical, and performanceoriented civil service. Support under the subprogram includes (i) the strengthening of the Civil Service Reform Program coordinating structures; (ii) improving expenditure management and control through drafting of financial regulations and directives, roll-out of

22 - 16- budgeting and accounts reforms, implementation of procurement reforms, development of medium-term planning systems, strengthening of internal and external audit, modernization of cash management, and the roll-out of financial management information systems; (iii) improving the governance of human resource management including the development of prototype policies on human resource development, time management, and remuneration, the implementation of the results-oriented appraisal system, the development of payroll and human resource information systems, and support for subsidiary regulations such as the code of ethics; (iv) improving performance and public service delivery through the roll-out of the Performance and Service Delivery Improvement Program (PSIP) in ministries, agencies, and bureaus; (v) improving accountability and transparency through a parliamentary oversight, anti-corruption, the strengthening of systems and development of innovative techniques for monitoring fiscal and output performance including expenditure tracking surveys, cost efficiency studies, service delivery report cards; (vi) strengthening of top management systems through training of senior managers and officials in strategic planning, performance measurement, top management development, and value for money management; and finally (vii) building the policy and institutional capacities of emerging regions through the development of basic civil service structures and systems. Linkages with the district-level decentralization, urban management, ICT, and tax systems reform subprograms will be reflected in federal and regional plans and coordinated during implementation. Subprogram 2-District-level decentralization.. The objective of the subprogram is to deepen the devolution of power to the lower tiers of regional government, to institutionalize decision-making processes at the grassroots level with a view to enhance local participation, to promote good governance, and to improve decentralized service delivery. Subprogram activities include support for (i) woreda manning and training including human resource policies, procedures, and plans as well as bulk training in areas critical to local government; Figure 2. Building PSCAP Components from Activity Menus - 1 I

23 -17- (ii) technical assistance and training for grassroots participation including the development of guidelines and monitoring mechanisms, and the strengthening of civil society involvement at the local level; (iii) woreda institutional and organization development including assessment of functional assignments and enabling legislation, assistance in establishing structures and restructuring existing arrangements including local level accountability relationships; (iv) capacity building for policy and program development including technical assistance for woreda decentralization strategy and policy development, benchmarking and review of plans; (v) development of woreda fiscal transfer mechanisms and revenue mobilization capacities through the review and design of various intergovernmental fiscal instruments; (vi) strengthening of the planning system & financial management at the woreda level; and (vii) the development of minimum service standards in priority sectors. Linkages with the civil service reform, urban management, and tax systems reform subprograms will be reflected in. federal and regional plans and coordinated during implementation. Subprogram 3-Justice system reform. This subprogram, currently a work-in-progress, is designed to promote the rule of law as well as the efficient and effective functions of the justice system as part of Ethiopia s broader democratization and private sector development processes. Subprogram activities include (i) strengthening the Justice Systems Reform Program Office and regional equivalents; (ii) strengthening the courts by providing in-service training of judges and court clerks, court administration reform, development of records and case load management systems, and identification of measures to enhance access to justice; (iii) support for law reform including the development of systems and procedures for declaring income and property, identification of new areas for law development, compiling and preparation of laws and regulations, and drafting of stock exchange and other laws; and (iv) strengthening of legislative process including training, technical advisory services, and acquisition of equipment for staff of federal and regional standing committees on legislative drafting and analysis of legislative process and management, as well as training for members of standing committees on principles of federal grant and intergovernmental fiscal framework, monitoring and impact assessment, HIV/AIDS and gender issues, accountability and participation. Linkages with the civil service reform, urban management, ICT, and tax systems reform subprograms will be reflected in federal and regional plans and coordinated during implementation. It should be noted that IDA will not finance activities outside the. remit of its Articles such as strengthening ofpolice, prosecutions, and prisons. Subprogram &Urban management capacity building. This subprogram aims to enhance the capacity of municipalities in the delivery of services and enable urban centers to play a more effective role in social and economic development. The major activities envisaged under this subprogram include (i) technical assistance for the development of federal and regional policies related to urban development, housing, urban land, municipal structures, the formation of municipal associations; (ii) technical assistance for the deepening of municipal decentralization through the preparation of manuals governing resource management, review and organization of training and human resource needs, establishment of regional planning units, and development of fiscal transfer and revenue mobilization mechanisms; (iii) support for local government restructuring and capacity building including restructuring of water and sanitation, urban land, and other services, development and roll-out of financial, human resource, and land systems, and organizational and related reviews, as well as bulk training for municipal officials and staff. Linkages with the civil service reform, district-level decentralization, ICT, and tax systems reform subprograms will be reflected in federal and regional plans and coordinated during implementation.

24 -18- Subprogram %Tax systems reform. The subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency of collection), and ensure equity and fairness in the tax system through a comprehensive overall of the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities: (i) continued development of tax policy and legislation including amending the current income tax legislation to reflect the current business and investment environment, implementing presumptive and value-added taxes, strengthening enforcement powers of tax collection bodies, and sensitization of taxpayers inter alia through establishment of a Taxpayer office; (ii) roll-out of the computerized Tax Payers Identification Number (TIN) system in 74 regional centers, improving information sharing between the Federal Inland Revenue Authority (FIRA), Ethiopia Customs Authority (ECuA), as well as regional and city administrations; (iii) customs reform and modernization including the review of legal framework, review and implementation of customs procedures in line with COMESA, deepening of ongoing implementation of performance improvement in ECuA, establishment of a customs laboratory and training center, roll-out of management and core staff training in areas such as human resource development, IT management, WTO valuation system, commodity classification, and application of international conventions on simplification of customs procedures. Linkages with the civil service reform for examples, performance activities in ECuA), justice, ICT, and tax systems reform subprograms will be reflected in federal and regional plans, and coordinated during implementation. Over time, the tax systems reform program will be coordinated with plans to develop sub-national taxes as. envisaged under the district level decentralization and urban management subprograms. Subprogram &Information & communications technologies (ICTs). The objective of this subprogram is to harness ICTs for the development of human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seeking to use ICTs in this manner. Successful implementation of ICT-based solutions across government will require support for (i) human resource development through the development of an ICT human resource strategy, ICT curricula for schools, vocational training centers, and universities, as well as the training of trainers, the establishment of distance learning centers, and the financing of research on the use of ICTs; (ii) ICT use for public service and good governance through the development of information systems strategies, development of service delivery applications, establishment of data centers and government portals, WAN and LANs, as well as the procurement of required hardware and software; and (iii) ICT for sector development including the installation of applications in the social and infrastructure sectors; and (iv) community-based ICT systems and services through the development of strategies, applications, and local content for community information centers to facilitate specific developmental activities. While the development of public sector applications such as financial, human resource, and land management systems will be procured under respective reform programs for example, CSRP, UMCBP, TSRP), sector-specijc applicationsfor example, agriculture) will be financed under the ICT subprogram. Plans for these applications will be coordinated between subprograms, regions, and ICTDA. Mandatory activity-program support. As a required activity at both the federal and regional level, program support is designed to ensure speedy implementation of the six subprograms in a holistic manner. It will finance incremental costs associated with operating requirements of Planning and Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, related subprogram offices that serve members of the federal and

25 -19- regional Technical Teams, and relevant offices in the Ministry and Bureaus of Finance and Economic Development. Specific support activities will include the costs of progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, basic training, auditing, office supplies, equipment operation, transport, travel, and per diems. Program (and suuuort project) comuonents Indicative Component Sector costs (US%M) 1. Federal PSCAP YO of Total Bankfinancing (US%M) YO of Bankfinancing Multi-sectoral % % 2. Regional PSCAP Multi-sectoral % % Total Program Cost % % 2. Key policy and institutional reforms supported by the program The Bank's Support Project will contribute-through the six public sector capacity building subprograms of PSCAP-to a wide range of policy and institutional reforms at federal, regional, and. local levels. These can be categorized as follows: Development of expenditure, revenue, and civil service management systems. A variety of legal, institutional, and procedural changes related to expenditure, revenue, and human resource management envisaged under the CSRP and TSRP. These include proclamations, directives, regulations, and circulars governing the Government's financial calendar; medium-term forward planning; strategic planning and performance improvement; budget classification; double entry, modified cash accounting; cash or liquidity management; modern ' internal and external audit (and legislative oversight); and professional standards for public sector accounting and auditing cadres. Revenue sector reforms include directives and guidelines related to various federal, regional, and local taxes such as the VAT, the presumptive tax, as well as local land and user fees. Procedural improvements are envisaged for the Tax Payer's Identification Number as well as the administration of the various new federal and regional taxes and customs. Similarly, the legal and institutional reforms governing the civil service will be sought including a new code of conduct for civil servants; the establishment of institutional charters for public bodies; a remuneration policy inclusive. of revised job grades; and a human resource policy. Strengthening the intergovernmental fiscal system and administrative structures. The DLDP and UMCBP subprograms will support the adoption of enabling legislation for woredas and municipalities within regions including the assignment of revenue and expenditure responsibilities and the corresponding transfer of functional responsibilities from regional bureaus (for example, of health and education) to local authorities. They will also support the development of new instruments for fiscal and administrative decentralization such as the design of capital funding mechanisms for local jurisdictions and the establishment of new structures for woredas and municipalities. Guidelines for ensuring vertical accountability (for example, service delivery standards) and horizontal accountability (for example, procedures for participatory budgeting) will also be supported. In addition to the above-mentioned reforms envisaged under the program, the creation of PSCAP as a federal specific purpose transfer itself represents an important step forward in the evolution of Ethiopia's heretofore equity-oriented intergovernmental fiscal system. The

26 program s design-based on equity-oriented allocations, followed by performance-based disbursements and reallocations-accommodates other proposed fiscal transfers such as the proposed Local Investment Grant (LIG) Program to meet the investment needs of local service delivery. Role restructuring and performance improvement. Across all the subprograms, the Program will support restructuring of the role, functions, and work organizations of ministries, agencies, bureaus, local governments, courts, and other institutions. These organization-specific efforts are also intended to establish the accountability framework, standard operating procedures, review mechanisms, and esprit de corps appropriate to performance- or results-oriented management. Completion of law reform and revision. In addition to the legal framework for various aspects of woreda and municipal decentralization, urban land, and public administration, the Program will support a broad agenda related to law reform and revision including revisions of the family, administrative, and commercial codes. Strengthening of courts and parliamentary oversight bodies: The JSRP will also support procedural reforms and new institutional arrangements design to improve the functioning of the judiciary and legislative oversight bodies such as budget and public accounts committees. Development of information systems and IT architecture: The ICT elements of PSCAP will support the development of information systems strategies and applications roadmaps to guide the roll-out of Government systems in areas such as financial, human resource, land management, as well as service delivery. 3. Benefits and target population The benefits of PSCAP in terms of improving the overall quality of federal, regional, and local institutions are expected to be as follows: Improved delivery of rural, urban, social, and legal services: Ultimately, the Program will enhance the scale, efficiency, and quality of service delivery across priority sectors including agricultural extension, health, education, urban land supply and management, a range of municipal services, business registration and licensing, and legal services. Increased predictability of resource flows: The roll out of planning, budgeting, and related financial management reforms under the CSRP will not only encourage adherence to the financial calendar but also improve the quality of fiscal data and the predictability of resource flows. The establishment of robust intergovernmental fiscal transfer systems within regions will also contribute to predictable and transparent flows of financial resources to regions, their bureaus, and local governments. Improved inclusiveness of planning and budgeting: By promoting open and transparent systems of planning and budgeting, particularly at the woreda and municipal levels, the Program will improve the efficiency of allocative decisions. More inclusive budgeting and planning processes tend to produce more demand-responsive spending patterns, particularly at the local level.

27 -21 - Enhanced motivation and incentives for staff: The roll out of the human resource reforms under the CSRP will include streamlined and less hierarchical grading systems that promote initiative and career advancement. In addition, the development of medium-term, affordable wage policies and improve staff performance evaluation systems will motivate staff and provide better incentives for them to perform at all levels of government. Increased fiscal autonomy of local governments: The assignment of expenditure and revenue responsibilities will enhance the fiscal autonomy of woredas and municipalities, i.e., the inflow of unearmarked resources that can be allocated according to local priorities. Restructuring and capacity building for woredas and municipalities will also enhance their tax autonomy and revenue performance. Enhanced operational and cost efficiency: Through restructuring and performance improvement activities across sectors, the Program will improve the operational efficiency of sectoral MABs, other regional institutions, woredas and municipalities, as well as the courts. Specifically, the cost efficiency and demand-responsiveness urban, rural, social, and legal services would improve, as well as associated sectoral outcomes. Improved transparency of government institutions: Strengthening of evaluation capacity, anti-corruption bodies, statutory and legislative oversight institutions (such as the Human Rights Commission and the Public Accounts Committee) will increase the availability of information on the performance of state institutions to the public. Expanded opportunities for public sector in-service training: The Program will rapidly expand opportunities for civil servants at the federal, regional, and local levels to receive inservice training in critical areas such as planning, budgeting, tax administration, procurement, personnel management, monitoring and evaluation, economic management, the law, as well as computer literacy and IT maintenance. Public and private suppliers will in turn receive several opportunities to deliver training to a vast and diverse clientele. Utilization of new technologies: PSCAP will facilitate the transfer of appropriate information technologies to public institutions involved in service delivery. From basic computerization of manual processes to the implementation of complex integrated financial management systems, ICT-related benefits under the Program are expected to include efficiency gains in Government procedures and processes, and improved the quality and availability of information on government performance. Ultimately, the Program will benefit citizens and their communities (particularly the poor) as well as economic agents such as farmers and the urban private sector through improved service delivery, empowerment, and greater transparency and accountability of government institutions. Intermediate beneficiaries will include civil servants at the federal, regional, and local levels; woreda and municipal officials; the judiciary and their staff; staff involved in basic legislative processes; revenue and tax authorities; public, private, and non-profit training institutions; the media; and service providers. 4. Institutional and implementation arrangements As Ethiopia s multi-sectoral capacity building platform, PSCAP represents an important innovation and challenge in terms of inter-ministerial and intergovernmental coordination. Overall, the Government is adopting a risk aware approach by building on established

28 -22- implementation modalities (for example, for planning and budgeting, funds flow and disbursement, as well as procurement) developed under the Education and Health Sector Development Programs. The following distinguishing features of PSCAP are worth noting in terms of their implications for its underlying institutional and implementation framework: PSCAP is inherently multi-sectoral, comprising six cross-cutting subprograms. Successful implementation of these subprograms necessarily requires the active participation of several lead institutions at the federal and regional levels (for example, the Urban Development Capacity Building Office in the Ministry of Federal Affairs and its lead role in carrying out federal activities of the Urban Management Capacity Building Program and supporting regions on sub-national level activities). Unlike financing provided under the Education and Health Sector Development Programs, federal specific-purpose transfers under PSCAP are additional to the regional subsidy. Formula-driven drawing rights are not entitlements but commitments that may be reallocated-within parameters-if not properly and efficiently utilized. In other words, regions that access PSCAP are therefore subject to performance-oriented conditionality. Such an arrangement places a premium on timely financial and activity-based monitoring within year, and output-based monitoring across years. Third, several multilateral and bilateral donors have responded to the Government s desire to pool resources around a Sector-Wide Approach to PSCAP in order to ensure that all regions and subprograms under the Program have access to predictable and adequate financing. These SWAP arrangements necessitate a transparent process of joint review, appropriately aligned with the overall SDPRP monitoring and annual budgeting cycles. In response to these new challenges, the Government has developed a governance and institutional framework that places a premium on four governance principles+) intensive coordination across tiers and branches of government, (ii) compliance with clearly defined rules of the game (for example, for allocation and reallocation); (iii) transparency and information sharing (for example, on matters of performance) within the public sector and with the public at large; and (iv) extensive support to implementing agencies in the design, execution, and quality assurance of reform activities. These are described below and depicted in figure Governance and cabinet level accountability A unique feature of Ethiopia s capacity building system is the role of the Minister of Capacity Building-as head of the super-ministry -within the framework of cabinet decision-making. Specifically, (s)he is accountable to the Council of Ministers for the overall achievement of agreed upon semi-annual and annual outputs and results for PSCAP. In order to deliver on these results, the Minister-in coordination with other cabinet ministers for lead PSCAP institutions including the Ministries of Federal Affairs, Finance and Economic Development, and Revenues-will approve regional and federal plans, allocate federal and regional budgets for PSCAP, and oversee program implementation. In addition, the Minister will ensure that the PSCAP system of planning, resource allocation, execution, and re-allocation operates in a fair and transparent manner on the basis of clearly defined rules. In supporting hidher final proposals to cabinet (and eventually parliament) on resource (re)allocation within PSCAP, the Minister of Capacity Building will rely on the recommendations of federal and regional Technical Teams (see below) as well as technical experts in the Ministry of Finance and Economic Development.

29 Similarly, at the regional level, the heads of bureaus of capacity building will be responsible for endorsing PSCAP plans in coordination with bureau heads of other lead institutions; seeking appropriation of regional contributions for infrastructure and recurrent costs of PSCAP activities from regional parliaments; and achieving the agreed upon outputs and results of regional PSCAP, as reflected in annual summary performance and participation agreements. It is important to note that the JSRP is managed by a steering committee comprising a wide array of stakeholders across branches of government at the federal and regional levels. At the federal level, the steering committee consists of members from the Supreme Court and House of Peoples Representatives along with the Ministry of Justice and Ministry of Capacity Building. Similar steering committee arrangements for JSRP exist at the regional level. These bodies will continue to function, as established, within the overall governance framework for PSCAP. 4.2 Federal level implementation arrangements Ministry of Capacity Building. The Ministry of Capacity Building (MCB) is responsible for macro-level management of Ethiopia s national capacity building efforts such as PSCAP including establishing policies, designing national strategies, ensuring their integration with sectoral strategies, developing guidelines for programming capacity building, providing technical support to regions, and evaluating ongoing program implementation. The Ministry, and specifically, the State Minister of Capacity Building is responsible for the overall coordination of PSCAP; serves as co-chair of the Joint Government-Donor PSCAP Working Group; and coordinates Government participation in regular formal reviews of implementation progress. For purposes of day-to-day management of PSCAP, the Ministry coordinates an inter-ministerial Federal Technical Team (FTT), and houses a Planning and Program Directorate (PPD) as well as a. Budget and Finance Directorate (BFD). Roles and responsibilities of each are described below. Federal technical team. The FTT comprises inter alia the director of MCB s Planning and Programming Directorate as well as PSCAP s six subprogram directors, as well as representatives from MOFED and MFA is a critical quality assurance and coordination body. As such, the FTT is responsible for reviewing, appraising, and recommending approval of annual plans submitted by federal lead institutions and regions in line with technical criteria delineated in the PIP (for example, completion of the mandatory minimum capacity building activities, sequencing of reform activities, provision of regional financing for upfront civil works and ongoing recurrent costs of IT investments). It is also responsible for reviewing in-year and annual performance and recommending re-allocations of five-year drawing rights between non-performing and performing regions. During implementation, the FTT-with the support of the PPD and BFD-supports the development of content of reform programs, provides quality control and review of outputs produced by consultants prior to approving payment; defines equipment specification and undertake acceptance tests of equipment procured; develops communication and change management strategies; and ensures the quality and consistency of reform efforts. If needed, additional technical expertise will be recruited on a temporary basis to assist FTT in appraising applications of a specialized nature (for example, those under the ICT component). Planning and programming directorate. A planning and programming directorate (PPD), housed in MCB, serves as the secretariat for the Program, and specifically for the State Minister responsible for PSCAP and the federal technical team. The PPD issues and enforces operating guidelines; assists the FTT in the vetting of annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates

30 coordination between members of the federal and regional technical teams; assists in consolidating, managing, and organizing the supply of training across six subprograms; helps the FTT provide detail follow-up and quality assurance during implementation; implements communication and change management strategies; and consolidates quarterly, semi-annual, and annual progress reports. The PPD also serves as the counterpart institution to the Joint Government-Donor PSCAP Working Group and shall therefore facilitate review and supervision missions, as well as information sharing such as disclosure of annual and other related reports, survey data, and other occasional papers. Budget and finance directorate. The budget and finance directorate (BFD) of the MCB is responsible for overall monitoring of procurement under the Program. It is also tasked with procurement and financial management of the three federal level subprograms that fall within the Ministry s mandate-namely CSRP (except expenditure management and control activities), DLDP, and JSRP (except strengthening the judiciary activities). The directorate is also responsible for carrying out international competitive procurement of goods under the Program. Supported by a full complement of local procurement specialists and international advisers, the directorate will work closely with subprogram directors and staff in the CSRP, DLDP and JSRP Offices in the MCB to vet and finalize TORS, undertake equipment specification, technical evaluation, drafting and negotiation of contracts, and contract management. It will work with regions and other lead institutions for international competitive procurement of goods. The directorate will commit to service standards in terms of efficiency and timeliness of financial management and procurement activities. Ministry of Finance and Economic Development. The Ministry of Finance and Economic Development (MOFED) is responsible for enforcing the rules of allocation and access for this flagship intergovernmental transfer program. The Ministry (and specifically, the Regional Affairs Department), in collaboration with the MCB, is responsible for effecting vertical and horizontal divisions of PSCAP resources; issuing formula-based medium-term drawing rights or notional envelopes to govern medium-term planning and annual budgeting; and recommending mid-year and annual reallocations of five-year drawing rights. Both the Central Accounts Department (CAD) and Counterpart Funds Unit (CFU) are responsible for the overall financial management under the Program including recording for budgetary support grants and loans. While the CFU manages the various special accounts (including requesting replenishments), the CAD will focus on closing of local currency accounts and the consolidation of financial reports. Opening and closing the special account, transfer of funds to the local currency accounts, and the replenishment of funds are the responsibility of the Treasury Department (TD). Subprogram offices in lead institutions. The mandate for supporting the implementation of the six subprograms of PSCAP rests with subprogram offices in lead institutions. Overall, the role of lead institutions responsible for subprograms at the federal level is to ensure that this large constituency of eligible institutions are informed and consulted in the preparation of mediumterm and annual plans. Specifically, the MCB houses the subprogram offices responsible for the Civil Service Reform, District-Level Decentralization, and Justice Systems Reform Subprograms. The newly created ICT Development Authority holds the mandate for the ICT Subprogram. For purposes of day-to-day management, the Expenditure Management and Control Program (EMCP) Coordinating Office within MOFED is responsible for expenditure management and control activities under the CSRP. The Ministry of Revenue manages the Tax Systems Reform Program, and the Ministry of Federal Affairs has the responsibility for the Urban Management Capacity Building Program. The Supreme Court is responsible for day-to-day management of federal PSCAP activities related to strengthening the judiciary. As lead institutions, these ministries

31 and authorities with subprogram offices are delegated the financial management and procurement autonomy to carry out activities relevant to their reform mandates. In addition, the Ministry of Federal Affairs has established a taskforce to provide additional technical support to emerging regions such as Afar, Benishangul-Gumuz, Gambella, and Somali to carry out PSCAP-related activities. Other eligible institutions at the federal level. Several other federal institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and its six subprograms. These include sector ministries (for example, for health, education, and infrastructure), authorities and agencies (for example, the Environmental Protection Agency), and other offices within the executive branch; public sector training institutions such as the Ethiopian Civil Service College; the judiciary or the courts; as well as supreme audit and oversight bodies such as the Office of the Federal Auditor General and the public accounts committee. 4.3 Regional level arrangements Bureaus of Capacity Building. In each of Ethiopia s eleven regions (including Addis Ababa and Dire Dawa), the Bureaus of Capacity Building (BCBs) are responsible for program coordination. For purposes of day-to-day management of PSCAP, the BCBs coordinate Regional Technical Teams (RTTs), and house Planning and Program Directorates (PPDs) or equivalents including Procurement Desks. Roles and responsibilities for each are described below. Regional technical teams. In each region, an RTT comprising inter alia the director of the regional Planning and Programming Directorate as well as subprogram directors from lead institutions such as the Bureau of Finance and Economic Development, the Bureau of Trade, Industry, and Urban Development, the Bureau of Capacity Building, and the Bureau of Justice serves as the quality assurance and coordination body for PSCAP. As such, the RTTs are tasked with ensuring the consolidated regional plans meet eligibility, appraisal, and other criteriaprior to their endorsement by regional cabinets and submission to the FTT. If needed, additional technical expertise will be recruited on a temporary basis to assist RTTs in appraising applications of a specialized nature (for example, those under the ICT component). During implementation, regional technical teams-with the support of PPDs-support the development of content of reform programs, provide quality control and review of outputs produced by consultants prior to approving payment; define equipment specification and undertake acceptance tests of equipment procured; develop communication and change management strategies; and ensure the quality and consistency of reform efforts. Planning and programming directorates or equivalents. Planning and programming directorates (PPDs) or equivalents, housed in BCBs, serve as secretariats for PSCAP in regions and will maintain close links with the federal PPD. Each regional PPD enforces nation-wide PSCAP operating guidelines and relevant regional guidelines; assists the RTT in the vetting of annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates coordination between members of the RTT; assists in consolidating, managing, and organizing the supply of training across six subprograms; supports regional PSCAP procurement activities (see below); helps the RTT provide detail follow-up and quality assurance during implementation; implementation of communication and change management strategies; consolidates quarterly, semi-annual, and annual progress reports; and facilitates regional involvement in supervision and review missions. Procurement desks. Procurement desks, established within regional BCBs, are tasked with carrying out all relevant regional procurement activities for PSCAP. The desks are supported

32 -26- by at least two local procurement specialists and work closely with the beneficiary institutions to vet and finalize TORS, undertake technical specification and evaluation, drafting and negotiation of contracts, and contract management. In addition, Desks are expected to commit to service standards to ensure the timeliness of procurement activities within respective regions. Bureaus of Finance and Economic Development. In each region, the Bureau of Finance and Economic Development (BOFED) is responsible for all relevant financial management activities required under the Program including managing funds flows through Channel 1, ensuring monthly consolidation of Statement of Expenses, ensuring the accuracy and timeliness of financial reporting, and effecting payments on local and foreign contracts in line with the recommendations of the regional PPD. Other eligible institutions at regional and local levels including woredas and municipalities. Several regional institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and its six subprograms. These include sector bureaus (for example, for health, education, and infrastructure) as well as authorities and agencies within the executive branch; public sector training institutions such as Regional Management Institutes; the regional and localjudiciary or the courts; audit and oversight bodies; and woredas and municipalities. Even though the actual transfer of PSCAP resources from regions to woredas and municipalities is not currently envisaged at this stage, the bulk of PSCAP support is expected to be delivered inkind at the local level. In order to ensure a close match between regionally managed activities and woreda and municipal level needs, the PSCAP planning process is expected to incorporate a sample of woreda and municipal development plans. Woredas and municipalities are expected to be informed about eligible expenditures under PSCAP so that capacity building activities (for example, accounts and budget reform roll out or bulk and hands-on training) are appropriately reflected in development plans. The introduction of PSCAP transfers from regions to woredas and municipalities will be considered at a more advanced stage of program implementation. 4.4 Joint Government-Donor institutional review processes A Joint Government-Donor PSCAP Working Group has been established to support information sharing on capacity building, as well as joint preparation, appraisal, and supervision activities. On the Government s side, the MCB and MOFED are primarily involved in supporting this harmonization agenda. From the donors side, members to date include AfDB, CIDA, DCI, DBD, EC, Finland, France, Germany, IDA, Italy, Japan, KfW, Netherlands, SIDA, UNDP, and USAID. The active involvement of these members in regular, institutionalized joint Government- Donor review of implementation is critical to the success of a Sector-Wide Approach to PSCAP. Specifically, formal quarterly review meetings of the Addis-based Joint Government-Donor PSCAP Working Group are held to review implementation progress reports. In addition, a semiannual multi-donor supervision mission and an Annual Joint Government-Donor Review Mission (ARM) are held prior to and/or during the mid-year reallocation and annual allocation exercises. Both the supervision mission and ARM contribute to the ongoing due diligence requirements of IDA and other donors; findings feed into the various allocative decisions undertaken by Government, as well as the Annual Progress Report on the SDPRP. General Terms of Reference for these arrangements are contained within the PSCAP Harmonization Agreement.

33 1 Y IA A

34 D. Project Rationale 1, Project alternatives considered and reasons for rejection The Government, IDA, and other donor partners considered and rejected the following four project alternatives in favor of a fifth alternative, described below. Alternative 1: Other bilateral donors take the lead. The first alternative considered was to encourage bilateral donors take the lead in financing the nation-wide, integrated program with marginal involvement from IDA. The Government considered this unviable since no other donors had the ability to help scale up PSCAP in terms of their ability ta commit the required financial resources or their ability to convene global knowledge resources across a variety of reform areas (for example, civil service reform, urban management). The Government therefore sought IDA S lead role among PSCAP donors. Alternative 2: Support provided through six separate, stove-piped IDA projects. A second alternative was to support six separate operations for each subprogram. Neither the Government nor the Bank considered this stove-piped approach robust in terms of exploiting the interlinkages and synergies across the subprograms, or ensuring a flexible, bottom-up approach to planning and implementation. Furthermore, the administrative costs to the Bank of supporting numerous different capacity building operations was deemed excessive. Finally, the likely coordination problems for Government and donors that would result from a stove-piped approach were precisely what the creation of the National Capacity Building Program was designed to address. The scale and network economies that derive from integrating the six subprograms under the umbrella of an omnibus national program were recognized early by the Government, IDA, and other donor partners. Alternative 3: Support leveraged purely through balance of payments support. A third alternative considered by the Bank and donors such as DfID was to provide additional financial assistance to the Government s capacity building programs-financing primarily through Government s own treasury resources in FY2002 and FY2003 -through direct budget supportyy or DBS operations such as the Poverty Reduction Support Credits (PRSC). The weaknesses of this alternative are three-fold. First, DBS commitments as a share of overall development assistance in Ethiopia-while considerable-would not be sufficient to cover the financing gap for the full range of SDPRP priorities such as food security, health, and education and capacity building. Second, the lack of clarity on and institutionalization of key aspects of PSCAP design such as rules of access, allocation, reallocation, and disbursement meant the DBS would constitute undue fiduciary and operational risks. Finally, the advisory support and peer review required for a variety of capacity building activities-for example, the design and implementation of financial management or land management systems, necessitate intensive day-to-day interaction and disbursement approvals at the level of specific plans rather than annual budgets. Alternative 4: Replicate and enlarge the CBDSD design. Another alternative was to design a larger version of the Capacity Building for Decentralized Service Delivery Project. This existing operation inter alia seeks to provide support on a first-come, first-served basis-through a series of demand-driven financing windows within the Urban Management Capacity Building Subprogram-to beneficiaries that successfully apply for capacity building support from a menu of eligible expenditures. It also provides a combination of flexible or demand-driven and projectized support for the Civil Service Reform. While this approach to design sought to

35 -29- provide greater flexibility, the early experience with CBDSD revealed three weaknesses that contributed to less than satisfactory physical and financial performance. First, the project originally intended to provide short-term, opportunistic financing for certain advanced capacity building subprograms, and therefore was stove-piped with separate components for UMCBP and CSRP. This type of design was neither intended to nor amenable to nation-wide scale up of the other four subprograms (DLDP, JSRP, TSRP, and ICT) in a flexible manner. Second, the project does not delegate financial and procurement responsibilities to regions, and only partially delegates these responsibilities to the MFA. Third, the project provided financing through Channel 2 (through sector ministries) rather than through Channel 1 (through the finance ministries and bureaus), even though the latter is more amenable to larger scale implementation. The Borrower therefore sought an alternative design, which was aligned to Ethiopia s intergovernmental system and amenable to a larger volume of disbursements to regions. Alternative 5. IDA leveraging donor assistance for Sector-Wide Approach for PSCAP. Having considered these alternative support modalities, the Bank has sought to support the Government s PSCAP with a five-year, US$lOO million Support Project, using a Sector Investment Loan or SIL. The Support Project aims to leverage considerable bilateral assistance, which will be provided under a Sector-Wide Approach through (i) pooling of funds through Channel 1, which is Government s preferred modality for leveraging assistance under PSCAP, and (ii) third party or Channel 3 arrangements. Transitional arrangements for donors with existing projects are being identified to further encourage harmonization around the SWAP. Options for using various IDA lending instruments were reviewed at length with the Borrower in order to ensure that the Support Project could be effectively aligned in terms of design with the Government s program. The longer term time horizon of the APL with specific multi-year performance targets were considered insufficiently flexible for the Government s proposed system of generating semiannual and annual output commitments from beneficiaries, and reallocating resources on a mid-year and annual basis. In addition, the transaction costs of processing multiple phases of an APL would be ill-suited to the significant short-term financing needs of PSCAP overall. The SECAL was deemed redundant to the ongoing serial balance of payment support operations (or the Poverty Reduction Support Credits) and also inappropriate to the requirements of implementation support. 2. Major related project financed by the Bank and/or other development agencies HIV/AIDS I Multi-Sectoral HIV/AIDS Proiect-ESMAP I S I S I I Pastoral Development I Pastoral Community Development Project I S I S I

36 -30- Sector Issue Civil Service Reform District-Level Decentralization Justice Sector Reform Tax System Reform Urban Management and Development Information and Communication Technologies Donor Involvement Decentralization Support Activity for Expenditure Management and Control (USAID, DCI); Internal and External Audit Subprogram (DCI); Auditor General Capacity Enhancement (CIDA); Expenditure Management, Support for Freedom of Information Act, Top Management Capacity Building (Dff D); Overall Support (UNDP) District-Level Decentralization (DfID); Various Area-based Programs including for regional administration (CIDA, DCI, Netherlands, SIDA) Parliament Capacity Building (CIDA, DCI); Court Administration Reform (CIDA); Justice Sector Reform Program (CIDA. SIDA, UNDP) Tax System Reform Program (DfI D, EC, IMF, Netherlands, SIDA, UNDP) Municipal Management and Development Program (GTZ); Municipal Leadership Program (EC) Support for ICT development and School-Net (UNDP) 3. Lessons learned and reflected in the project design The design of the Government s program, and therefore by the Bank s Support Project, builds directly on lessons learned from Ethiopia s recent experience with public sector capacity building as well as the international experience in discrete areas of public sector reform including civil service and expenditure management reforms, decentralization, legal and judicial reform, tax administration, and ICT. The design also seeks to build on examples of successful program design in countries undergoing rapid institutional transformation. 3.1 Lessons learned from Ethiopia Lesson 1. Projectized capacity building efforts supported by various donors in Ethiopia over the 1990s tended to be fragmented and poorly coordinated. They lacked the flexibility necessary to meet the fluid demands of institutional change. Multiple projects imposed significant transaction costs on beneficiaries through distinct financial management and reporting requirements. Scattered geographically based on the interests of various donors, these area-based or projectized initiatives did not, in most cases, provide nation-wide coverage. In deliberate attempt to break with the past, the Government has created a Ministry of Capacity Building to coordinate a Sector-Wide Approach that pools donors resources around a single design solution to PSCAP with common fiduciary requirements. The design allows the Government to more thoroughly exploit economies of scope across capacity building programs (for example, civil service reform and decentralization) by using the Government s own planning and budgeting system to encourage beneficiary institutions to prioritize across the full range of eligible PSCAP expenditures on a yearly basis. It would also follow a system of performancebased disbursement and reallocation to reward performers. Lesson 2. Ethiopia s tried and tested implementation strategy for managing rapid institutional change relies on a combination of top-down prototyping, and to a lesser extent, bottom-up implementation planning. This approach to rapid implementation was evident, for example, during the creation of the federation, the woreda and municipal decentralization process, and the re-launching of the CSRP. Increasingly, the Government has encouraged

37 -31 - learning by doing initiatives at the regional and local levels; these initiatives help identify good practices that are subsequently then scaled up (for example, municipal and urban land reforms). The PSCAP planning and budgeting system enables regions and their local governments to prioritize the roll out of prototypes and other prescribed activities within a resource envelope and in line with their sub-national priorities. The traditional practice of federal authorities providing informal guidance and direction, as well as the increasing tendency of regions to innovate approaches to public sector management (for example, strategic planning) have been formalized through the creation of a matrix management structure with subprogram directors providing quality assurance or technical advice, and regions determining implementation priorities between subprograms in any given year. Lesson 3. The generally satisfactory record of other large scale operations such as the Education Sector Development Program (ESDP) can be attributed to their alignment with the intergovernmental fiscal system; delegation of financial management and implementation responsibilities to regions; and a strong effort on donor coordination. Other successful operations such as ESRDF benefited from a nation-wide network of implementation hubs that support planning, project management, and supervision. By the same token, the CBDSD project faced significant implementation delays in part because the project did not sufficiently delegate financial and procurement management responsibility (for example, for locally procured goods and services) to regions. Nor did it explicitly align planning and prioritization of procurement activities with the Government s planning and budget cycle. Finally, the key executing agency was not sufficiently equipped to coordinate project activities. Overall, PSCAP s institutional architecture will follow and build on arrangements employed under the SDPs and ESRDF. Specifically, the program will delegate financial and procurement responsibilities to lead ministries at the federal level and lead bureaus at the regional level. Planning of PSCAP activities will be undertaken in line with the established Government procedures and in accordance with the financial calendar. The funds flow from federal to regional levels will follow Channel 1 (Le., from MOFED through the BOFEDs). A network of secretariats at the federal and regional levels will be used to ensure proper coordination of this nation-wide effort. Lesson 4. In Ethiopia s resource-scarce public sector, behavioral change has resulted from extrinsic and intrinsic incentive measures. Anecdotal evidence suggests that civil servants in Ethiopia respond favorably to both formal extrinsic incentives such as increased pay and formal performance targets, as well as intrinsic motivational measures such as participatory self-scrutiny, positive reinforcement by the leadership, and sensitization campaigns. These efforts to strengthen intrinsic motivational factors have resonated with actors within Ethiopia s prevailing bureaucratic and political culture. Such measures, employed in the Civil Service Reform Program, have resulted in tangible improvements in service delivery performance including greater client orientation on the part of public servants (for example, in the Ministry of Trade and Industry and the Addis Ababa City Administration). The reliance on intrinsic incentive mechanisms such as self-scrutiny has two implications for PSCAP. First, in the short term, such measures in conjunction with significant capacity building support are viewed as effective means of motivating performance and institutional change. In subsequent phases of capacity building, the Government is intending to rely more heavily extrinsic incentives. Second, intrinsic incentive measures including a nation-wide mobilization and planning process, which relied heavily on peer review, have also been employed by the

38 Government to communicate the objectives and expected outcomes of PSCAP, and elicit formal commitments from regions and federal institutions to performance targets under the Program. 3.2 Lessons learned from international experience Lesson 5. Sustaining rapid institutional change is often difficult, but feasible when political and technocratic ownership are closely aligned. In a few African countries such Uganda and South Africa where the learning by doing process has been (i) supported by high level political commitment and clearly defined strategic framework, (ii) enriched through the involvement of competent technocrats, and (ii) opened up to regular review by experts, stakeholders, and the public at large. In such settings, the roles of the legislature, media, public at large in regularly reviewing change processes have been institutionalized as well. The program s matrix management structure-built around subprograms and regions-as well as regular joint reviews by donor teams is intended to provide timely technocratic support to the ongoing process of change. At the same time, the participatory planning and review processes as well as regular monitoring and evaluation including through client surveys are anticipated. In addition, reviews of public sector reform processes such as the multi-donor financed Institutional Governance Review, CFAA and CPAR updates, and ultimately, the Government s Annual Progress Reports on the SDPRP should provide the basis for more intensive scrutiny of implementation progress. Lesson 6. Based on its extensive experience across a wide range of institutional settings, the Bank has identified several elements of good practice that should be incorporated in the design of public sector reform programs. The Bank s corporate strategy paper, Reforming Public Institutions and Strengthening Governance, identifies the following corporate priorities which should inform the design of specific public sector reform operations-(i) a shift in focus from the content of public policy to the way policy is made and implemented, (ii) support for a broad range of mechanisms that promote public sector reform; (iii) emphasis on good fit over best practice; (iv) enhanced support for institutional development through multi-sectoral programmatic lending; and (v) a focus on organizing Bank teams to do better institutional work. IDA support during PSCAP preparation and implementation reflects these broad corporate priorities in the following ways. Program beneficiaries use the Government s own planning, budgeting, and execution processes as a way of prioritizing and sequencing their implementation of capacity building activities across the six PSCAP subprograms, and ensuring good fit with the specific institutional transformation needs of individual regions. The six subprograms of PSCAP address a gamut of issues related to the fundamental reform of the state including the creation of a local government sphere, establishment of formal checks and balances, and the introduction of performance oriented public management systems. PSCAP also is inherently multi-sectoral and seeks to avoid stove-piping through the involvement of sectoral institutions at each level of the planning and implementation process. Finally, PSCAP is supervised with the help of a sizeable Addis-based, multi-donor team, organized to leverage the core competencies of different members of Ethiopia s aid consortia in supporting institutional development. 4. Indications of borrower commitment and ownership Since the mid-l990s, Ethiopia s leadership has demonstrated a unique level of commitment to the PSCAP agenda and its precursors. Described below are six indicators of borrower ownership of the Program and its likely sustainability.

39 Track-record of rapid institutional change. The Government s track-record in supporting rapid institutional change over the past decade is arguably one of the most compelling indicators of its ownership of PSCAP and the state transformation agenda. Watershed moments in the evolution of this agenda include the creation of the federal state system, the establishment of regional subsidies and woreda block grants, and the re-launch of the CSRP. Establishment of institutional framework. Following political reforms in 2001, the Government established a super-ministry for capacity building to coordinate and monitor institutional transformation processes. Capacity building focal points such as the CSRP liaison offices have also been designated within each of the key economic management and sectoral ministry. Capacity building bureaus were also established in the regions to ensure progress in rolling out key NCBP activities to the sub-national level. Put simply, capacity building was institutionalized as government-wide concern-a development that would profoundly affect public spending in Ethiopia. Using its new institutional framework for capacity building (including the numerous federal and regional officials newly redeployed to capacity building offices across the country), the Government re-launched the nation-wide roll-out of established subprograms such as Civil Service Reform, Tax Systems Reform, and to a lesser extent, Justice Systems Reform, and launched for the first time several new subprograms such as District-Level Decentralization, Urban Management Capacity Building, and ICT. Allocation of Treasury resources. As a clear indication of high level political commitment to public sector transformation, the federal government committed and efficiently disbursed significant Treasury resources to PSCAP related subprograms over the FY period (see table 2). Senior officials at the regional and city levels followed suit by increasing expenditure allocations to certain subprograms such as civil service reform and urban management, as well as encouraging bottom-up innovations among public sector leaders (for example, the strategic planning initiatives of the Tigray health bureau and the far-reaching restructuring the Addis Ababa City Administration). Table 2. Expenditures of Treasury resources in PSCAP-related subprograms, FY (in millions of Ethiopian Birr) Budget Items Capital expenditures Budgeted I Actuals 1. Program management 2. Justice svstem reform program ICT 51.8 I DLDP csm 6.8 I UMCBP 3.9 I I 1.o Total I I I Development of Government plans and strategies. In early 1999, the Government took the initiative to develop a National Capacity Building Strategy and Framework under the direct supervision of the Prime Minister and other senior Ethiopian leaders. By mid-2001, it had developed a National Capacity Building Program Document, a Capacity Building White Paper, and several subprogram documents with detailed strategies and plans. The PSCAP planning process itself has been unprecedented with the preparation of five-year medium term plans by all eleven regions and federal subprograms.

40 In March 2003, the MCB prepared an initial program document proposing the omnibus Public Sector Capacity Building Program or PSCAP and a held a series of consultations within regional and sectoral institutions starting in May These consultations revealed a broad and diverse nation-wide constituency determined (i) to help develop the proposed omnibus program comprising various reform initiatives; (ii) to play by explicit rules of the game for accessing much-needed capacity building resources; and (iii) to utilize PSCAP to achieve broader goals such as improved service delivery. Participatory program identification at technical and political levels. Under the leadership of the Ministry of Capacity Building, the Government initiated an unprecedented nation-wide mobilization and strategic planning campaign around PSCAP and specifically, the notion of scaling up state transformation. Teams from all the regions of Ethiopia participated in a medium-term planning exercise that was carried out through a series of bi-weekly peer review meetings over the June-September 2003 period. Regions set up steering committees to oversee the preparation of consolidated regional PSCAP plans. Regional technical teams joined a federal technical team to define the eligible expenditures for the program (based on the content of each subprogram), prepared five-year plans that prioritized activities across subprograms, and developed a narrative around the transformation process. Consolidated PSCAP plans for each region were prepared and rigorously peer reviewed over this period of intensive preparation. A federal plan was also prepared. IEC activities sought to raise awareness at the grassroots level of the objectives of PSCAP through various media including television, radio, newsletters, and oral or word of mouth traditions (for example, community-based Afari and Somali traditions). The already impressive preparation process helped confirm the leadership role for MOFED in ensuring transparent and fair resource allocation across regions and the lead role of other technical ministries in ensuring quality in relevant reform areas (for example, MOR in tax reform or MFA in urban management). Over the period, ownership of the objectives and priorities underlying PSCAP has been confirmed on numerous occasions by senior members of Ethiopia s leadership in the press, public meetings, and through other media. By mid-september 2003, a wide range of political leaders, bureaucrats, citizens, and training institutions at federal, regional, and local levels were mobilized and organized around PSCAP as the Government s primary instrument for state transformation. Engagement with international donor community. Notwithstanding its own contributions, the Government acknowledged the considerable financial and technical assistance gap that remained in rolling out its various reform programs. As the immediate-post war period came to a close, it actively sought assistance and engagement from the international community. A high-level seminar involving the Council of Ministers and members of the Bank s team was a held in Sodere in October 2001, followed by a range of CAS Workshops on capacity building, decentralized service delivery, and private sector development in A Consultative Group meeting later that year also provided an opportunity for Government to articulate the objectives and document the progress made across its public sector reform subprograms. Donors in turn committed and delivered short- to medium-term assistance to the Government. Notably, the Bank s CBDSD Project was approved and declared effective by early Short-term assistance from other donors such as the EC, CIDA, DCI, DfID, GTZ, Italy, Netherlands, and SIDA was also committed.

41 Value added of Bank support in this project The substantial and complex requirements of Ethiopia s state transformation agenda necessitates IDA s intensive involvement for three reasons-i) managing the demands of rapid nation-wide scale up, (ii) leveraging the comparative advantage of IDA and other interested partners, and (iii) mitigating risk factors associated with serial direct budget support. Managing the demands of rapid, nation-wide scale up. The scale and scope of the Government s public sector capacity building program are unique in Africa (with the notable exceptions of Uganda and South Africa), as is Ethiopia s political commitment to overcoming the fiscal and operational challenges to successfully implementing state transformation. Of the various donor partners involved in capacity building, IDA is best positioned to help the Government bring to scale this nation-wide, multi-sectoral program of institutional overhaul within acceptable levels of risk. In addition, IDA financing in the context of Sector-Wide Approach to public sector capacity building also enables the Government to smooth out fluctuations in the provision of bilateral aid resources across regional states within the federal system, across subprograms of PSCAP, and across time. Leveraging the Bank s comparative advantage and that of other partners around a single design solution to PSCAP. IDA brings to bear considerable cross-country experience in several of the reform areas under implementation as part of PSCAP including urban management, district-level decentralization, civil service reform, and ICT. It is also leveraging its experience as a lead or strategic partner in supporting large scale capacity building programs in the few African countries that embarked on complex and rapid transformation strategies (for example, IDA s provided critical programmatic support to Uganda s multi-pronged effort to deepen democratic decentralization, civil service reform, expenditure management, and legal-judicial reforms over the mid-late 1990s). Overall, in Ethiopia, the Bank is also playing a catalytic role in encouraging donors-particularly those with intensive experience at the sub-national level and in areas such as justice systems and tax reform-to pool their support and harmonize around the Government s single design solution for PSCAP. Mitigating risk factors associated with serial direct budget support. A final set of rationale of Bank involvement relates to mitigating the fiduciary and implementation risks associated with IDA s as well as bilateral direct budget support programs designed to help Government achieve poverty reduction objectives in the SDPRP. Specifically, assistance to be provided under PSCAP-for example, for the modernization of expenditure management systems, or restructuring and skills development in woredas and municipalities-are expected to significantly strengthen the confidence of Ethiopia s aid consortia that budgetary resources are being effectively utilized to deliver essential services with a decentralized framework. E. Summary Program Analysis 1. Economic For this framework -type project and the larger federal program that it seeks to support, the Government will rely on its medium-planning and annual,budgeting systems to generate federal and regional applications with time-bound capacity building proposals. These applications and proposals will be comprised of costed plans that are screened within indicative formula-driven resource envelopes or drawing rights. Eligibility criteria will include inter alia the establishment of agreed institutional arrangements (including regional planning and programming departments

42 or equivalent, responsible for PSCAP); completion of relevant capacity assessments or inclusion of assessments in first year plans; submission of medium-term action plans and annual. procurement plans using standard unit costs within established resource envelopes; and submission of endorsed (either by regional cabinet or federal ministry head) participation and performance agreements. Generic appraisal criteria include inter alia the relevance of planned activities against assessed constraints; provision for completion of the minimum mandatory capacity building (defined across subprograms); provision for program support (for example, financial and procurement management and M&E); and evidence of participatory planning including sample plans for local jurisdictions. Subprogram-specific appraisal criteria are also envisaged and will include appropriateness of sequencing strategies recommended by federal program director; sector-specific technical analysis; the previous year s performance; and submission of relevant TORS. Mid- and end-year reallocations of drawing rights are intended to provide an incentive and in the process ensure the economic viability of project activities. 2. Financial Three sets of financial issues are relevant to the Support Project. First, it is important to note that fiscal additionality provided by PSCAP to regions will be explicitly reflected within the Government s Macroeconomic Fiscal Framework (MEFF), medium-term Public Investment Program (PIP), and the annual vertical division of revenues. While the additionality will likely be marginal to these macro-fiscal targets, the Program will be designed in a manner that continues to secure the macroeconomic management fundamentals. Second, the ex ante civil works (facilities) and ex post recurrent expenditure implications of capacity building activities are not included in the list of eligible expenditures under PSCAP. In the case of regions, these costs will need to be identified as well as their fiscal sources prior to drawing down on PSCAP resources. Third, implementation of PSCAP activities are expected to result in improvements in expenditure and revenue management, stronger cash or liquidity management, streamlined government operations, and enhanced fiduciary accountability at all levels of government. While the direct financial benefits of project activities may not be realized in the short term, increased receipts and better value for money at all levels are expected over the medium-term. 3. Technical Several aspects of the content of various reform subprograms under PSCAP will require ongoing review and scrutiny. As a framework -type project, the nature and sequencing of this content will need to be developed and managed flexibly through the annual planning and implementation review processes within standards prescribed by subprogram directors. A central feature of the PSCAP system is the matrix management structure in which Technical Teams comprised of subprogram directors and supported by PPDs ensure the quality of regional plans, priorities, and implementation processes. 4. Institutional 4.1 Executing agencies At the federal level, responsibility for execution has been delegated across lead institutions that house each of the six PSCAP subprograms or key elements of these subprograms. Specifically, the executing agencies tasked with overseeing implementation of the federal PSCAP component are: (i) MCB, which houses offices for the Civil Service Reform, District-Level Decentralization and Justice Systems Reform Subprograms; (ii) MOFED, which is responsible for the overall funds flow to federal and regional institutions, and also undertakes day-to-day management of

43 -37- CSRP activities related to expenditure management and control; (iii) MOR, responsible for the Tax Systems Reform Subprogram; (iv) the ICTDA, which houses an implementation unit for execution of the ICT Subprogram; (v) MFA, which houses an office for the Urban Management Capacity Building Subprogram; and (vi) the Federal Supreme Court, which houses an office for day-to-day management of JSRP activities related to the strengthening of the courts. This approach to delegating management across lead ministries is appropriate to the Program s multisectoral focus. It will also encourage accountability for subprogram implementation in exchange for greater autonomy for lead ministries to oversee and satisfactorily meet their day-to-day implementation responsibilities. As noted earlier, the MCB s Planning and Programming Directorate (PPD) will serve as the body responsible for overall coordination across the various executing agencies noted above. Under the Program, the Bureaus of Finance and Economic Development as well as the Bureaus of Capacity Building are also designated as executing agencies, responsible for the regional PSCAP component, upon approval of signed participation and performance agreements. Specifically, BCBs and their PPDs undertake day-to-day management (including planning and programming, procurement, and M&E) and BOFEDs carry out all financial management activities on behalf of lead regional institutions with technical mandates for each of the six PSCAP subprograms (for example, BCB for Civil Service Reform) or the Bureau of Trade, Industry, and Urban Development for Urban Management Capacity Building). 4.2 Program management As reflected in its Program Implementation Plan (PIP), the Government has strengthened program management framework for the federal level implementation of PSCAP. Specifically, program management will be supported by (i) the Planning and Programming and the Budget and Finance Directorates (PPD and BFD) of MCB, both of which will be appropriately strengthened with international and local experts to carry out the full range of program management activities; (ii) offices to support day-to-day management of each subprogram or, where designated, elements of subprograms at the federal level; and (iii) a Federal Technical Team, comprising subprogram directors, tasked with quality assurance during planning and implementation for the Program as a whole. Similar arrangements in regions comprise (i) PPDs along with Procurement Desks, housed in BCBs, responsible for program management of the regional component; (ii) interbureau regional technical teams, who will fulfill the quality assurance function at the regional level; and (iii) BOFEDs will be responsible for payment based on the approval of BCBs. In addition to the generally robust framework for program management described above, the Government is taking steps to rapidly embed necessary expertise in the PPD and BFD at the federal level, PPDs at the regional level, and relevant staff in MOFED and BOFEDs prior to effectiveness inter alia through the recruitment of experienced consultants with expertise in financial management, procurement, and program management. Where necessary, resident advisors are intended to support subprogram directors as members of the Federal Technical Team (and their counterparts in regions). 4.3 Procurement In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD in the MCB shall serve as the lead agency responsible for monitoring all procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In

44 -38- addition, the Ministry s BFD is responsible for handling all ICB procurement of goods. National procurement of goods and selection of consultants would be handled as follows: Procurement for the three subprograms under MCB (CSRP, JSRP, and DLDP) will be handled by MCB procurement unit from preparation of bidding documents and RFPs, until award of contract. The contracts for procurement of goods would be signed by MCB. The contracts for the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specifications and Terms of References and technical evaluation of bids and proposal. Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT, expenditure management and control activities under CSRP, and strengthening of the judiciary activities at federal level will be carried by the Ministry of Revenue, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), and the EMCP Coordinating Office in MOFED and a designated office in the Federal Supreme Court respectively. BCBs are responsible for handling all procurement activities, except ICB procurement of goods, for the respective regions and city administrations (Le., Addis Ababa and Dire Dawa). Relevant lead institutions in each region would participate in the preparation of procurement plans, specifications, terms of reference, technical evaluation of bids and proposals. MFA is tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-Gumuz and Gambella) in the management of procurement as required. It is anticipated that procurement arrangements will evolve as capacity increases. Regional proposals for building up their procurement capability and for changes in procurement arrangements will be regularly reviewed and assessed by the BFD, and semi-annually by IDA and donors. A more thorough analysis of procurement arrangements is provided in Annex Financial management (see Program Implementation Plan and Annex 6A) PSCAP is legally constituted as a specific federal grant to be executed by multiple institutions at the federal level, as well as regional BOFEDs and BCBs at the regional level. Four features of PSCAP s institutional framework have been identified as pertinent to the overall fiduciary risk of the Government s program: (i) alignment of PSCAP s planning, budgeting, and execution arrangements with the public finance system, (ii) provisions for embedding financial management capacity across executing agencies, (iii) the utilization of the Channel 1 modality for funds flow, and (iv) the planned pooling of donor and Treasury funds. These are described in detail below including the rationale and implications for managing financial management risks. 9 As prescribed under a Sector-Wide Approach, the program (and therefore the Bank s Support Project) will align resource allocation, planning, budgeting, and execution practices and procedures-where they are deemed to be robust-with those established under Ethiopia s public financial management regulations. Specifically, federal and regional institutions participating in the Program shall use Government s chart of accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term and annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government s financial system is designed to ensure that the planning and execution of capacity building activities is undertaken in a flexible manner in line with

45 -39- the changing demands on the ground. It is also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financed and implemented. The major financial management risks to PSCAP (and therefore the Bank s Support Project) involve coordination and capacity constraints across numerous planning and programming departments (PPDs), BOFEDs, and federal subprogram offices involved in implementation. In order to mitigate these risks, all PPDs will recruit additional staff to strengthen their capacities and MOFED will provide regional staff with extensive training in the financial management requirements of the Program. In addition, the preparation and issuance of short and concise guidelines, as part of the PIP, on recording and reporting of the financial transactions of the Program is a crucial step in accelerating the implementation of the Program. The guidelines will be used by the staff of the executing agencies such as federal subprogram institutions and regional BOFEDs after MOFED conducts the necessary training. MCB will take the responsibility in the overall coordination of the Program s implementation. After receiving the required financial reports from MOFED, MCB will prepare and submit regular financial monitoring reports to IDA. As described in the PIP, funds flow arrangements under PSCAP eventually involve the pooling of external resources (for example, from IDA and other bilateral donors) with Treasury resources. These pooled resources are then channeled from MOFED to designated federal and regional beneficiaries through Channel 1 in line with assigned drawing rights and against monthly SOE-based disbursement procedures. Under the Channel 1 procedure, as practiced under the Education and Health Sector Development Programs, the specialized finance bodies at each administrative level control the release of funds and report upwards on their utilization. The same principles apply to both recurrent and capital budgets. Although MCB and Regional Bureaus of Capacity Building have a special role in approving and supervising the capital budget, the disbursement and accounting functions remain with Figure 5. Funds Flow and Reporting Arrangements under PSCAP r I 1 IDA Credit Account I I Washington, DC I I! r q I i Government of Ethiopia I I Contribution I I! IDA Special Account in USD at NBE (MOFED) I f---- PSCAP Pooled Local Currency Account at NBE/CB (MOFED) at NBE (MOFED) - + Reporting on expenditures + Flow offunds I Local Currency Accounts (Regional BOFEDs) Local Current Accounts (Lead federal institutions)

46 MOFED and the Regional BOFEDs. At the federal level, designated lead institutions will serve as executing agencies that receive funds directly from MOFED to carry out capacity building activities. Other federal bodies such as sector institutions implementing the CSRP or other subprograms do not receive funds; rather lead institutions procure goods, training, and services on their behalf. At the regional level, BOFEDs will receive funds through Channel 1 based on approved annual plans in the same way as they currently receive Treasury resources. As noted above and depicted in Figure 5, PSCAP is intended to pool resources from domestic and external sources in the context of a SWAP. Accordingly, for each donor, including IDA, MOFED intends to open a Special Account (SA) in US Dollars at the National Bank of Ethiopia. In addition, MOFED will open one Birr account-the pooled account -for which money from the SAs and the government contribution will be deposited. The Birr account will serve as a consolidated fund for all donors and the government. MOFED will be responsible for the day-to-day management of the SAs and the pooled Birr account. Funds will be moved from the Foreign Exchange Special Accounts in the National Bank of Ethiopia to the Pooled PSCAP Account, and forwarded to the beneficiaries, based on the approved budget and agreed disbursement plan. Thus, released funds of one donor can be replenished from another donor on the basis of claims made. Although donor funds will be allowed to be kept in SAs in foreign currency, they will be transferred into Birr as soon as they are to be used and sent to the regions to cover anticipated expenditures. Part of the donor funds, however, will be kept in foreign exchange to be disbursed at the request of MCB and the regional capacity building bureaus through their regional finance bureaus. These funds will be drawn from the particular region s allocation and be used to cover the costs of imported goods. The SAs established in the National Bank of Ethiopia by MOFED to receive donor contributions (including those from the Bank) are revolving funds. Once funds are transferred to the pooled account, or direct expenditures against approved contracts are undertaken for earmarked funds, replenishments can only be made when the necessary expenditure reports are received from the federal and regional beneficiaries (through their BOFEDs). It is absolutely crucial that these reports and other necessary documents are submitted monthly to the CAD. Otherwise, part of the program may be stalled due to lack of donor funds. A single financial reporting format is to be prepared by executing agencies, that is, federal lead institutions and regional BOFEDs. These forms will deal with both Government and donor funds used in the implementation of PSCAP. In addition donors such as IDA will need to receive at least monthly replenishment requests. The overall conclusion from the financial management assessment is that the existing Government system-where deemed sufficiently robust-can be used for the implementation of PSCAP (and therefore the Bank s Support Project), provided that additional staff are recruited at all levels and the required trainings are provided by MOFED on recording and reporting of the financial transactions. A more detailed analysis of financial management arrangements and associated risks is provided Annex 5A. 5. Environmental Not applicable.

47 Social As noted earlier, it is anticipated that PSCAP will affect a wide range of stakeholders with myriad-at times competing-interests. Primary participants in public sector reform activities that will be affected by PSCAP include federal, regional, and local level public servants (both general administrators and frontline workers in sectors); officials and interest groups involved in the management of control and sectoral agencies at the regional and local level; officials and staff within supreme audit institutions; the judiciary and legislative oversight institutions such as the public accounts committee; as well as the indigenous suppliers of training, equipment, and knowledge services required for PSCAP including public and private training institutions, various local firms, and NGOs or not for profit institutions. Indirect clients of public sector capacity building include ordinary citizens in urban and rural areas, who could potentially take advantage of the greater opportunities for democratic decision-making under woreda or municipal decentralization. Citizens and local communities are also expected to benefit from service delivery improvements resulting from various PSCAP subprograms. The private sector is also poised to benefit from anticipated improvements in public sector governance (for example, greater improvements in commercial justice or reduction in the processing time for business licensing or customs clearance). Overall, the social development impact of PSCAP will depend on the degree to which institutional reform and capacity building efforts improve three critical aspects of state-society relations-inclusion, accountability, and cohesion. These are discussed below along with the prospects that specific subprograms in PSCAP would provide key entry points for deepening social development impact. Inclusion. Under PSCAP subprograms, public officials are expected to undergo the attitudinal and behavioral changes necessary to foster the participation, free expression, and genuine inclusion of citizens, communities, and marginalized groups in public processes, such as planning and budgeting. Particularly worth of note are the CSRP, UMCP, and DLDP programs, which support the development of more predictable and participatory planning and prioritization processes. Efforts to foster grassroots participation both in woredas and municipalities are also envisaged. Risks that such consultation prototypes and capacity methodologies will be excessively top-down and formulaic should be noted and monitored in the future. Greater focus on improving and monitoring the quality-not simply the quantityof local representation in public decision-making should be maintained. Accountability. The Program intends to support performance management and other related efforts to improve the accountability of public servants for efficient, effective, and clientoriented service delivery. In addition, capacity building activities are intended to result in unbiased and judicious exercise of regulatory authority (for example, in case of business licensing or customs clearance) in order to improve governance. Several subprograms including CSRP, JSRP, TSRP, and ICT (as well as those subprograms focusing on local government) serve as entry points through which service delivery operations, as well as citizen monitoring of frontline delivery performance can be strengthened. Key success factors are the Government s continued commitment to involving citizens and the private sector in the monitoring of public sector performance (for example, through client score cards and surveys), and also its track-record in disseminating the findings of such efforts. Cohesion. The Program seeks to improve the capacity of public officials to carry out resource allocation, service delivery, regulatory, and related activities in a fair, transparent, and nonarbitrary manner-that is, increasingly in compliance with explicit and established rules of

48 game. Scope for speedy recourse and redress will also be critical for economic agents in commercial and other disputes. Such an approach to public management is critical to balancing the diverse interests of stakeholders and encouraging cohesion (or the accumulation of social capital) across diverse stakeholder groups such as regions, local communities, and other such groupings. The JSRP, CSRP, TSRP, and ICT all support strengthening of executive, judicial, and legislative oversight functions that delineate and enforce the legal and regulatory framework within which public officials and economic agents such as farmers as well as private sector firms function. The credible commitment of both state and non-state actors to new rules and regulations is an important indicator of success. To further encourage cohesion across a diverse stakeholder group under PSCAP, it will also be important to monitor the success of the federal government in encouraging emerging regions to join the mainstream of Ethiopian public administration practice, while meeting their specific cultural and institutional needs. Similarly, regions will need to rapidly build capacity in poorer and more remote woredas, and ensure appropriate targeting of capacity building efforts towards historically marginalized groups such as women. Finally, the performance-based features of the PSCAP system itself-that is, the proposed mid-year and annual reallocation of drawing rights based on performance-poses an important resource management challenge for the Government. If managed transparently and fairly, the system could help deepen the implementation of fiscal federalism including healthy competition for federal resources within and across regional states. However, arbitrariness in the application of PSCAP s rules or poor dissemination of the rationale for (re)allocative decisions could undermine credibility of the system. Overall, the Government is well-positioned to leverage the social development impact of the Program provided that (i) increasingly bottom-up approaches to consultation and local level capacity building are employed; (ii) citizens, firms, and public officials are involved in the monitoring and publicly reviewing service delivery performance; and (iii) state institutions (including those involved in allocating and managing PSCAP resources) operate in a fair and transparent manner to balance the interests of diverse stakeholders, specifically the poor and historically marginalized groups. These and related issues are further detailed in a social appraisal report, archived in the project files. The report recommends that future review missions focus on the above-mentioned social development and related risks over the course of implementation. Suggestions on specific monitoring indicators are also included. 7. Safeguard Policies

49 F. Sustainability and Risks 1. Sustainability The sustainability of institutional reforms and capacity building activities under PSCAP depend on the following six factors, which have been addressed in the context for program design. As a framework rather than blueprint -type operation, the Bank s Support Project will depend on the Government s system of program formulation and execution, and specifically, how effectively it articulates and enforces the rules of game governing access, allocation, and re-allocation. Of particular importance in institutionalizing PSCAP is the degree to which these rules are formally locked into the intergovernmental fiscal system (for example, through PSCAP s designation as a specific purpose federal program additional to the regional subsidy, or the use of formula-based drawing rights and performance-based disbursements) as well as Government s reliance on established planning and budget procedures to guide yearto-year prioritization processes. Alignment with the fiscal system is a key design principle underlying PSCAP; this bodes well for the program s viability. The reform content of plans and the quality of implementation within this framework -type project will be a second factor affecting value for money and sustainability. Given the complexity of capacity building and institutional reform activities, the credibility of PSCAP as a whole will depend heavily on the review and quality assurance mechanisms the support planning, appraisal, and implementation at the federal and regional levels. Particularly noteworthy are the benefits that will likely derive from institutionalizing regular coordinated feedback from donor partners on the implementation of various subprogram activities within the overall federal and regional PSCAP components. Third, the program s multi-sectoral scope places a premium on effective coordination within and across tiers of government. The Government s network of capacity building offices and liaison.units at the federal, regional, and local levels provides the basic institutional framework for this type of coordination. However, the efficacy of these arrangements will depend in large part on the clarity of roles and responsibilities between capacity building, finance, and sectoral offices at each tier of government. The role of institutions outside the executive including the legislatures and courts will also need to be appropriately defined. Recent efforts by the Government to clarify the roles and responsibilities as well as the accountability framework for the Program overall are highly encouraging. Specifically, delegation of program management responsibilities to federal subprogram offices and regions, as well as delineation of financial management and procurement arrangements across tiers of government bode well for coordination efforts during program implementation. Coordination among donors is a fourth factor necessary to ensure the continuity of Government s institutional reform efforts. Organized in the form of a Sector-Wide Approach, the multi-donor support for PSCAP will reduce transaction costs and maximize consolidated external funding around a single design solution. The establishment of a Joint Government-Donor Working Group to support quarterly reviews, semi-annual supervision missions, and Joint Annual Review Missions will likely enhance transparency and credibility of Government efforts under PSCAP. Fifth, the credibility and viability of the PSCAP system will require that Government showcase tangible improvements in service delivery performance early on. Notable successes

50 -44- such as dramatic reductions in processing time for business licensing, increased convenience and client orientation of one-stop shops in Addis Ababa, or rapid improvements in land management in cities such as Mekele and Bahir Dar are all indications that capacity building makes a difference for the bottom-line of ensuring value for the taxpayer s money. A sixth and final concern is the need to ensure a regular participatory review (preferably involving Government, private sector, civil society, and external actors) of change processes to encourage learning-by-doing as well as effective demand for institutional change. The Government s plans to use a variety of monitoring and feedback mechanisms such as surveys, client report cards, and workshops, as well as its commitment to require disclosure or public reporting of the findings of M&E activities under the program is highly encouraging. Equally important is the MCB s commitment to regular disclosure of the findings of these various assessments as well as two-way IEC activities at the federal, regional, and local levels. Over time, it will be critical to foster a safe, yet accountable environment within which public servants and their clients can experiment with and develop more effective ways of undertaking planning, service delivery, and regulatory activities. 2. Critical risks Implementation of this ambitious and complex program poses an array of technical, managerial, and coordination-related challenges for Ethiopia s federal, regional, and local governments. Three. risks in particular (and associated risk mitigation measures) are worth highlighting. First and foremost, weak institutional capacity at all levels-and especially in emerging regions-poses significant financial, procurement, and program management risks to this ambitious project. Timely and accurate reporting on financial flows and physical implementation performance will be critical if the results-oriented reallocations envisaged under the Program is to function effectively. The major financial management risk for the Program is that MOFED may not receive timely reports to process replenishments of the special account and closing of the annual accounts of the Program due to limited institutional capacity across tiers of government, and specifically within BOFEDs and BCBs. Also, PSCAP will stretch the already weak capacity of federal and regional institutions to undertake procurement and contract management activities. In light of the implementation challenge that PSCAP poses, the Government s plans to strengthen federal and regional PPDs, the BFD, and subprogram offices inter alia through the recruitment of skilled local and international consultants, intensive training in the operational guidelines, and early preparation and approval of Terms of Reference and procurement documents is encouraging. The role of MFA in providing technical support for plan preparation and implementation in emerging regions is also noteworthy. The adequacy of such efforts should be monitored, particularly in the first year of implementation, and remedial actions identified early. Second, while the PSCAP design places a premium on flexibility, the Government will likely face difficulties in adjusting the program semi-annually and annually, and reallocating drawing rights to meet changing circumstances and needs. At this stage, notwithstanding progress made on aligning PSCAP process with the new financial calendar and overall public finance system, the capacity currently available to make such rapid allocative adjustments, remains weak and probably inadequate. Strengthening of PPDs, as noted above, should help mitigate this risk, although major efforts to improve financial and physical reporting across tiers of government should continue in the run up to implementation. Also worthy of note is the Government s commitment to joint quarterly, semi-annual, and annual reviews with all

51 -45 - stakeholders including donors. These reviews are to be aligned with the planning and budgeting cycle to ensure that adjustments are reflected in the annual budget (Annex 9). Third, in-service training on a massive scale is envisaged under PSCAP requires. The importance of moving beyond a purely public sector supply response to in-service training demand-given its limitations in terms of scale, cost, innovation, and efficiency-is widely acknowledged by Government and other key stakeholders. Recently, the Government has taken noteworthy steps towards clarifying a three-pronged approach for deepening the involvement of public, private sector, NGO, and university sectors in the delivery of training under PSCAP. First, the Government has confirmed the critical role of public sector suppliers such as the Civil Service College and Regional Management Institutes in the provision of in-house skills development (for example, related to implementation with Government procedures) as well as sensitization with Government policies. These types of activities are to be financed under the IDA program on a unit cost basis, i.e., covering the actual cost of the training sessions rather than the overhead or salaries of personnel in these public institutions. Second, the role of local and international private providers was acknowledged as key for highly specialized forms of training (for example, development of skills for the maintenance of IS/IT networks or best practice land management systems) and would be financed on the basis of competitive tendering under the IDA program. Third, for bulk generic training in areas such as general management, strategic management, finance, leadership development, public speaking, and computing, the Government intends to prequalify public autonomous, private, university, and non-profit suppliers to compete on a financial or cost basis for bulk training contracts bundled under the Program. As a basis for pre-qualifying suppliers, the Government intends to move forward with an assessment of the supply-side of the training sector. Figure 6. A three-pronged approach to deepening the indigenous supply response In-house Generic Specialized The above-mentioned risk factors and others are described and rated in the table on the following page. Despite several risk mitigation measures undertaken by the Government in the preparation for program launch, the overall risk rating for the operation is considered high. Over the course of implementation, further analysis and assessment will be required to assess the overall riskreward ratio (inclusive of fiduciary, institutional, and social development factors) by subprogram, region, and the program as a whole.

52 -46- Risk From Outputs to Objective Insufficient expressed demand on the part of citizens, civil society, and the private sector for improved public sector performance in terms of service delivery, empowerment, and good governance Absence of or delay in woredas and municipalities access to fiscal support for investment and recurrent service delivery needs, after receiving capacity building support Overemphasis on process rather than the bottom-line of service delivery and empowerment Lack of coordination between subprograms and their outputs, or lack of consistency public sector reform programs across regions Political commitment to institutional transformation wavers, or Government is unable to sustain focus on PSCAP because its ambitious development agenda (including food security, human development, rural development, and private sector development) From Components to Outputs Vested interests at regional and federal levels hamper various reforms including restructuring, accountability, and systems modernization efforts Lack of coordination among donors supporting the Sector Wide Approach Constraints on the cost, innovation, quality, timeliness, and efficiency of the supply response of purely public sector supply of training and capacity building in Ethiopia Risk Rating H N S S M S M H Risk Mitigation Measure :EC campaigns prior to implementation will :ontinue; systematic disclosure of findings of ;ervice delivery and related assessment; regular workshops with clients governed by institutional :harters across civil service institutions Both budget and capital investment support will xovide fiscal additionality to capacitated local iurisdictions to meet recurrent and investment service delivery needs PSCAP outcomes are defined in terms of service ielivery impact rather than simply triggers; over :ime, outcomes rather than outputs provide basis for allocation and reallocation decisions The design empowers regions to prioritize between subprograms, exploiting synergies between them, and at the same time, leveraging the expertise of federal subprogram directors to ensure complies with national policy directors and standards for content and implementation High level political involvement in consensus building around PSCAP across ministries, among regional leaders; establishment of a nation-wide structure of capacity building bureaus and offices with budgetary responsibilities At the regional level, allow for prioritization and reallocation from subprograms that are stalled towards those proceeding rapidly Establishment of a Joint Government-Donor PSCAP Working Group to facilitate joint quarterly review meetings, semi-annual supervision, and annual review missions; increased supervision intensity for Bank and donor team including measures to better meet due diligence requirements in regions, woredas, and municipalities Assessment of the supply-side of training and capacity building across Ethiopia s public, private, and non-profit sectors; pre-qualification of training suppliers for generic training activities; and strengthening of public sector training institutions to carry out in house training activities

53 Risk Severe constraints on absorptive capacity in emerging regions Weak institutional capacity at the regional and federal levels to carry out core financial, procurement, program management, and M&E activities, particularly in emerging regions Arbitrariness in resource allocation across federal institutions and to regions, and weak capacity to effect mid-year and annual reallocation of drawing rights against ulans Overall Risk Rating Risk Rating H (High Risk); S (Substantial Risk Risk Rating H H S H Risk Mitigation Measure Strong program support prior to project effectiveness with the assistance of the Ministry of Federal Affairs; offering premia on fees for consulting assignments in remote regions; establishment of minimum mandatory amount of capacity building and a floor on reallocation of drawing rights from any given region Establishment of well-staffed Planning and Programming Directorates (PPDs) and subprogram offices or equivalents; contracting in skills through of local consultants to support various aspects of program management; preparation of sample Terms of Reference and procurement materials; intensive training of Government officials; preparation of M&E Action Plan as part of PIP/OM; incorporation of semi-annual and annual output commitment into participation and performance agreements Formula-driven drawing rights with clear decision rules for performance-based reallocation; strengthening of the network of PPDs to suuaort alanning and M&E 3. Possible controversial aspects There are no controversial aspects of this project. G. Main Credit Conditions 1. Effectiveness conditions a. the Borrower has finalized and adopted the Program Implementation Plan, including a Procurement Plan, monitoring and evaluation action plan, financial reporting guidelines, and information, education and communication strategy, in form and substance satisfactory to the Association; b. the Borrower has recruited to: (i) the executing agencies: (A) at the federal level, Director, four team leaders and four team experts in the Planning and Programming Directorate, and (B) at the regional level, equivalent of the Director of Planning and Programming Directorate; and (ii) the MCB, two local procurement consultants, and an international procurement consultant, all in accordance with the provisions of Section I1 of Schedule 3 to the Development Credit Agreement; C. the Borrower has budgeted and approved implementation plans to be carried out by regional and federal institutions during the first year of PSCAP, and reflected the said

54 -48- plans under the appropriate item in the federal budget, in form and substance acceptable to the Association; d. the Borrower has opened the Project Account and has deposited therein the initial deposit in an amount equivalent to Birr 9,000,000 to finance the counterpart contribution to the Project; and e. the Borrower has initiated pre-qualification of in-service training suppliers for generic training activities. 2. Financial and other covenants a. The Borrower (and specifically MOFED) shall submit the audited project accounts to IDA nine months after the end of each fiscal year. The audited financial statement will include all sources of pooled funds in the Program, including those from IDA, other pooling donors, and the Treasury. b. The Borrower (and specifically MCB) shall, after receiving compiled financial reports from MOFED, submit semi-annual consolidated Financial Management Reports (FMRs) to IDA forty-five days after the end of the FMR period. c. The Borrower and the pooling donors shall execute a Memorandum of Understanding as a condition for disbursement of funds from the pooled funds category. d. The Borrower shall comply with the following dated covenants, which serve as annual progress actions during implementation. 1. No later than the end of the first program year, the Borrower shall (i) submit annual procurement plan, including sample development plans for up to 5% of the woredas and municipalities; (ii) launch the second woreda-municipal benchmarking survey; (iii) complete minimum mandatory requirements in at least four regions; and (iv) publish the PSCAP annual progress report, all in a form and substance satisfactory to the Association. 2. No later than the end of the second program year, the Borrower shall (i) submit annual procurement plan, including sample development plans for up to 15% of woreda and municipalities; (ii) launch third woreda-municipal benchmarking survey; (iii) complete the prequalification of suppliers for generic training; (iv) review allocation and reallocation procedures and mechanisms, including reviewing alternatives for high performing executing agencies who have fully utilized their allocations; (v) complete minimum mandatory in seven regions; and (vi) publish Program annual progress report, all in a form and substance satisfactory to the Association. 3. No later than the end of the third program year, the Borrower shall (i) submit annual procurement plan, including development plans for up to 25% of woredas and municipalities; (ii) launch the fourth woreda-municipal benchmarking survey; (iii) review feasibility of capacity building transfers to woredas and municipalities; (iv) completion of minimum mandatory in all regions; and (v) publish the Program annual progress report, all in a form and substance satisfactory to the Association.

55 -49 - H. Readiness of Implementation [ 3 1. a) [XI 1. b) [XI 2. [XI 3. The engineering design documents for the first year s activities are complete and ready for the start of project implementation. Not applicable. The procurement documents for the first year s activities are complete and ready for the start of project implementation. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] 4. The following items are lacking and are discussed under loan conditions (Section G). I. Compliance with Bank Policies [XI 1. The project complies with all applicable Bank procedures. [ ] 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Acting Seetor Manager Country Director

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61 ANNEX 2: DETAILED PROJECT DESCRIPTION ETHIOPIA: Public Sector Capacity Building Program Support Project 1.1 How PSCAP s two components work The Bank s Support Project is fully aligned with the basic design of the Government s PSCAP. As such, it supports the scale-up of ongoing institutional transformation and capacity building activities through two components-one federal, and the other regional. Activities planned under these two components will be drawn from a menu of eligible expenditures consisting of PSCAP s six subprograms and a mandatory program support activity. Drawing on this menu, each component is (i) planned based on annualized five-year drawing rights; (ii) adjusted semiannually and annually; and (iii) reflected in participation and performance agreements with commitments to deliver on specific capacity building outputs.. Component 1-Federal PSCAP: This component supports federal level activities across each of the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component is required to include basic program support activities to ensure effective implementation. Component 2-Regional PSCAP: This component constitutes the bulk of the Program and is designed to empower regions to adapt and implement national reform and capacity building priorities envisaged under PSCAP s six subprograms in a manner that is efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms will be fully leveraged through this component. Regions will also shift resources year-to-year and in-year from poor performing to higher performing subprogram activities. This component is also required to include basic program support activities to ensure effective implementation. 1.2 Drawing down on activity menus within PSCAP Subprograms The objectives and specific menu of activities that fall within each subprogram of PSCAP are explained below. Selected and planned on a annual basis, these activities provide the building blocks for the components described above. Subprogram 1-Civil service reform. The overall objective of the Civil Service Reform Subprogram is to promote the development of an efficient, effective, transparent, accountable, ethical and performance-oriented civil service at the federal, regional, and local levels. Under this subprogram, beneficiaries draw down on support across the following seven areas: Strengthening the capacity of Civil Service Reform (CSR) Coordinating structures is designed to enable CSR coordinating structures at federal, regional and local levels to more effectively support target institutions in implementing reforms and performing at levels that citizens require of them. Specifically, the following activities are envisaged: (1) review and redesign of the organizational structures as well as roles and responsibilities of CSR coordinating structures; (2) assessment and implementation of jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation of training requirements including preparation of materials, training of trainers, packaging of generic training activities, and coordination of external training or study tours; (4) design, development, and adoption of appropriate CSR change management

62 -56- (including M&E) and coordination systems; and (5) strengthening of Information, Education, and Communication activities including the provision of equipment and technical know-how.. Improving expenditure management and control activities seek to deepen implementation of the Country Financial Accountability Assessment Report and Country Procurement Assessment Report Action Plans, strengthen Ethiopia s public sector fiduciary framework, and in the process, improve the efficiency and effectiveness of public expenditure management through the following capacity building activities: (1) development of a comprehensive legal framework for public sector financial administration; (2) nation-wide adoption of the new budget classification systems and related budget reforms; (3) roll-out of the double entry accounting system; (4) development of medium-term planning systems including the transition from the existing Public Investment Program into a Public Expenditure Program or PEP system and its integration with strategic planning and management initiatives; (5) implementation of procurement reforms; (6) strengthening of the internal audit function including the introduction of systems audits; (7) modernization of cash and asset management; and (8) roll-out of financial management information systems. Improving governance of human resources management and control aims to instill ethical, merit- and performance-based personnel management practices in the Ethiopian civil service through the following capacity building activities: (1) development and implementation of the prototype rules, regulations, and policies for human resource development, time management, promotion and transfer, as well as job grading and remuneration; (2) rollout of the resultsoriented performance evaluation system and related incentive measures; (3) development and installation of payroll management as well as more comprehensive human resource management information systems; (4) strengthening of human resources through improved in-service training and sensitization of civil servants of key Government policies. Improvingperformance andpublic service delivery is a spearhead of the overall Civil Service Reform Program and aims to install a performance management system across ministries, agencies, and bureaus (MABs) in a phased manner. Specifically, the following activities are envisaged: (1) assessment of performance barriers through client surveys, business process and functional reviews, and training assessments; (2) preparation of targeted performance improvement plans and more comprehensive strategic plans; (3) retooling, training, implementation support, and related technical assistance for implementation of performance. improvement initiatives. Improving accountability and transparency activities include: (1) strengthening of external audit and parliamentary oversight for economic governance; (2) technical assistance for promotion of performance monitoring techniques including expenditure or input tracking surveys, cost efficiency studies, and service delivery report cards; (3) development and implementation of ethics management and anti-corruption policies; and (4) continuing support for the development of accounting and auditing professions. Strengthening top management systems through: (1) the development of new and improved strategic planning and management systems, performance measurement techniques, and decision-making methods to aid civil service management; (2) training of top managers in strategic planning, performance measurement, top management decision-making, and value for money management; (3) development and implementation of top management development systems inter alia through leadership training and preparation of handbooks.

63 Building the policy and institutional capacities of emerging regions such as Afar, Somalia, Benishangul-Gumuz and Gambella, through: (1) assessment of existing civil service institutions including identification of capacity and infrastructure constraints as well as performance barriers; (2) development, on a learning by doing basis, of alternative techniques for implementing modern civil service management practices and reforms in emerging regions; (3) development and implementation of basic or hybrid legislation, structures, and systems to support basic governance improvements in emerging regions. Subprogram 2-District-level decentralization. The District-Level Decentralization Subprogram (DLDP) seeks to deepen the devolution of power to the lower tiers of regional government, to institutionalize decision-making processes at the grassroots level with a view to enhancing democratic participation, to promote good governance, and to improve decentralization service delivery. Capacity building support under the subprogram covers the following seven areas: Capacity building for manning and training activities support the following technical assistance activities: (1) preparation of human resource plans for woredas including aggregate projections of staffing requirements; (2) assessment of short-term training needs for woredas; (3) development of modules for short-term in-service training for electorates, administrators and civil servants in areas such as decentralization policy and strategy, local governance and capacity building, democratization, grassroots participation, general management, monitoring and evaluation, and local level planning; (4) development of systems for provision and evaluation of in-service training; and (5) training of trainers in facilitation techniques to support training of woreda level personnel. Grassroots participation support activities for woredas includes technical assistance and training activities for (1) further development of local grassroots participation framework manual and related monitoring and reporting mechanisms; (2) promotion of participatory techniques in woredas including the involvement of NGOs, civil society institutions, and other donor agencies in the development process at the local level; (3) measurement of the impact of participatory techniques and processes. Capacity building for woreda institutions and organizations involves: (1) technical assistance for gap analysis of functional assignments and remedial actions; (2) preparation of restructuring guidelines based on the legal framework of the regional governments and sample woredas; (3) implementation support for restructuring and performance improvement. Capacity Building for Program Development includes technical assistance for the following: (1) assessment and refinement of decentralization strategies and linkages among programs & sectors; (2) assessment of the impact of decentralization policy; (3) conduct of policy analysis on capacity building and decentralization; (4) development of benchmarks and monitoring and evaluation system for implementation of DLDP and strengthen the capacity of DLDP office; and (5) evaluation of PSCAP plans of woredas for nine regional governments and evaluation of the overall performance of woredas for nine regional governments. Capacity building for woreda fiscal transfer and own revenue enhancement comprise the following technical assistance activities: (1) studies, development, and adoption of model formula and budget allocation system for region-woreda block grant; (2) studies on options for capital investment and sector priority setting at woreda level; (3) identification of

64 institutional constraints on and remedial measures for own revenue collection, utilization, and revenue sharing at the woreda level. Capacity building for woreda planning and Jinancial control aims to strengthen expenditure management and related fiduciary aspects of woreda decentralization through: (1) the development and implementation of a local (Woreda) multi-year planning system and fiscal framework; (2) training and technical assistance for improving reporting and supervision practices; and (3) the development and roll out of budget consultation systems to ensure participatory woreda planning and budgeting. It is important to note that capacity building activities related to financial management such as the roll-out of budgets and accounts reforms will be undertaken at the woreda level under the governance of financial resource management activities envisaged under the CSW. Minimum service standards for woredas will help establish minimum basic service levels in priority sectors inter alia through: (1) technical assistance for refinement of minimum standard service indicators; (2) the development of general guidelines for rural woredas; and (3) assessment of the implementation of minimum service levels including through performance benchmarking at the woreda level. Subprogram 3-Justice system reform. The Justice System Reform Subprogram aims to promote the rule of law as well as the efficient and effective functions of the justice system as part of Ethiopia s democratization and private sector development processes. This subprogram, currently a work-in-progress, will receive Bank assistance for the following activities: Strengthening of the Justice Systems Reform OfJice will involve (1) review of the organizational structures as well as roles and responsibilities of Justice System Reform Office structures; (2) assessment and implementation of jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation of training requirements including preparation of materials, training of trainers, packaging of generic training activities, and coordination of external training or study tours; (4) design, development, and adoption of appropriate change management (including M&E) and coordination systems; and (5) strengthening of Information, Education, and Communication activities including the provision of equipment and technical know-how. Strengthening the judiciary comprises the following capacity building activities: (1) training and professional development of judges and court clerks (with a special focus on the training of female judges); (2) establishment of training institutes for the judiciary; (3) court administration reform; (4) implementation of modern case load management systems within federal and regional courts; and (5) identification of measures to enhance access to justice. Law Revision and law reform initiatives include consultancy services for: (1) technical analyses and studies on the establishment of systems and procedures for declaring income and property; (2) reviews and analyses in new areas of law; (3) publication and distribution of legal research materials; (4) compilation, consolidation and distribution of legislation and regulations; (5) studies on procedural, commercial, and stock exchange draft laws. Strengthening legislative processes will be achieved through (1) training, technical advisory services, and acquisition of equipment for staff of federal and regional standing committees on legislative drafting and analysis of legislative process and management; and (2) training for members of standing committees on principles of federal grant and intergovernmental

65 fiscal framework, monitoring and impact assessment, HIVIAIDS and gender issues, accountability and participation. Subprogram "Urban management capacity building. The objective of the Urban Management Reform Subprogram is to enhance the capacity of municipalities in the delivery of services and enable urban centers to play a more effective role in social and economic development. Three sets of activities, financed under PSCAP, are envisaged. Federal and regional urban management policy involves technical assistance and support for (1) preparation of a National Urban Development Policy; (2) preparation of a National Urban Land and Housing Policy and Strategy; (3) preparation of a Model Municipality Act; (4) establishment of the Urban Development Fund (UDF); and (5) establishment of the National Association of Municipalities. Deepening the process of decentralization covers support for (1) preparation of model operating manuals and prototypes on financial management, procurement and contract administration, solid waste management system, operations and maintenance of infrastructure services, archive management, organizational structure and staffing plan, personnel policies and incentive mechanisms, land information systems, model municipality acts, model city court systems, municipality revenue and inter-governmental fiscal transfer systems (including service charges), and urban planning systems; (2) strengthening of relevant federal and regional institutions to provide technical support; (3) development of efficient revenue mobilization and fiscal transfer mechanisms including analyses of revenue potential of various urban centers; and (4) establishment of regional and town planning units. Local government restructuring and capacity building involves technical assistance and implementation support for the following municipal level activities: (1) the delivery of sanitation services; (2) the supply of serviced of urban land; (3) restructuring of the municipal financial system; (4) restructuring and preparation of staffing plans; (5) introduction of land information systems; (6) restructuring of services delivery systems in the areas of procurement and contract administration, operation and management of infrastructure services, overall municipality service delivery system, revenue mobilization and fiscal transfer; and (7) provision of "bulk" generic training to regional and municipality staff. Subprogram %Tax systems reform. The Tax Systems Reform Subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency of collection), and ensure equity and fairness in the tax system through a comprehensive overall of the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities: Tax policy and legislation activities include technical assistance for (1) the amendment of the current income tax legislation by reflecting the current tax business and investment environment; (2) strengthening of the enforcement powers of the tax collection institutions; (3) simplification of tax administration procedures and practices; (4) issuance and adoption of proclamations, regulations & operational directives; (5) development and implementation of regional revenue enhancement programs; (6) development of agricultural income tax and land use fee proclamations and directives; (7) research and review of various proclamations that need to be amended; and (8) analyses of revenue potential across regions. Taxpayer Identijkation Number (TIN) system rollout activities aim to information sharing between FIRA, ECuA, as well as regional and city administrations in order to control tax

66 -60- evasion, create a dependable database on taxpayers, and forge efficient and effective tax collection through inter alia: (1) installation of equipment at operational TIN sites; (2) deployment of the TIN system at the national and regional levels; (3) training in the TIN system of relevant staff and other users; (4) enhancement of MIS capacity including procurement of hardware and software; (5) development, printing and publication of certificates, forms and manuals; (6) public awareness campaigns for tax payer registration; (7) monitoring and evaluation of the implementation activities; (8) establishment of links between TIN system of customs and financial institutions; and (9) TIN implementation for new tax payers. Presumptive taxation implementation aims broaden the tax base through sensitization of the hard-to-tax group, particularly the large informal sector and taxpayers who understate their income, through: (1) review of the profitability rate; (2) surveys of annual turnover of businesses; (3) IEC and other consultations with stakeholders prior to making amendments; (4) development and implementation of profitability rate directive(s); (6) development of relevant operating manuals and training for staff and taxpayers; (7) implementation of standard assessments based on review of the profitability rate; (8) development and implementation of accounting systems for revenue transfer payments refund; and (9) review and implementation of the revised standard assessment scheme. Value-Added Tax PAT) implementation aims to ensure the appropriate balance between income taxes and commodity/consumption taxes, enhance the competitiveness of the Ethiopian business community internationally, and promote capital investment and development through technical assistance and capacity building for: (1) migration from VAT system to the main VAT system; (2) development and implementation of coherent operational programs and procedures; (3) development and implementation of comprehensive audit and enforcement programs; (4) organization of sustained staff training, taxpayers education campaigns, registration and revenue collection activities; and (5) regular monitoring and evaluation of the implementation progress. Strengthening of organizational structures, operational programs, systems and procedures is expected to foster voluntary compliance by taxpayers and ensure fairness and equity in tax administration through support for: (1) the development and implementation of comprehensive and accurate computerized accounting systems and operations; (2) training of federal, regional and city administration tax officers on the usage of manuals and adoption of various systems and procedures (3) review and evaluation of other relevant strategies, systems and procedures; (4) identification of training needs and organizing training and study tours; (5) customization & implementation of the integrated tax system; and (6) adoption of an effective organizational structure with competent and skilled staff. 4 Reforming and modernizing customs aims to improve the efficiency, efficacy, and transparency of customs services through (1) supporting the migration to an enhanced IT system; (2) improving the management of the tariff classification through inter alia establishment of a customs laboratory; (3) establishing a customs training school to develop the knowledge and skills required by ECuA personnel to successfully implement new programs and procedures; (4) strengthening enforcement to combat contraband trade and international criminal activities; and (5) implementing all procedures consistent with subregional, regional, and international agreements.

67 -61 - Subprogram /:Information and communications technologies. The objective of the Information & Communications Technologies (ICT) Subprogram is to harness ICTs for the development of human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seeking to use of ICTs in this manner. Successful implementation of ICT-based solutions across government will require support for the procurement of hardware and software, establishment of enabling legislation and regulations on the procurement and utilization of ICTs, development of human resources, content, and applications relevant to service delivery; and promotion of community-based information systems/services. The following areas will be addressed under this subprogram: ICT human resource development for e-government initiative seeks to generate a critical mass of ICT literate worker in government through the following activities: (1) provision of ICT training for civil servants at all levels of profession; (2) establishment of ICT training centers, where relevant and affordable; (3) development of ICT training materials in working and local languages; and (4) provision of technical assistance to review human resource requirements of rolling out Government systems and applications. ICT for public service delivery and good governance through technical assistance and capacity building for: (1) development of information systems strategies, system design studies, and related analyses; (2) establishment of regional information centers, where feasible and affordable; (3) implementation of WAN, LAN and other information systems at the federal and regional levels; (4) procurement of appropriate hardware and software for public service delivery systems; and (5) IEC and other awareness building activities. ICT applications for sector development in health, education, agriculture, e-government, e- commerce, and other priority sectors through technical assistance, procurement of equipment, and training to support (1) customization of common administrative applications to regional context; (2) development and implementation of sectoral information systems at federal and regional levels; (3) coordination of different sector-specific information systems. Community-based information systems and services that allow access to government data and information and enable communities to become centers of indigenous knowledge and contents. The latter is an important dimension of ICTs for development and a strong effort must therefore be made to enable ICTs to operate at grass roots level and in all walks of life. The empowerment of communities with information is essential to its pursuit of specific developmental activities. These goals are expected to be achieved through: (1) development of local language content; (2) repackaging of globally available information to local community needs; (3) establishment of multi purpose community centers; (4) broadcasting of information through the local media; (5) procurement and distribution of appropriate technology for information sharing; and (6) training of communities in ICT use. Mandatory activity-program support. A mandatory activity, program support is designed to ensure speedy implementation of the six subprograms under both the federal and regional components. It finances incremental costs associated with operating requirements of Planning and Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, and related subprogram offices that serve members of the federal and regional Technical Teams. Support activities also include the costs of progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, training of staff in program management, auditing, office supplies, equipment operation, transport, travel, and per diems.

68 ANNEX 3: ESTIMATED PROJECT COSTS ETHIOPIA: Public Sector Capacity Building Program Support Project Program Component Local Foreign Total 1. Federal PSCAP 2. Regional PSCAP Total Project Cost Total Baseline Cost Contingencies Disbursement Categories Local Foreign Total Goods & Equipment Consultant Services Training Operating Costs Total

69 ANNEX 4: COST BENEFIT ANALYSIS SUMMARY (Cost-Effectiveness Analysis Summary) ETHIOPIA: Public Sector Capacity Building Program Support Project Not applicable.

70 ANNEX 5: FINANCIAL SUMMARY ETHIOPIA: Public Sector Capacity Building Program Support Project FY04 FY 05 FY06 FY 07 FY 08 Total Program Costs Investment Costs Recurrent Costs Total Financing Sources (YO of Total) IDA Government CIDA SIDA Other Donors Total % 26% 25% 19% 30% 25% 58% 36% 35% 26% 41% 35% 0% 9% 10% 13% 7% 10% 0% 2% 2% 3% 2% 2% 0% 27% 28% 39% 20% 28% 100% 100% 100% 100% 100% 100%

71 ANNEX 5A: FINANCIAL MANAGEMENT ASSESSMENT TECHNICAL ANNEX' ETHIOPIA: Public Sector Capacity Building Program Support Project Introduction The financial management assessment was undertaken in line with the guidelines issued by the FM Board on June 30, 2001 and revised on October 1, The assessment sought to determine whether the Executing Agencies (EAs) identified under PSCAP have acceptable financial management arrangements in order to ensure that (1) Support Project funds are used only for the intended purposes in an efficient and economical way, (2) the preparation of accurate, reliable and timely periodic financial reports and (3) safeguard the entities' assets. The FM assessment of the Ministries of Finance and Economic Development (MOFED), Capacity Building (MCB), Federal Affairs (MFA), and Revenue (MOR), as well as sample of regional Bureaus of Finance and Economic Development (BOFEDs) and Capacity Building (BCB) was undertaken in December The Ethiopia Country Financial Accountability Assessment (CFAA) was carried out jointly by the Government, Bank and donors, issued on June 17,2003. Country Issues According to the 2003 CFAA, considerable progress has been made in the budgeting process, yet several aspects of ongoing expenditure management reforms including medium-term planning, budgeting, accounting, reporting, and auditing remain works-in-progress. A CFAA action plan identified key commitments as well as sequenced capacity building activities necessary to adequately address fiduciary risks within Ethiopia's public finance system. Most of the activities in the action plan will be covered under the existing public financial management reform agenda currently under implementation with the assistance from donors. The Bank is currently providing significant financial assistance to the Education and Health Sector Development Programs (SDPs) through SWAP modalities (without pooling). PSCAP replicates certain key design features of these SDPs including formula-based allocations, flow of funds through the Channel 1 modality, and similar reporting arrangements between the federal and regional levels. PSCAP also involves additional features such as delegation of financial management and procurement responsibilities across several federal institutions as well as pooling for donor funds. A noteworthy lesson from the SDP experience is the need for MOFED to address early on possible delays in obtaining regular reports from the regions in order to ensure timely replenishment of the SA. In addition, MOFED should anticipate potential delays in submission of audit reports as a result of delay in financial reporting from the regions. Risk Analysis PSCAP will be implemented by several EAs with varying degree of implementation capacity. The major financial management risk to the Program is the likelihood that MOFED would not receive timely reports in order to process replenishments of the SA and close the annual accounts. In order to address this risk, MOFED, MCB, the various federal EAs, as well as regional BOFEDs and BCBs involved in execution of Program will recruit and appropriately assign additional civil service staff, and where necessary consultants. In addition, MOFED will prepare short and concise guidelines on A detailed Financial Management Assessment Report that was prepared by financial management specialists from the World Bank (February 4,2004).

72 recording and reporting as part of the PIP, provide extensive training on the guidelines, and take the necessary remedial actions to address potential reporting delays early in the implementation cycle. SUMMARY RISK ASSESSMENT Project: Public Sector Capacitv Building Program Support Project Date: Februarv c Assessment Risk Mitigating Measures accounting and auditing not clearly defined, especially the relationship between MOFED and MCB and federal line ministries In the short-run, contract in skilled personnel in these priority areas. In the long-run, the CSRP intends to develop incentive measures in line with the Results Oriented Performance Evaluation System. Strengthening of standards and the profession is one area of focus of CSRP. The Government has designated MOFED with the financial management responsibilities for PSCAP and have established a super ministry coordination structure around MCB to ensure close coordination of other key cabinet ministries. The PPDs, BFD, and finance institutions such as MOFED and BOFEDs at all levels will recruit adequate and trained staff Control Risk PSCAP executing agencies are many and in some cases the roles and responsibilities of Government has designated the overall financial management responsibility to MOFED and the overall coordination to PPDs in MCB and I Funds flow up to the regional levels 3. Staffing Lack of trained manpower and low salary scale 4. Accounting Policies and Procedures The financial management guidelines has not yet been finalized 5. Internal Audit There is a duplication of work between the internal audit department of each executing agency and the inspection department of MOFED and BOFEDs 6. External Audit Low capacity in the auditing profession 7. Reporting and Monitoring Non-regular reporting from lower levels, which are not complete and relevant Overall Control Risk H = High, S = Substantial, M = Moderate, N = Neglil )le or Low market rates. The guidelines to be designed will be concise and clear to accommodate the needs of the Program The government should take initiatives to consolidate the work of internal audit and inspection Government has designated the overall financial management responsibility to MOFED and the overall coordination to PPDs in MCB and BCBs. This is reflected in the PIP. Regular field visits bv MOFED. MCB and W&d Bank mission: I

73 Strengths and Weaknesses The country s discipline in executing budget and compliance with the existing government regulations is the major strength in executing this Program. MOFED and BOFEDs have good internal control system, including regular post audit by the inspection departments at both MOFED and BOFEDs. All the executing agencies at the federal level and five larger regions are using the new chart of accounts based on modified cash basis of accounting. All the executing agencies involved in processing most of the Program s financial transactions are strictly following-up the budgetary discipline and regular government reporting mechanism. Despite all the strengths, there are some weaknesses in implementing the Program. These are as follows: Significant Weaknesses Lack of trained manpower in the area of financial management and high turnover of staff The Program is implemented by various agencies Auditing the Program financial statements may take time to complete as the executing agencies are various and dispersed all over the country Regular financial reports may not be received on time from regions Resolutions Address incentive framework and career paths for financial management personnel in the civil service, and strengthen the accounting and auditing professions, both of which are supported under the CSRP Strengthen the monitoring capacity at the federal and regional level and regular supervision by the Bank Agree with the selected auditors on the timetable to complete the audit well in advance and the MOFED should close the accounts immediately after the end of the fiscal year. Design a system of monitoring to ensure that transfer of hnds is based on the receipt of regular financial reports Executing Agencies PSCAP will follow a Sector-Wide Approach and will be implemented by various sector ministries and regional bureaus. The sector ministries include MOFED, MCB, MFA, Ministry of Revenue, ICTAD, Federal Supreme Court and all the eleven regional BOFEDs and Bureaus of Capacity Building. MOFED will be responsible for the transfer of money and compiling all the financial reports, including annual financial statements and the external audit requirements. MCB, through its Planning and Programming Department, is responsible for overall co-ordination, monitoring all the activities of the Program and report compilations. The Ministry s BFD will be responsible for the overall procurement monitoring as well as procurement of ICB. At MOFED, the Counterpart Funds Unit (CFU) will be responsible for the management of the SAs in US Dollars and the pooled Birr account. Based on the approved work plan, CFU will transfer money to BOFEDs and line ministries. The CFU will collect all the statements of expenditures from all regional BOFEDs and line ministries and submit requests for each donor for the replenishment of the SAs. The Central Accounts Department (CAD) at MOFED will be responsible for regular financial reports and the annual audit of the Program accounts. Each BOFED will establish one Birr account for the implementation of PSCAP activities under the Regional Program and make payments as per the instruction of BCBs. BOFEDs will be responsible for the recording and reporting of the financial transactions of the Program to MOFED monthly. Funds flow For each donor, including IDA, MOFED will open one special account in U S Dollars at the National Bank of Ethiopia. In addition, MOFED will open one Birr account for which money from the SAs

74 and the government contribution will be deposited. The Birr account will serve as a consolidated fund for all donors and the government. MOFED will be responsible for the day-to-day management of the SAs and the pooled Birr account. The first installment from IDA will be deposited in the Special US Dollar Account opened at NBE. MOFED manages the flow of funds between the SA in US Dollars and the pooled Birr account, based on projections for payments of goods and services expected to be procured locally or internationally. MOFED can draw from the US Dollar SA to the pooled Birr account as required. Federal EAs and regions, through the BOFEDs, are required to formally submit requests for budget transfers, financial reports, and Statements of Expenditures (SOEs) justifying the use of funds previously received from MOFED. Budget transfers requests and SOEs are sent to the CFU and financial reports to CAD in MOFED. SOEs record amounts and purposes of expenditures incurred from the advanced funds. On receipt of the SOEs from EAs, CFU sends an application for withdrawal to IDA and other donors for the replenishment of the SA. The SA is replenished by an amount equivalent to the total of SOE. Staffing The staffing level at each of the executing agencies varies in number and quality. For example, the CAD has 29 staff, out of which 7 are degree holders and the others have diploma from various colleges. The CFU at MOFED has 2 staff, of which 1 is a degree holder. The Addis Ababa BOFED has 17 staff, out of which 5 are degree holders and the others are diploma holders from various colleges. The SNNPR BCB has 10 staff (3 degree holder and 7 diploma holders) serving in a pool. The pool serves the BCB and regional health bureau. BCBs receive accounting services from an administrative pool, which supports more than two institutions. Some of the BCB is intending to recruit contractual staff to look after the accounting task of the Program. MOFED and BOFEDs also need additional staff to discharge their responsibilities properly. In general, MOFED, BOFEDs and BCBs do not have sufficient staff in place to handle both the government and donor financial transactions. As agreed during appraisal and subsequent negotiations of the Program, required recruitment of key staff has been initiated and will be incorporated into the first year procurement plans. Budgeting and planning According to the Government of Ethiopia s Chart of Accounts, PSCAP will be proclaimed annually as a Program under the MCB, which is designated as apublic body. Allocations to federal executing agencies (for example, Urban Management Capacity Building Program, or ICT) and regions (for example, Tigray National Regional State or Oromiya National Regional State) will be classified and proclaimed as subprograms under PSCAP in the federal budget in order to allow for mid-year and annual reallocations. As such, resources leveraged by regions from PSCAP will be fully additional to their subsidy and therefore, not offset in general purpose transfers. Each federal and regional EA will prepare a consolidated PSCAP annual plan for each budget year and following various technical reviews (discussed in annex 9), MCB shall propose the approved elements of the plan as part of the annual budget proposal. Following Cabinet approval and the subsequent appropriations process, MOFED will transfer the resources to the federal EAs (designated above) and BOFEDs.

75 Accounting policies and procedures Starting from July 2002, the Government has introduced a double entry modified cash basis of accounting. The new accounting reform has been introduced at the federal level and to five regions, namely, Amhara, Oromiya, Addis Ababa, Tigray and SNNPR. These regions and federal line ministries are using a computerized Budget Disbursement and Accounting System (BDA) to some extent. The other regions are using a manual system of accounting based on single entry. The main elements of the accounting reform are the adoption of (i) a revised and comprehensive chart of accounts consistent with the reformed budget classification, (ii) a system of ledgers accommodating all types of accounts (including transfers, current assets and liabilities, and fund balance in addition to revenues and expenditures), (iii) double entry book-keeping (thus, selfbalancing set of accounts), (iv) a system of control of budgetary commitments (recording commitments as well as actual payments), (v) modified cash basis transaction accounting and (vi) revised monthly report formats to accommodate double-entry book-keeping and commitment control and permit better cash control. The computerized BDA system enables public bodies to produce financial reports much more easily. In the meantime, accounting and financial reporting are performed manually in most jurisdictions. Massive capacity building would be required in order to accelerate the rollout of the BDA system. This would need to include support to clearing accounts backlog, equipment and customization of software, training of staff, etc. The new chart of accounts is capable of recording the financial transactions and producing the required regular reports for PSCAP. However, MOFED needs to prepare concise guidelines on how to record transactions and report the results because (1) all regions are currently not using the same chart of accounts and accounting system, (2) the chart of accounts do not include account nos. for PSCAP activities, and (3) the specific reporting formats for the program (therefore, the Bank s Support Project) need to be clearly mentioned. All the source documents will be kept at the regional BCBsA3OFEDs and federal EAs where the transactions took place. BCBs/BOFEDs and all federal EAs will report to MOFED on regular basis. MOFED will develop the reporting formats before effectiveness of the Program. Internal audit MOFED and BOFEDs have an inspection department performing post audit activities on assessing whether the budget utilization is in line with the intended purposes. The staff of the inspection department varies from region to region. Each of the EAs has an internal audit department, which performs post audit activities on all the financial transactions of the entity. The recent CFAA report for the Ethiopia recommended that the government should consolidate the organizational structure, redefine the role and responsibilities of the internal audit function to better address the need of the government. The Expenditure Management and Control activities (EMCP) under the Civil Service Reform Program is currently working in improving the internal audit function. It is envisaged that the Inspection Departments at MOFED and BOFEDs and the Internal Audit Section of each EA will perform post-audit activities on the financial transactions of PSCAP. External audit According to the Ethiopian Constitution, the Office of Federal Auditor General (OFAG) is responsible to carry out the audit of all the financial transactions of the federal government and

76 subsidies to the regions. Each of the regions has regional Auditor General responsible for auditing financial transactions in the region. The OFAG usually delegates its responsibility mostly to the Audit Services Corporations, the government owned audit firm, and in some cases to private audit firms to carry out the audit of donor-financed projects. For the Bank s PSCAP Support Project, OFAG will assign an external auditor acceptable to IDA. MOFED is currently the main body responsible for closing the accounts and getting the audit reports for two sector programs, ESDP and HSDP. MOFED s experience-to-date with these programs suggests that periodic delays in the submission of audit reports were caused primarily by accounts backlogs within regions. In order to improve the reporting system for PSCAP, the capacity at all levels should be strengthened by adding additional staff and providing regular training by MOFED on recording and reporting. According to the new audit policy of IDA, MOFED will prepare a consolidated Program accounts, which include all the sources from pooled donors and the government and related Program expenditure and the auditors will express a single opinion on the consolidate Program accounts. Considering the nature of the Program, the audit reports should be submitted to IDA nine months after the end of each fiscal year, which ends on July 7 of each year. Reporting and monitoring Federal and regional EAs are responsible for reporting the uses of hnds transferred from MOFED. MOFED requires monthly reports from all EAs participating in the implementation of the Program, but from the practical point of view quarterly reports are highly recommended. MOFED will develop short guidelines on reporting. The Bank requires quarterly Financial Monitoring Reports (FMRs) to be submitted 45 days after the end of each quarter. The FMRs includes financial, procurement and physical reports. Considering the nature of the Program, IDA agreed to receive FMRs on a semi-annual basis, to be received 45 days after the end of each six months. MOFED will be responsible for the financial sections and MCB for the other two sections of the FMR. MCB after receiving the financial reports from MOFED will submit the whole FMR to IDA. A format for the FMR was agreed during the negotiation. Action plan Action to be taken Expected completion date I Responsible body 1 I Preparation of a short guideline on recording I I I and reporting of financial transactions as part 1 Before effectiveness I Borrower I of the PIP. 2 Organize workshop(s) for finance staff at all levels to familiarize them with the flow of Before effectiveness Borrower funds, recording and reporting - requirements. of PSCAP 3 Incorporation of initiatives to strengthen the financial management capabilities of EAs Before effectiveness Borrower into the final procurement plan Opening of bank accounts at the national and Before effectiveness Borrower 14 I regional levels

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

78 ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS ETHIOPIA: Public Sector Capacity Building Program Support Project General Procurement at the federal level is regulated by (a) the Financial Proclamation No. 57/1996 which constitutes the Procurement Law, (b) the Financial Regulations No. 17/1997 issued by the Council of Ministers, and (c) the Ministry of Finance Directives - procurement and contracts, issued in 1997 and revised in Two Country Procurement Assessment Reviews (CPARs) were carried out in 1998 and The reviews include detailed diagnosis of the current procurement system, its strengths, weaknesses and an action plan to address the weaknesses. The main weakness identified were (i) lack of an oversight body for policy and monitoring, (ii) weak procurement procedures, (iii) lack of a legal and regulatory framework, and (iv) lack of adequate procurement capacity. The main recommendations and action plan of the CPAR include (i) enactment of a procurement law, (ii) establishment of a regulatory body, (iii) development of procurement directives, (iv) preparation of standard bidding documents, manuals and guidelines, and (v) implementation of a comprehensive capacity building (including training) strategy. The Government has accepted the recommendations of the CPAR and has established a taskforce to lead the procurement reform process. As part of the procurement reform program the Government has drafted a new procurement code that is expected to be enacted by July The code provides for the establishment of an independent regulatory body and the Government plans to fully decentralize procurement functions to civil service institutions at the federal level staring from the middle of The directives issued by the MOFED have been adopted by regions without major changes and are applicable for procurements done at the regional level. The directives provide waivers for procurement financed by donors or lending institution, and the procurement follows the guidelines and procedures of the donor or lending institution, if indicated in the financing agreement and the financier wants to exercise its right. Use of Bank Guidelines and Standard Bidding Documents All goods financed under the Support Project would be procured in accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits of January 1995, lastly revised in January Bank Standard Bidding Documents for Goods, the Standard Pre-Qualification Document (if applicable) and the Standard Evaluation Forms shall be used. Consultants will be selected in accordance with the Guidelines: Selection and Employment of Consultants by World Bank Borrower of January 1997 lastly revised in May IDA S Standard Request for Proposals (SRFP), the Forms of Contracts as needed (lump sum, time based, and/or simplified contracts for short-term assignments and individual consultants) as well as the Sample Form of Evaluation Report for Selection of Consultants shall be used for all consulting assignments. The Government is planning to develop new standard bidding documents for the procurement of goods, works and services. The National Bidding documents, when developed, can be used for national competitive bidding after verification by the Bank that the countries laws and procedures are acceptable. In order to be acceptable the national procedures should ensure that (i) bids will be advertised in national newspaper(s) with wide circulation; (ii) the bid documents clearly explains the bid evaluation and award criteria; (iii) bidders are given adequate response time (minimum four

79 weeks) to prepare and submit bids; (iv) bids are awarded to the lowest evaluated bidder; (v) foreign bidders are not to be precluded from participation in NCB; and (vi) no domestic preference margins are applicable to domestic manufacturers and suppliers. Advertising. The GPN was issued on March 6, 2004 in the United Nations Development Business (UNDB) and Development Gateway, listing the Program Components and goods, training, and consulting services for which specific contracts will be advertised. The Borrower will keep a roster of the responses received from potential bidders interested in participating in bidding for contracts. It is not anticipated that there would be any contract with estimated value exceeding US$10 million. Specific Procurement Notices (SPN) will be published in at least one national newspaper of wide circulation for contracts to be procured under ICB and NCB procedures and for consultant contracts with an estimated cost of US$lOO,OOO or more to obtain expressions of interest (EOI) prior to the preparation of the shortlist. The Borrower is encouraged, in addition to national advertising, to advertise also in UNDB and DG-Market, in order to get the broadest interest possible from potential bidders. The Borrower may, advertise on the online version of the UNDB and the Development Gateway to save time. The date of advertisement of a specific contract should coincide with the date that the bidding documents are available for purchase by interested bidders. Sufficient time would be allowed (not less than 30 days) for NCB and not less than 45 days for ICB contracts. Consultant contracts estimated to cost US$200,000 or more would be advertised on the online version of Development Business or DG-Market and in an International or Technical Newspaper, in order to seek Expressions of Interest. The Borrower will send a copy of this advertisement to those firms that have responded to the expressions of interest for consulting contracts listed in the GPN. The Borrower will wait at least two weeks after the advertisement has appeared requesting expressions of interest, before preparing the short list. Procurement capacity The Country Procurement Assessment Report (CPAR) done in 1998 and updated in 2002 has identified procurement capacity as one of the major weaknesses in public sector procurement. The procurement capacity assessments undertaken for the Program also confirm these findings. The assessments also concluded that the procurement risk was high at the regional and federal levels. The Ministry of Capacity Building (MCB) has a procurement unit under the BFD that was established recently during the implementation of the CBDSD Project. This unit would play a major role of coordinating procurement activities of the Program. However, the unit s performance has not been very satisfactory. The regional BCBs generally use a pool service for conducting procurement that is comprised of members from different bureaus. The procurement handled by the regional procurement pool services is mostly limited to small value procurement for internal use of the offices and no international procurement has so far been done by the regions. Some regions have however members from the regional health and education bureaus that have some experience in international and World Bank procurement procedures. The following six constraints were identified during the capacity assessment done of the EAs. First, the number of procurement staff in each EA is not adequate and a majority of the staff have not participated in procurement training programs. Second, there is lack or very limited experience at regional level especially in selection of consultants and international procurement. Third, the procurement unit at MCB and the pool system organizational setup of the regional Procurement Units is not adequate for handling the large volume of procurement anticipated under the PSCAP. Fourth,

80 the procurement records management systems are not adequately organized. Fifth, there is no national and standard documents available for procurement of goods, and consulting services. Finally, some national procedures, especially on the procurement of works are not acceptable. In order to build capacity, one international consultant and two additional national procurement specialists with adequate qualification and experience would be recruited to the BFD to assist in the management of the procurement functions and building procurement capacity. The advertisements for these consulting posts were issued prior to negotiation. The international consultant and two local procurement consultants shall be employed prior to effectiveness. The former shall be responsible for providing technical assistance and training in the management of procurement activities at federal level and regional bureaus, and for mentoring national procurement staff. A comprehensive and intensive procurement training program would be conducted for procurement staff in each of the EAs for all staff that have not already participated in such type of training. At least two staff from each EA that is involved in the preparation of bidding documents, and evaluation of bids would participate in the training program. The training should cover all aspects of procurement and focus on the identified weak areas such as: procurement planning and monitoring, selection of consultants, preparation of tender documents, and evaluation of bids. The training program could include specialized training for selected staff at management training institutes in Africa such as ESAMI, GIMPA etc. The first round of training would be conducted prior to effectiveness. An orientation workshops would be conducted to staff in the EAs that are involved in the procurement decision-making process including tender committee members, department heads, bureau heads with the assistance of the international consultant during Program launch. The number and qualification of the procurement staff in each EA shall be reviewed and additional staff shall be employed or assigned where shortages are identified. Each EA shall have a separate desk for procurement with at least two qualified staff with adequate training in procurement. Prior to the commencement of any procurement function, relevant EAs including the BFD in MCB should submit participation agreements that confirm satisfactory compliance with eligibility criteria including establishment of prescribed institutional arrangements; delineation of service standards for procurement and financial management; confirmation that staff involved in procurement have received necessary training, and national and international consultants involved in procurement are both qualified and appropriately tasked to carry out PSCAP related activities. Procurement planning Five-year drawing rights have been assigned to each EA and annualized in order to establish the first year s budget envelope. Five-year PSCAP Action Plans prepared by federal EAs and regions are being revised within the medium-term resource envelopes. Furthermore, a draft consolidated procurement plan including all budgeted items for twelve months has been prepared prior to negotiations. The draft is being further revised to reflect the period for the implementation of the full procurement cycle for all the items including those that may last eighteen months or more, and will be further refined and finalized well in advance of effectiveness. It is noted that this rolling procurement plan and the five-year Action Plan are to be regularly revised in line with the in-year and annual reallocation arrangements envisaged under this performance-oriented program. A draft Program Implementation Plan (PIP) incorporating operational guidelines has been prepared, and will be finalized as a condition for effectiveness.

81 Procurement implementation arrangements In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD at MCB shall be responsible for monitoring all procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In addition, the BFD is responsible for handling all ICB procurement of goods under the Program. National procurement of goods and selection of consultants would be handled as follows: Procurement for the three programs under MCB (CSRP except expenditure management and control activities, JSRP except strengthening of the judiciary, and DLDP) will be handled by MCB procurement unit from preparation of bidding documents and RFPs, until award of contract. The contracts for procurement of goods would be signed by MCB. The contracts for the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specifications and terms of references and technical evaluation of bids and proposal. Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT, expenditure management and control activities under the CSRP, and strengthening of the judiciary activities under the JSRP activities at federal level will be carried by the Ministry of Revenues, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), a designated office in MOFED, and the Federal Supreme Court respectively. BCBs are responsible for handling all procurement activities, except ICB procurement of goods, within the respective regions and city administrations (i.e,, Addis Ababa and Dire Dawa). Relevant lead institutions in each region would participate in the preparation of procurement plans, specifications, Terms of Reference, and technical evaluations of bids and proposals. MFA is tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-Gumuz and Gambella) in the management of procurement as required. It is anticipated that procurement arrangements will evolve as capacity increases. Regional proposals for building up their procurement capability and for changes in procurement arrangements will be regularly reviewed semi-annually by IDA and donors. Procurement methods (Table A) Goods The program will finance office and field equipment, and supplies. To the extent possible and practicable, goods and equipment to be purchased under the program would be combined into packages worth at least US$150,000. Packages estimated to cost the equivalent of US$150,000 or more would be procured under ICB procedures using Bank s Standard Bidding Documents. Goods that can not be packaged and procured efficiently using ICB procedures will as much as possible be packaged in sizable contracts to be awarded on the bases of NCB procedures. Contracts estimated to cost less than US$150,000 equivalent would be procured using NCB. Procurement for readily available off-the-shelf goods that cannot be grouped together estimated to cost less than US$50,000 equivalent would be procured on the basis of Shopping Procedures. Solicitations for National and International Shopping will (a) be issued in writing to at least three reputable suppliers (it may be better to approach five or six suppliers because not all three suppliers may respond, so that at least three competitive quotations are received.), (b) include specifications, and if goods are not

82 immediately available, the delivery time, (c) give the estimated cost, including cost of inland transportation and insurance, (d) be opened at the same time for evaluation (to avoid abuse), and (e) in the case of International Shopping quotations, be solicited from at least three suppliers from two different countries. Alternatively such goods may also be procured from UN Agencies (Inter-Agency Procurement Services Office or IAPSO) provided each individual contract does not exceed us$loo,ooo. Services Consulting services shall include development of legal frameworks and policies; training needs assessments for strengthening human resource and financial management skills; studies in organizational structures and functional assignments in rural districts and municipalities; development of guidelines and manuals for new systems for improved service delivery, law reform; development of WAN/LAN and other management information systems. As a general rule, consultant services will be selected through the Quality and Cost Based Selection (QCBS) method. For contracts estimated to cost less than the equivalent of US$200,000 per contract, the shortlist may be made up entirely of national consultants in accordance with section 2.7 of the guidelines, provided that foreign consultants who wish to participate are not excluded from consideration. Indefinite Delivery Contract (IDC) procured by using QCBS method may be used for large contracts involving technical assistance taking into consideration the capacity limitation of regional offices. Consultant for complex and highly specialized assignments with high downstream impact and assignments that can be carried out in substantially different ways may be procured under contracts awarded using Quality Based Selection in accordance with the provisions of clause 3.2 of the Consultant Guidelines. Services for audit and other similar services estimated to cost less than US 100,000 equivalent per contract may be procured under contracts awarded using least-cost selection method in accordance with the provisions of clauses 3.1 and 3.6 of the Consultant Guidelines. Consulting assignments costing less than US$lOO,OOO may be procured by using Selection Based on Consultants Qualifications (SBCQ) by comparing the qualification of consultants who have expressed an interest in the job or who have been identified. Individual consultants will be selected in accordance with Section V of the Guidelines. Services for tasks that meet the requirements of paragraphs 3.8 to of the Consultant Guidelines may be awarded using the Single Source Selection method. Services for which a team of Consultants are not required and meet all the requirements set forth in paragraph 5.01 of the Consultant Guidelines shall be procured under contracts awarded to individual consultant in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines. Training shall include human resource development in the areas of financial and human resources management; justice system, tax system; information and communication technology; and urban management. Selection of training institutes for workshopshraining for which the quality of training is of critical importance and the training can be carried out in substantially different ways, the selection may be based on a competitive process using Quality Based Selection (QBS) method. For standard programs for which detailed course contents can be adequately defined in advance Quality and Cost Based Selection (QCBS) may be used. Prior review thresholds (Table B) All goods contracts estimated to cost US$l50,000 or more and the first contract under NCB will be subject to IDA review of bidding documents prior to inviting for bids and bid evaluation reports prior to contract award.

83 Single source selection irrespective of value will be subject to IDA prior review. Consultancy contracts with firms with estimated value of US$lOO,OOO or more, and consultancy contracts with individuals estimated to cost US$50,000 or more and the first contract will be subject to prior review by the Bank in accordance with the procedures in Appendix I of the Consultants Guidelines. Contracts not subject to prior review will be selectively reviewed by the Bank during program implementation and will be governed by the procedures set forth in paragraph 4 of Appendix I to the relevant Guidelines. Procurement Methods (Table A) Table A: Program Costs by Procurement Arrangement (US$ million equivalentl2 Expenditure Category ICB Procurem NCB it Method NSAS Others3 Total Goods & Equipment Consultant Services Training Operating Costs Total Program Cost Funded by IDA S Support Project 30.7 (11.7) (11.7) 28.0 (3.6) ( (2.7) (2.7) (37.0) (40.0) 20.0 (5.o> (82.0) 72.0 (18.0) (37.0) (40.0) 20.0 (5.0) (100.0) * Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies Includes goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to managing the project.

84 Annex 6, Table A2: Consultants Selection Arrangements (US$ million equivalent) CQ QCBS QBS IC Grand Total A. Firms (5.6) (22.2) (2.6) (30.3) B. Individuals 26.6 (6.7) 26.6 (6.7) Total (5.6) (22.2) (2.6) (6.7) (37.0) Table B: Thresholds for Procurement Methods and Prior Review (US$) Expenditure Category Goods Contract Value Procurement Contracts subject to Prior Threshold Method Review Greater than 150,000 ICB All Less than 150,000 NCB First contract for each Note: ICB - International Competitive bidding; NCB -National Competitive bidding; NS/IS -National Shopping / International Shopping; QBS - Quality Based Selection; LCS - Least Cost Selection Overall Procurement Risk Assessment: Frequency of procurement supervision missions proposed: High Once every six months (includes special procurement supervision for post-review/audits)

85 Table C: Allocation of Credit Proceeds Expenditure Category Amount in US$ million Financing Percentage Expenditure Category Amount (US% million) Financing Percentage 1. Pooled Funds Expenditure financed under Subprogram activities, including goods, consultant services, training and operating costs, for: (a) Federal Program (b) Regional Program Z. Non-Pooled Funds Such percentage of Pooled Fund expenditures as the Association may determine for each Fiscal Year Expenditure financed under Subprogram activities, including goods, consultant services, training and operating costs, for: (a) Federal Program (b) Regional Program % of foreign expenditures and 85% of local expenditures 3. Refunding of the PPF Total Amounts due pursuant to Section 2.02 (c) of the DCA (1) Goods - the amounts shown here include all I 1 procurement across P SCM (Federal & Regional); (2) Consultants - the amount shown includes the estimated cost of procurement of international consultants (Federal & Regional Programs) (3) Training - the amount represents federal training activities. (4) Programs - the amount represents estimated costs of goods & consultants to be procured locally and all training activities at the regional level. (5) Operating Cost - the amount represents the recurrent cost estimate. (6) Unallocated - the amount represents the 12% contingency across all categories to meet any unforeseen price and physical variations & exchange rate fluctuations during the implementation o f the program. DISBURSEMENT ARRANGEMENTS The closing date of the proposed Credit will be July 7, 2009 The proposed IDA credit would be disbursed against the categories shown in Table C in Annex 6. Disbursements will be made in accordance with procedures and policies outlined in the Bank's Disbursement Handbook. The Support Project will utilize the traditional disbursement method for disbursing IDA funds from the Non-Pooled Funds category, that is, based on SA, SOE procedures and direct payment procedures (see Uses of Statement o f Expenditures below). As a basis for disbursing IDA funds from the Pooled Funds category, the Borrower, the Bank, and relevant pooled donors (or cooperating partners) will

86 need to (i) execute an MOU as well as annual Side Agreements governing the proportion of expenditures to be replenished by respective cooperating partners, and (ii) agree on a satisfactory SOE format-with sufficient detail-for pooled fund expenditures to be replenished from the SA. To ensure that parallel and differing SOE and disbursement procedures are not introduced under the Program, the Borrower and the Bank will ensure that disbursement from the Non-Pooled Funds category will cease, and remaining funds reallocated to the Pooled Funds category once utilization of the pooling arrangements is initiated. At this stage, the capacities at all levels seem very low in terms of producing the regular financial and other reports required to sustain report-based disbursements by project launch. The Government and the Bank have therefore agreed that disbursement from IDA will follow a traditional disbursement method at the outset. Over time, it is anticipated that the Government would transition first, to the more detailed SOE format describe above, and eventually, to a report-based method-comprising regular Financial Monitoring Reports (FMRs) plus additional statements-to facilitate disbursement from the Pooled Funds category. Uses of Statement of Expenditures (SOEs) Disbursements made on the basis of SOEs, as described above, will be as follows: (a) for goods and grants on all contracts less than US$150,000; (b) for individual consultants on all contracts less than US$50,000; (c) for consulting firms on all contracts less than US$lOO,OOO and (d) for training and workshops, and operating costs on all contracts regardless of the amount. The Borrower will retain all the supporting documentation for SOEs, including completion reports and certificates, at the point of transaction. The supporting documents will be made available to IDA during Program supervision and will be audited annually by independent auditors acceptable to the Association. Disbursements for expenditures above these thresholds will be made against presentation of full documentation relating to those expenditures. During the launch workshop, a session on preparation of withdrawal applications, including the preparation and submission of required supporting documents is required. Special Account To facilitate disbursements against eligible expenditures under the Credit, the Treasury Department of MOFED will establish an SA in the National Bank of Ethiopia. The authorized allocation for the Special Account will be US$15,000,000. Upon effectiveness, IDA shall make an initial deposit up to US$8,000,000 into the Special Account. Once the total disbursements from the Credit account, including commitments, have reached an aggregate amount of SDR 15,000,000, the initial allocation may be increased up to the authorized allocation. The CFU will submit replenishment applications at least once a month. Counterpart funds The Government shall open a local currency account at the NBE and shall deposit Birr 9,000,000 for the first program year and subsequent deposits by February 15 and July 15 of each fiscal year.

87 ANNEX 7: PROJECT PROCESSING SCHEDULE ETHIOPIA: Public Sector Capacity Building Program Support Project Project Schedule Time taken to prepare the project (months) First Bank mission (identification) Appraisal mission departure Negotiations Planned Date of Effectiveness Planned Actual 11 months 21 months July 2002 July 2002 March 2003 January 2004 April 2003 March 2004 July 2004 Bank staff who worked on the project included: Task Team Leader, overall design Review of overall design, operational support Education sector Review of program design, operational support ent assessment and related issues Bank funds expended to date on project preparation: 1. Bank resources: $158, in FY2003; $169, in FY Trust funds: Not Applicable 3. Total: US$328,143.51

88 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$lO,OOO 2. Estimated annual supervision cost: US$170,000 Donor members of PSCAP Working Group who worked on the project included: Multi-donor team members DfID S. Lister, Consultant, Expenditure Management K. Brown, Consultant, Civil Service Reform R. Mellors, Consultant, Decentralization M. Frazer, Consultant, Expenditure Management K. Gebreselassie, Expenditure Management C. Fumo, Social Development R. Blandon, Tax Systems Reform CIDA C. Piggott J. Rivard S. Racine, Justice Systems Reform DCLlIreland S. Assefa GTZ/Germanv H. Matthaeus, GTZ, Urban Management IMF A. Kyei, IMF, Tax Systems Reform M. Netsere, IMF, Tax Systems Reform Italian Cooperationfltaly A. Cecci, Urban Management Netherlands A. De Boer P. De Keizer M. Vogels SIDA E. Korsgren P. Sevastik, Consultant, Justice Systems

89 ANNEX 8: DOCUMENTS IN THE PROJECT FILE ETHIOPIA: Public Sector Capacity Building Program Support Project. A. Correspondences During Preparation Letters to Ministry of Capacity (MCB) Building regarding PSCAP o World Bank, Comment on PSCAP Action Plan Guidelines to Director of MCB External Relations and Resource Mobilization, June 6,2003 o World Bank, Feedback on PSCAP Action Plan Preparation Process to the Minister of Capacity Building, August 6,2003 o PSCAP Donor Group, Donor Follow up on Pre-appraisal to the State Minister of. Capacity Building, November 24,2003 o World Bank, Management Visit to Minister of Capacity Building, November 17,2003 Letter to MOFED. o World Bank, Follow Up on World Bank Management Visit, November 24,2003 Letters from Government o MOFED letter on specific purpose grant o MCB letter on institutional arrangements B.. World Bank and Joint Mission Aide-Memoires During Preparation PSCAP Identification Mission, Aide Memoire, July 8 -August 29,2002. Capacity Building Mission, July 2001 PSCAP Preparation Mission, Aide Memoire, February 12-28,2003 PSCAP Pre-Appraisal Mission, Aide Memoire, September 15-26, 2003 PSCAP Appraisal Mission, Aide Memoire, January 26-February 10,2004 C. Government Documents, Action Plans, and Related Materials National Program Document Vol I and II,2003/ /08. PSCAP Concept Document, May 2002 Federal PSCAP Plans o Expenditure Management and Control Program - Strategic Plan o Federal PSCAP Plan - Civil Service Reform Program (CSRP) o Federal PSCAP Plan - District Level Decentralization Program (DLDP) o Federal PSCAP Plan - ICT o Federal PSCAP Plan - Justice Sector Reform Program (JSRP) o Federal PSCAP Plan - Tax System Reform Program (TSRP) o Federal PSCAP Plan - Urban Management Capacity Building Program (UMCBP) Regional PSCAP Plans o Addis Ababa City Government PSCAP Action Plan o Afar National Regional State Government PSCAP Action Plan o Amhara National Regional State Government PSCAP Action Plan o Benishangul-Gumuz National Regional State Government PSCAP Action Plan o Dire Dawa City Government PSCAP Action Plan o Gambella National Regional State Government PSCAP Action Plan o Harari Peoples National Regional State Government PSCAP Action Plan o Oromiya National Regional State Government PSCAP Action Plan o SNNPR Government PSCAP Action Plan o Somali National Regional State Government PSCAP Action Plan o Tigray National Regional State Government PSCAP Action Plan

90 First PSCAP Design Workshop, May 9-10, Joint Government - IDA Communique, May 9-10, Welcoming Note - World Bank, May 9-10,2003 Group Questions for Breakout Session, May 9-1 0,2003 Summary of Breakout Session, May 9-10,2003 Civil Service Reform Program - Presentation, May 9-1 0,2003 Information, Communication and Technology - Presentation, May 9-10,2003 Urban Management Capacity Building Program - Presentation, May 9-1 0,2003 Tax System Reform Program, May 9-10,2003 Justice System Reform Program, May 9-10,2003 Regional Perspective: Amhara, May 9-10,2003 Regional Perspective: Benishangul-Gumuz, May 9-1 0,2003 Regional Perspective: Oromiya, May 9-1 0,2003 Regional Perspective: World Bank, May 9-1 0,2003 Sectoral Perspective: Health, Tigray, May 9-1 0,2003 Sectoral Perspective: Primary Education, Amhara, May 9-1 0,2003 Sectoral Perspective: Performance Management, DfID, May 9-1 0,2003 Sectoral Perspective: Urban Services, Addis Ababa, May 9-10,2003. Agenda, Thematic Notes and Minutes of the PSCAP Action Plan Preparation Workshops o Addis Ababa with Emerging Regions, June 18-19,2003 o Awassa, June 21-22,2003 o Bahir Dar, July 5-6,2003 o Adama, July 19-20,2003 o Makale, August 1-3, 2003 '. '. Ethiopia: Progress in Implementation of Tax Reform, November 18-22,2003 Implementing Capacity Building Strategy and Program, Unofficial Translation, February 2002 Oromiya Bureau of Finance & Economic Development, Decentralization Process in Oromiya, October 2002 Oromiya Bureau of Finance & Economic Development, Learning Decentralization by Doing- Financial Decentralization in Oromiya, October 2002 Tigray Bureau of Finance & Economic Development, Highlight on the Framework of the Financial Management, October 2002 Tigray Bureau of Finance & Economic Development, Summary Notes on the Exercised Endeavors to Strengthen Decentralization, October, 2002 D. CommuniquCs, Press Releases, and Newsletters ' ' ' World Bank, Oromiya Regional State Joint Communique, November 4-7, 2002 World Bank, Amhara Regional State Joint Communique, February 24-26,2003 World Bank, Tigray Regional State Joint CommuniquB, October 28-November 1,2002 World Bank, CAS Workshop on Decentralized Service Delivery, Joint Communique World Bank, CAS Workshop on Capacity Building, Information Note Frontline httu://www,worldbank,ordafr/et/uscap,htm PSCAP Website: Background. Notes, Papers, and Assessments By World Bank, and Multi-Donor Teams AFRITAC, Report on Cash Management World Bank, Concept Note on Federal Legislative Framework for Urban Land Management in Ethiopia, March 2,2003 ' World Bank, Committing to & Monitoring Capacity Building Outputs through PSCAP Action Planning, July 19,2003 ' World Bank, Output Oriented Action Plans for PSCAP, Presentation, July 19,2003.

91 World Bank, Political and Administrative Accountability Review, Background Note to IGR World Bank, Design Options: PSCAP Grant and Drawing Rights Approach, Background Note World Bank, PSCAP: Informatics, Presentation World Bank, PSCAP: Platform for State Transformation, Presentation World Bank, PSCAP Regional Technical Notes on Decentralization, Municipal Development and Civil Service Reform o Tigray, October 28-November 1,2002 o Oromiya, November 4-7,2002 o Amhara, February 26-28,2003 World Bank, Cost of Decentralization, Background Note, April 2003 World Bank, Financial Management Assessment Report, February 2004 World Bank, Procurement Assessment Report, February 2004 World Bank, Social Appraisal Report, April 2004 DfID, Review of Capacity Building Approaches for Local Government, July 2003 Inputs from World Bank Sector Teams.. World Bank, Minutes of Community Empowerment World Bank, Brainstorming Minutes on Decentralized Fiscal Support for Infrastructure World Bank, Programmatic Design of Community Empowerment, Background Note World Bank, Education Team Note on PSCAP World Bank, Education Team Note on PSCAP - Prototype Capacity Development Matrix World Bank, Environment Team Note on PSCAP World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia-2 World Bank, Note from Infrastructure Team World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Road World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Energy World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Water World Bank, Infrastructure Note on PSCAP - Responsibility Matrix - Urban Development. Economic and Sector Works.. Multi-Donor/GOE, Country Financial Accountability Assessment, March 3 1,2003 World BanWGOE, Country Procurement Assessment Report, March 2003 World Bank, Woreda Studies-Volume I, January 2002 World Bank, Woreda Studies-Volume 11, January 2002 World Bank, Municipal Decentralization in Ethiopia, July 2001 World Bank, Issues in State Transformation: Decentralization, Delivery and Democracy. An Institutional Governance Review Concept Note Donor Coordination and Harmonization PSCAP Donor Working Group Members. Minutes of PSCAP Donor Working Group Meetings, March 14 and 19,2003 Minutes of PSCAP Donor Working Group Meetings, July 16,2003 Minutes of PSCAP Donor Working Group Meetings, August 13,2003 Minutes of PSCAP Donor Working Group Meetings, August 27,2003 Minutes of PSCAP Donor Working Group Meetings, November ,2003 Bilateral Donors, Harmonization Issues Note, February 10,2004

92 ANNEX 9: KEY FEATURES OF RESOURCE ALLOCATION AND MANAGEMENT: EXCERPT FROM THE PROGRAM IMPLEMENTATION PLAN ETHIOPIA: Public Sector Capacity Building Program Support Project This chapter describes resource allocation and resource management arrangements under PSCAP. This includes an explanation of the Program s rules of access and allocation for drawing rights; its appraisal criteria for plans from federal and regional institutions; its planning, budget, and execution system with the Government s public financial management (including the chart of accounts and financial calendar); and finally, PSCAP s performance-oriented execution and reallocation features. Specific-purpose federal program As a specific-purpose federal program, PSCAP serves as a pillar of Ethiopia s evolving intergovernmental fiscal system. The Program allocates five-year drawing rights to additional federal resources across federal and regional beneficiary institutions. Failure to utilize these time-bound rights results in their reallocation from poor performers to high performers within a given fiscal year and across fiscal years. These performance oriented features of PSCAP represent an important innovation in terms of the design of fiscal transfers within the Ethiopian public finance system. At the same time, the basic planning, budgeting, and execution system of Program is fully with the requirements of the Government s public financial management as well as its SDPRP monitoring systems. Federal and regional institutions participating in PSCAP use the Government s chart of accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term and annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government s system is designed to ensure that the planning and execution of capacity building activities is undertaken in a flexible manner in line with the changing demands on the ground. It is also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financed and implemented in GOE s state transformation process (Table 3). Budget classification of PSCAP expenditures The Government of Ethiopia s Chart of Accounts will be utilized to plan, budget, and report on PSCAP expenditures. Specifically, PSCAP will be proclaimed annually by Cabinet in the GOE budget as aprogram under the MCB, which is designated as apublic body. Allocations to the 6 eligible federal institutions and the 11 regions will be proclaimed under PSCAP subject to mid-year reallocations based on performance. Coding and Classijication of the Federal Component. PSCAP budget coding and classification for the federal level allocation will be structured as follows: (a) Public Body codes will be designated as Ministry of Capacity Building ; (b) Program code will be designated as Public Sector Capacity Building ; (c) Sub-Agency codes will only be designated for the CSRP, DLDP and JSRP as Planning and Programming Department; (d) Subprogram codes will be designated as Ministry of Revenue; Ministry of Federal Affairs; Ministry of Finance and Economic Development; Information, and communication Technology Development Authority; and (e) Project code will be designated for each subprogram (i.e. Urban Management and Reform Project, Tax Systems Reform Project, Information & Communications Technology Reform

93 Project, Civil Service Reform Project, District Level Decentralization Reform Project, Justice Systems Reform Project, and Program Support Project). Coding and Class$cation of the Regional Component. PSCAP budget coding and classification for the regional level allocation will be structured as follows: (a) Public Body code will be designated as Ministry of Capacity Building ; (b) Program code will be designated as Public Sector Capacity Building ; (c) Sub-Agency code will be designated; (d) Subprogram code will designated for each region (Le. Tigray Public Sector Capacity Building, Afar Public Sector Capacity Building, Amhara Public Sector Capacity Building, etc.); and (e) Project Code will be designated for each regional subprogram (Le. Civil Service Reform Project, Justice System Reform Project, Tax Systems Reform Project, Urban Management Reform Project, Information & Communications Technology Reform Project, District Level Decentralization Reform Project, and Program Support Project). Rules of access or eligibility criteria PSCAP is envisaged as a nation-wide program, designed to help remedy the severe public sector capacity constraints at the federal, regional, and local levels. To ensure the consistency of PSCAP activities undertaken by a wide array of beneficiaries with national policies and priorities, the Government has established clear rules of access. These access rules or eligibility criteria are detailed below and should be met by federal lead institutions as well as regions before their annual implementation plans can be considered for financing under the Program: Signed Participation and Performance Agreement by the relevant minister responsible for federal subprogram or relevant cabinet member in the case of regions (sample participation and performance agreements are included in Section 4 of this PIP). Establishment of appropriate governance and implementation arrangements; Completion of relevant capacity assessments across all participating sectors and levels of participating institutions, especially in the case of woreda and municipal strengthening; Timely submission of endorsed costed medium-term rolling plans, as well as technically sound, feasible annual implementatiodprocurement plans in line with financial calendar; Explicit provision for evaluation of annual performance including dissemination to the public of such evaluations, satisfaction score cards, etc, as part of the consultative planning process. Inputs from various nation-wide reviews As key inputs to the PSCAP planning, budgeting, and execution process, several review processes should be underway at the close of any given fiscal year. Specifically, the Government is responsible for consolidation of PSCAP outturn data (based on Statements of Expenditures) for the previous year by subprogram and region. These data are compiled in the form of a consolidate physical and financial report by the Planning and Programming Department and submitted as an input to the Joint Annual Performance Review Mission (ARM) no later than September 30. The ARM for PSCAP is held not later than October 1 each year and its findings-widely distributed-should serve as inputs to the SDPRP Annual Progress Report (to be issued in late October each year) as well as the annual multi-year planning exercise for PSCAP (see below).

94 Fiscal framework-medium-term projection and division of PSCAP resources Each year, during the Government s multi-year planning exercise, the Ministry of Finance and Economic Development (M0FED)-in close consultation with the Ministry of Capacity Building (MCB)-will ensure the medium-term projections of available PSCAP resources from external and Government resources-stimated in Year 0, February 2004, to be approximately Birr 3.3 billion over the 5 year planning period-are appropriately reflected in the Macro-Economic and Fiscal Framework (MEFF), which is prepared no later than October 26. Once the overall available pool of resources available over the medium-term has been established, both Ministries will initiate a formal dialogue with relevant PSCAP stakeholders such as lead institutions and regional governments on the vertical and horizontal division of resources and issue revised medium-term indicative planning figures for federal subprogram and regions no later than November 10. Guidelines for the vertical and horizontal split are described below and should provide the basis for joint Government-donor review: Vertical Division of PSCAP Resources in the First Year and Subsequent Years. During program preparation, an original percent vertical division of PSCAP resources (drawn from domestic and donor sources) over five years was effected between regional and federal levels of government respectively. Each year, the actual allocations for federal and regional components of PSCAP should be revised on changes in resource projections. Changes in the proportions between federal and regional allocations (Le., the split) should be undertaken in a transparent manner, in dialogue with federal and regional authorities, no more frequently than once a year, and on the basis of clear criteria such as the previous year s performance as well as existing multi-year commitments at the federal and regional levels. Horizontal Split of the Regional PSCAP Component in the First Year and Subsequent Years. Once the vertical split has been reviewed each year, a horizontal split of the regional component is undertaken on the basis of the established formula for the federal-regional subsidy as well as re-pooled drawing rights which high performers could draw down. The formula consists of three factors-the region s population, its level of development gap, and its previous years own revenue performance-weighted at 65%, 25%, and 10% respectively. During program preparation, the above-mentioned formula was applied and five-year drawing rights were assigned to each region. Each year, up to 50% of the five-year drawing rights of individual regions will be subject annual reallocation from poor performers to high performers. Reallocation recommendations by the PSCAP Federal Technical Team will comply with the following rules and be clearly communicated to all regions and federal institutions: 1. A cut-off point of fund utilization (as evidenced by SOE replenishment requests) and activity-based performance, 75% in both cases, will be established. Regions performing above this cut-off point are not subject to reallocation. 2. A minimum entitlement equivalent to 25% of the approved annual plan in any given year will be established for all regions to ensure that under-performers continue to have incentives and resources to establish a the minimum statutory level of capacity. 3. At end-year, poor performers or those with 25% or less of fund utilization and activity-based performance will have 50% of their remaining five-year drawing rights re-pooled and reallocated to high performers purely on the basis of performance ranking.

95 All such reallocations will be reflected in readjustments to their overall five-year envelopes. In future years, the formula as well as rules for annual reallocation will be reviewed and revised as necessary and any changes or modifications, will be made on the basis of extensive consultations, and widely publicized to all regions and related beneficiaries. Planning-aligning with Public Investment Program (PIP) preparation As one of the Federal Government s major capital spending initiatives, PSCAP is reflected within the Government s Public Investment Program. PSCAP planning is therefore integrated and aligned with the PIP preparation timetable, as laid out in the financial calendar. Accordingly, following the issuance of revised indicative medium-term planning figures, federal lead institutions and regions (under the guidance of their Regional Technical Teams) undertake and submit to the PSCAP Federal PPD their revised and appropriately costed rolling five-year PSCAP Action Plans no later than December 25. As noted in the eligibility criteria, the revisions of these plans should be undertaken in a participatory manner involving consultations with various regional and local stakeholders. Revisions of the PSCAP Action Plans should reflect the public sector capacity building priorities identified in woreda and municipal development plans. The Federal Technical Team (FTT), MCB, and MOFED review and finalize revised medium-term consolidated PSCAP Action Plans (by federal and regional components) no later than February 8. As part of this exercise, on the recommendation of the FTT, both ministries finalize the Annual Fiscal Plan for PSCAP part of the Government s overall fiscal plan) no later than January 24. Budgeting-Preparation, Appraisal Adoption, Execution, and Re-allocation Based on the Annual Fiscal Plan (Le., the annualized drawing rights), federal lead institutions prepare their PSCAP budgets along with annual procurement plans no later than March 1. These are submitted to the FTT via the Planning and Program Directorate (PPD) for appraisal and review. Similarly, regions submit their annual budgets and procurement plans to the Federal PPD no later than February 22 so that their Regional Technical Teams can pre-appraise, review, endorse, and submit their plans to the FTT no later than March 1. Regional Technical Teams, under the guidance of respective BCBs, are expected to have prepared their matching budgets for PSCAP activities (for example, for civil works and ongoing recurrent or O&M) at the same time. The FTT then reviews and appraises annual implementation and procurement plans under the federal and regional components against the following appraisal criteria established within and across subprograms: 1. The relevance of planned activities given existing assessments is established, as well as provisions for additional assessment where required are included; 2. Prioritization of the minimum mandatory capacity building--especially with regard to financial management, procurement, and related program support activities-is established as a necessary precursor to any more advanced activities; 3. Demonstration that civil works required to house any goods (e.g. especially ICT) are in place, and that budgetary provisions have been made for additional upfront civil works and ongoing recurrent as well as operations and maintenance requirements of goods procurement;

96 Evidence that annual plans are based on consultation with key stakeholders including local governments, regional bureaus, communities, and other stake holders, and that this consultative planning process becomes increasingly bottom up in each successive year as evidenced by steadily increasing numbers of woreda and municipal action plans, formal public consultations, participation of reference and focus groups in the planning process; 5. Sector-specific criteria such as sequencing, the previous year s performance, and the submission of relevant TORS. 6. Explicit focus on issues related to gender and HIV/AIDS mitigation. It is anticipated that the FTT will need to provide comments and suggest revisions in federal and regional plans as a basis for finalizing annual implementation and procurement plans. Once revised, the plans should be submitted to IDA for no objection no later than March 15. The FTT finalizes these plans for the federal and regional components no later than March 22 and submit them for cabinet approval. PSCAP s annual plan for the Year Y+l will be submitted along wit the overall budget to the Council of Ministers no later than May 22. Matching requirements in regional budgets (for civil works and recurrent costs) will be submitted to regional cabinets at the same time. The Cabinets should recommend the federal and regional budgets inclusive of PSCAP budgets no later than June 2. Approval and adoption by federal and regional legislatures will be undertaken roughly between June 8 and July 2, in anticipation of the coming fiscal year. Execution and Mid-year Reallocation Once proclaimed and allocated, execution of PSCAP budgets begin at the start of the fiscal years on July 8. Following an initial release to cover implementation financing requirements for up to the first quarter, funds are released to federal lead institutions and regions for monthly reimbursement against consolidated SOEs. Mid-year Reallocation Rules. PSCAP also envisages mid-year reallocation of annualized drawing rights, Le., a re-appropriation between regions within a federal budget line. Key performance criteria used as a basis for these in-year adjustments are SOE submissions and activity-based progress reports. Accordingly, federal lead institutions and regions submit their consolidated reports on yearto-date SOE submissions and activity-based performance, as well as projected budget utilization through the end of year Y to the Federal Technical Team (FTT) no later than January 22. The FTT will recommend in-year reallocations across regions on the basis of the following rules (similar to those applicable for annual reallocation), which are to be clearly reiterated to all regions and federal institutions at the start of each year: 1. A cut-off point of fund utilization and activity-based performance, 75% of projected cash flows in both cases, will be established. Regions performing above this cut-off point are not subject to reallocation; 2. A minimum entitlement equivalent to 25% of the approved annual plan in any given year will be established for all regions to ensure that under-performers continue to have incentives and resources to establish a the minimum statutory level of capacity;

97 At mid-year, poor performers or those with 25% or less of fund utilization and activity-based performance will have 50% of their remaining annual drawing rights re-pooled and reallocated to high performers; In-year reallocations will be reflected in readjustments to the annual and five-year envelopes; Access rules for high performers seeking to draw down on re-pooled drawing rights are the submission of revised plans (with revised projections for utilization through end-year), compliance with financial and physical reporting requirements, and satisfactory achievement of the in-year cut-off point. The FTT will hold discussions with regions on its review and recommendations for in-year reallocation between regions within annualized budgets no later than February 8. Following these discussions, the reallocation proposal will be submitted for no objection by IDA on February 15, and then MCB and MOFED issue in-year reallocations between regions and federal institutions no later than February 22. The Role of the Supplemental Budget. In the case in-year reallocations prove insufficient for high performers, MCB may seek to draw down on future years annualized drawing rights or allocations. In such cases, high performers should demonstrate nearly full (over 85%) utilization of annual drawing rights and realistic projections for utilization that exceed available resources from in-year reallocation. Once reviewed by the Federal Technical Team, the proposed use of future annualized drawing rights (financed in part of fully through IDA support) through the Government s supplemental budget mechanism should be submitted to IDA for no objection. Following IDA S no objection and finalization by the MCB, allocations within the supplemental budget for high performers will be finalized and communicated the EAs in questions as well as all other stakeholders involved in PSCAP.

98 I I t I

99 I6 I m a I I i z.t 7 C : N E 3 I R 3 c 7 4 a f w " E c U

100 ANNEX 10: HARMONIZATION ISSUES FOR BILATERAL DONORS-PREPARED BY BILATERAL MEMBERS OF PSCAP JOINT GOVERNMENT-DONORS WORKING GROUP4 ETHIOPIA: Public Sector Capacity Building Program Support Project Introduction This note is intended to encourage strong bilateral support for the PSCAP and to clarify joint thought amongst all donors about how and under what conditions, commitments should be made to PSCAP, and the implications arising therefrom. Donors acknowledge that an enormous amount of effort has gone into planning and developing the Programme so far, mainly by the GoE and the World Bank. It must also be acknowledged that the GoE is already implementing some of the PSCAP programmes with its own resources. Bilateral donors are much encouraged by: Government s expressed determination and commitment to address the capacity building needs of the country; Government s desire to establish a comprehensive, holistic and integrated approach to capacity building under one umbrella programme; High level of ownership of PSCAP plans by the regional governments of the country; The overall intergovernmental design and drawing rights approach; and The general content of the subprogrammes of PSCAP. There are, however, some design and programming issues which need to be considered for PSCAP implementation, over which the donors (and IDA) have serious and valid concerns: inter alia the quality of the various plans, the approach in some components, gender and HIV/AIDS analysis and mainstreaming, the sustainability of the heavy ICT investment, monitoring and evaluation arrangements and the planning and resource allocation timetable. However, it is felt that further efforts at this time to resolve all of these issues are more likely to hinder the process of project formulation and approval. Rather, the emphasis should now be on how to best optimise bilateral and IDA contributions and facilitate a learning process in the programme as it proceeds. It is considered likely that much of the programme will get off to a slow start given the lack of capacity for procurement and the giant step that still has to be made in most of the programmes from the present plans to actually doing something. It is also likely that the enormous challenges the programme is posing in terms of content, approach and implementation management will necessitate continued revision of plans, especially over the first 2 or 3 years. As already indicated at the Pre-Appraisal stage, the Promamme should therefore be seen vew much as a learning bv doing process. Three critical issues stand out which require resolution before implementation. These are: 9 If and how the bilateral donors should engage;. Confirmation of the approach to capacity building; and Harmonisation procedures Bilateral donor engagement The GoE objective is to design and implement a single, multi-donor solution to the public sector capacity building challenge, and their desire is for all bilaterals to join with IDA to support this programme. To Specific donor agencies represented in the drafting of the note during the appraisal of the program included DffD, CIDA, DCI, GTZ, Netherlands, and SIDA.

101 become committed, bilateral donors intending to participate should endorse the overall programme design and implementation arrangements. There are 3 basic options open to them:. Stay on the outside if they have strong reservations or incompatible agreements with their current programmes, leaving PSCAP largely to the Bank and the GoE. Make minor contributions on the margins. Get fully involved as either a pooling or non-pooling donor, and seek to influence the course of the Programme from the inside. It can be clearly argued that Ethiopia deserves a chance to implement PSCAP even if their plans could be further improved. Options 1 and 2 leave one on the outside of one of the biggest development efforts town and could be interpreted as a reluctance to respond to GoE plans and priorities. Also, the opportunity costs of trying to undertake and negotiate parallel programmes to PSCAP would likely be higher given that the space will be restricted. There are strong arguments, if one is to be involved at all, to fully embrace PSCAP and seek to join a learning process through option 3. Confirmation of the approach to capacity building There are a variety of approaches evident in the PIP covering the range from demand to supply driven, but in some of the subprogrammes there is an inappropriate emphasis on deficit analysis followed by prototype design, top down delivery and bulk training. PSCAP will, however, inevitably become a learning process, with some aspects succeeding and others requiring modification as implementation proceeds. Since PSCAP is intended to be transformational, it must give strong emphasis to planning and implementation approaches which are highly participative and which promote ownership of development plans and capacity building by citizens and officials at all levels. As both bilateral donors and IDA can bring considerable lessons learned from their current programming, there should be a strong commitment by all donors to incorporating those lessons learned from their current programming into the PSCAP process. MCB has demonstrated considerable openness to the views of various stakeholders regarding design, but it would be desirable for it to confirm its position regarding their capacity building approach. Similarly, the monitoring and evaluation system should be a driver of a participative learning process rather than a formalised recording system for central government and donor consumption. The GOE has shown a commitment in the PIP to biannual (and quarterly) review mechanisms, therefore, it behoves all donors to be fully engaged in the review process. The implications of a more demand driven learning approach are significant in terms of the nature and scale of the review process. This should not be a business as usual presentation of routine data. Rather, it requires a more collaborative and elaborate mechanism for review of experiences, analysis of problems and development of new solutions through an action-reflection process. Woreda, Regional and Federal level review meetings thus become fundamental learning fora. There is an obvious need to develop a clear TOR for a joint GovernmentDonor Review process. This platform will enable problems to be jointly owned and resolved by both the actors themselves and the donors. Now is an appropriate time, particularly for the Bilateral donors, to make firm commitments of time and the sharing of resources necessary to participate fully in ALL Regional and Federal Reviews, if donors are to have any hope of being adequately informed on the issues from all 6 subprogrammes in all 11 administrative regions. It is obvious a careful sharing of resources and responsibilities will be required to ensure effective coordination across all subprogrammes at both the federal and regional levels.

102 -96- Donor harmonisation It is important for non-ida donors, who now wish to become fully involved and strengthen this learning process, to iron out and harmonise their respective positions. It is also no longer acceptable to simply leave the key donor role to the World Bank, as has happened during the preparation phase. The GOE and World Bank have taken steps to encourage full bilateral participation through a number of harmonization approaches in Ethiopia, such as the PRSC, SDPRP and PSCAP. All participating donors should therefore take up responsibilities for supervision and involve themselves fully, if they want their perspectives to be taken into account. It is also important that GoE and all donors maintain dialogue on harmonisation throughout implementation. Harmonisation should promote policy dialogue aligned to the SDPRP cycle, taking into account the concerns of pooled and non-pooled partners to PSCAP. The following issues represent the consensus views of bilateral donors in terms of harmonisation: Pooling offers the most straightforward and coherent arrangement and simplifies the implementation management for what is a wide-ranging and complex programme. It should be encouraged. Budgetary off-set and the full additionality of PSCAP resources are compelling reasons to support PSCAP through the pooling arrangement. For various reasons, however, some donors may be unable to join this arrangement, although they wish to be fully involved in PSCAP and to integrate their activities as closely as possible. This should also be accommodated. On-going bilateral programmes: Several bilateral donors are presently engaged in on-going programmes which closely relate to the scope of PSCAP. Wherever possible, donors and the GoE agencies which they are supporting should endeavour to harmonise the planning and implementation arrangements for their programmes with those being established for PSCAP. Donor HarmonisatiodParticipation Agreement: The MOU will be the legal binding document for all donors involved in the pooling arrangements for PSCAP. It is important however, that non-pooling donors also be encouraged to sign on to an overall participation agreement that confirms their commitment to a code of practise covering mechanisms for non-pooled contributions, co-ordination and participation in joint review procedures etc. Such a HarmonisationParticipation Agreement will take into account the OECD-DAC principles on harmonisation, as well as local requirements for PSCAP. Procurement: Procurement arrangements should ideally be designed to strengthen the GoE system. At the same time, donors are concerned about capacity constraints that may slow the momentum of PSCAP. Donors emphasize the need and support GOE efforts to establish strong capacity for procurement planning and management within the framework of IDA procurement methods for pooled funds. Lessons from a variety of donor experiences (CBDSD, ESDRF, ERA) and the CPAR recommendations should be integrated into PSCAP procurement. Donors agree to work as a team to appraise GOE procurement TORS to ensure quality control in a timely manner. They will also take active interest in the annual GOE procurement plans to stimulate dialogue on capacity development methodologies. Options allowing responsive bilateral procurement of technical assistance via Channel 3 should be maintained. Donors also endorse efforts to ensure a diverse source of supply from the public, private and NGO sectors for PSCAP training and other requirements. Fiduciary requirements: Bilateral donors should also work closely with the World Bank and MCB to plan and harmonize fiduciary and other assessments, in order to maximize harmonization of individual donor planning, approval and review processes.