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

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1 Project Name Region Sector Project ID Borrower(s) Report No. PID5794 Lebanon-Municipal Infrastructure Project Middle East and North Africa Region Other Urban Development LBPE50544 Lebanese Republic Implementing Agency Environment Category Date PID Prepared March 8, 2000 Projected Appraisal Date March 20, 2000 Projected Board Date May 23, 2000 MOMRA Contact Person: Colonel Nicolas Habr Tel: Fax: B 1. Country and Sector Background (a) Inadequacy of infrastructure. Urban areas in Lebanon generally have reasonable access to basic services. Sewerage coverage rates are about 70.4 percent and access to piped water network is about 89 percent. However, these overall averages hide great disparities between districts, with the poorer districts of the North and South having much lower rates of access. Quite apart from differential access rates, existing infrastructure, notably roads, drainage and water and sewer networks are in a state of disrepair due to prolonged lack of expenditure on maintenance and upgrading in most municipalities. Only the largest and better off municipalities have been able to begin addressing the backlog of maintenance and upgrading needs since municipal elections took place. Improvements in existing infrastructure are key priorities to catch up with the backlog of maintenance and upgrading needs, and have generally been the first set of projects undertaken as resources become available.(b) Inadequate municipal finance. Currently, municipal revenues are not adequate to meet local needs. One reason is that own-source revenues collected by municipalities are derived from 16 different fees and taxes, which are not cost effective to administer. The most important of these taxes is based on the lease value of all rented or occupied residential and commercial property (the assessed value is in need of reevaluation and the reporting of such transactions is done haphazardly). It will take time to reform and rationalize the local tax base and establish systems for improved valuation and collections of property taxes. An equally compelling reason for the inadequacy of local resources is that the central-municipal transfer, consisting of surtaxes and fees collected by the state on behalf of all municipalities, has largely been folded into projects of the CDR or other regional development agencies through Decree 7425 of Most municipalities have, therefore, not been able to count on the intergovernmental transfers that are legally due to them as a bloc grant and for capital projects. The sustainability of municipal governments depends largely on substantially improving the municipal and intergovernmental finance system. (c) The Independent Municipal Fund (ImF) Arrears. The ImF is an account held in trust, as

2 part of the account of the Lebanese Treasury, at the central bank for the benefit of the municipalities and municipal associations. The law specifies the sources of ImF funds: taxes and levies collected by the central government on behalf of municipalities, as well as specified shares of custom duties, and surcharges on utility bills and insurance policies. The criteria along which ImF funds are distributed to, and used by, municipalities are spelled out in the law (Decree No of April 6, 1979 amended by Decree 1783 of 10/10/91). In line with that decree, ImF funds can be used to cover the salaries of contractual employees of the Ministry of Municipal and Rural Affairs working on tasks related to various municipalities, as well as the costs of service and materials benefiting municipalities. The remaining ImF fund are to be distributed on a yearly basis as follows:(a) No less than 75 percent (of available balance) should be distributed to municipalities along the following formulae:70 percent are provided as budget support out which: (i) 60 percent distributed in proportion to the number of registered population in the municipality; and (ii) 40 percent distributed to all municipalities in proportion to their own-source revenues over the preceding two years.30 percent are "earmarked" for project finance to foster regional development, particularly in rural areas.(b) No more than 25 percent should be distributed to municipal associations along the following formulae:25 percent are provided as budget support in proportion to the number of registered population within the municipal association.75 percent are "earmarked" for project finance within the administrative areas of the municipal association.over the past several years, the distribution of ImF resources to municipalities had been all but withheld. Proceeds of the World Bank loan would be counted against the ImF arrears, and the project would provide MOF with the opportunity to establish a more predictable and transparent accounting of ImF flows.(d) Limited institutional capacity at both central and local government levels. MOMRA and most municipalities are in need of institutional strengthening. Except for few large municipalities, most have weak administrative capacity and many have none whatsoever, relying on "voluntary" contributions of time by skilled professionals. The latter rely substantially on support from the central government, mostly through MOMRA. However, MOMRA is not equipped to effectively address such needs. The main reason for this situation, of course, is the major dislocations caused by the prolonged civil war, and as significantly, the absence of locally elected authorities until June, There is, as yet, no coherent strategy to deal with these issues. In general The Government policy objectives are to gradually shift the responsibility for local infrastructure to municipal governments. It is also committed to a municipal sector reform and development strategy that focuses on the balanced and equitable development of all the regions of Lebanon. 2. Objectives The project development objective is to address urgent municipal works while setting the stage for gradual assumption of responsibility for municipal services at the local level. The project would: (a) in the short term, restore selected basic municipal infrastructure to improve living conditions in virtually all the municipalities of Lebanon; and (b) in the medium term, set the stage for the development of the municipal sector by enabling municipalities to begin addressing local infrastructure maintenance and rehabilitation needs. - 2-

3 3. Rationale for Bank's Involvement The Bank's participation in the proposed Project would be an important catalyst for supporting viable options for municipal sector investment. The Bank's willingness to support these investments would complement the technical assistance support of the donor community for the sector. Currently, the EU has expressed interest in supporting the Government in these endeavors and USAID is already providing extensive technical assistance to 68 municipalities. Although the Government has taken the lead in countrywide reconstruction and development, it has not been able to mobilize local resources, establish a reliable system of transfers or to delegate responsibility and resources to local governments for addressing their own needs. The proposed project would constitute a first, if modest, step towards addressing some of these issues and complement the Bank's efforts to assist the Government in postwar reconstruction and development through regional projects. 4. Description 1. Upgrading and rehabilitating backlog of essential municipal infrastructure. 2. Capacity building at MOMRA; technical assistance for project implementation and project management. 5. Financing Total ( US$m) Government 20 IBRD 80 IDA Total Project Cost Implementation Executing agency. MOMRA would be responsible for project execution through a Project Coordinating Unit (PCU). Detailed terms of reference for the PCU have been agreed upon with MOMRA (Annex 11). MOMRA has assigned a temporary PCU Project Manager from its own staff of Engineers. It has already held workshops introducing the project to about 150 municipalities and rapidly surveyed investment programs of about twenty municipalities. By Board Approval, four positions will be filled according to the terms of reference: PCU Project Manager; Head of Project Preparation and Procurement Department; Head of Finance and Accounting Department; and Management Information Systems Administrator. The full staff of the PCU will be hired upon Project Effectiveness. The PCU would be responsible for all aspects of project management. Quarterly and annual reports, including the mid-term review and the implementation completion report, would be prepared by the PCU for Bank and Government review in accordance with Bank requirements. [TO BE COMPLETED BASED ON FINANCIAL ASSESSMENT].Accounting, financial reporting, and auditing arrangements. The PCU would hire experienced financial staff to manage project accounts. MOMRA, through the PCU, would establish and maintain project accounts and adequate control procedures to facilitate timely and transparent reporting in accordance with standards acceptable to the Bank The Budgeting and accounting system will be computerised to permit automatic production of Project management Reports. The Operations manual prepared for MOMRA in September 1998 is being updated and revised for -3 -

4 review during appraisal and would be finalized at negotiations. It would fully document all operations of the project. The revised Operations Manual will cover the following topics: (a) financial and accounting policies; (b) flow of funds; (c) accounting system and internal control mechanisms; (d) Chart of Accounts; (e) financial reports, including the format of financial management reports; (f) auditing arrangements; (g) budgeting; and (h) organization and staffing of financial management functions. The Project's annual financial statements, including summaries of the special account activities and of SOE based disbursements/prm based disbursements would be audited each fiscal year in accordance with international auditing standards by independent private auditors acceptable to the Bank. Auditors will be appointed on the basis of terms of reference to be agreed with the Bank, prior to Loan effectiveness. MOMRA would ensure that all project accounts are furnished to the Bank within six months of the end of each fiscal year, in such scope and detail as the Bank may reasonably request. Loan Administration Change Initiative (LACI) requirements will be met by date of project effectiveness. Financial management System. The Project Financial management arrangements are detailed in Annex 6. Initially the project would use the traditional disbursement system and within a (specific period) would convert to the PMR based disbursement system under LACI. The disbursement of funds would be through periodic advances to the Special account based on PMRs, which would link eligible expenditures with actual physical progress made under the project. The necessary copmuter software will be installed to produce reports compatible with the bank's PMR based disbursement system guidelines. A time-bound action plan to permit PMR based disbursements within a specific period) of effectiveness will be agreed with Government at negotiations.special Accounts. To facilitate disbursements against eligible expenditures, the Government would open at the Central Bank of Lebanon two accounts: a Local Account in Lebanese pounds for the contribution from the Government and Special Account (SA) in US dollars for the Bank loan. Both accounts would be operated by MOMRA, under terms satisfactory to the Bank. These procedures would be finalized during project appraisal and Administrative details of the Local Account and the Special Accounts would be included in Annex 6. Monitoring and evaluation arrangements. MOMRA's PCU would be responsible for monitoring progress against agreed-upon monitoring and performance indicators. The PCU would submit quarterly and annual progress reports. Monitoring indicators to evaluate development objectives and outputs, project design, implementation progress, and project impact, as detailed in Annex I are to be agreed upon at appraisal and will be included in the Project Operations Manual (OM). These indicators would be computed and analyzed by the MOMRA databank system included in the project. Beneficiary assessment surveys also would be conducted for representative areas and investments, to obtain basic qualitative and quantitative information that would enable monitoring and evaluation of the impact of the project on benefitting communities. Consultants would also undertake post-evaluation technical audits on a representative sample of projects to ensure that investments have been implemented in accordance with conditions stipulated in the OM, and would obtain feedback on the outcome or impact of the subprojects and feed these results into refining technical and economic criteria, as appropriate. Monitoring and evaluation reports would be reviewed at the beginning of each year to enable steps to be taken to ensure the efficient implementation and completion of the project. A mid-term review would be conducted in the - 4 -

5 second year of implementation to assess progress towards meeting development objectives and identify areas where adjustments need to be made to implementation processes and procedures to ensure achievement of objectives and adapt to potential changes in conditions. The resident mission would provide supervision support, supplemented by two Bank supervision missions per year to monitor and evaluate project implementation and achievement of objectives. A project launching workshop would be undertaken initially for MOMRA's staff with main representatives from the district offices and participating municipalities. A workshop would also be held as part of the mid-term review to encourage beneficiary participation in the review process. By maintaining a municipality data base, the PCU will collect fiscal, physical, and socio-economic data, which will provide an important input into future evaluations. 7. Sustainability Two key factors would affect sustainability of the project's development objectives: the ability of municipalities to strengthen capacity and improve administration; and the ability of MOMRA to build institutional capacity to carry on the agenda for municipal sector development. As noted, the recently elected municipal councils, despite weakness in capacity, are committed to demonstrating results in their communities. Moreover, the project would include components that assist in strengthening the institutional capacity at MOMRA through the PCU and complement donor assistance to municipalities from the EU and USAID. A more fundamental risk is the sustainability of benefits. This requires capacity building and improved local revenues and a more sustainable system of intergovernmental finance, to ensure adequate operations and maintenance at the local level. These risks can only be dealt with by a sustained effort to support reform and formulation of a coherent strategy for development of the sector, beyond the duration of this first operation. 8. Lessons learned from past operations in the country/sector The lessons learned in Lebanon are primarily from the ongoing ERRP project and the Solid Waste Project. The main concerns relating to these projects are the lack of institutional capacity in sectoral ministries as a consequence of the long civil war, and the regulatory constraints built into the administrative oversight of control agencies such as the Bureau of Accounts (BOA) and the Civil Service Bureau (CSB). Projects implemented by sectoral ministries have been delayed in some instances by the existing Lebanese procurement procedures. While changing these procedures has been addressed through Bank support in the context of procurement reforms, the rapid implementation of the small municipal rehabilitation works under this project would be significantly facilitated through streamlined procedures in the Operations Manual (OM), which would (i) be based on Bank guidelines, (ii) provide step-by-step instructions from advertising through contract administration, and (iii) include samples of the necessary simplified procurement documents. Corresponding prior review thresholds would be specified in the Loan Agreement. An additional lesson learned in Lebanon is the importance of applying and clarifying rules about the use of ImF resources and promoting an understanding by municipalities of their choices in use of these resources for locally determined investment priorities. Other lessons learned through municipal development projects, especially in the initial stages, - 5-

6 is the need to adapt and simplify objectives taking into account both local capacity and readiness. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues The proposed program would not include subprojects that would negatively impact the environment (such as wastewater networks, slaughter houses and septic tanks cleaning); however, subprojects would be subject to environmental reviews by qualified consultants. A sample of about 200 subprojects consisting of road resurfacing and street light rehabilitation have been appraised by consultants. The reviews of such works confirmed that small subprojects would not contribute to increased traffic volume, and that environmental benefits would be positive due to reduced vehicle emissions resulting from the improved traffic flow. The street lights would contribute to road safety at night and to general safety of people and their property. A review of 2,000 subproject applications screened by consultants also shows that such works consist of small rehabilitation and upgrading of existing municipal roads, street lights, and some road crossings and sidewalks, which would generally improve safety of both pedestrian and vehicular traffic on main roads. The mitigating measures of this group of services, such as proper rights-of-way and prevention of erosion, would be addressed as part of the detailed engineering design for civil works. However, there is a possibility of including subprojects consisting of urgent repairs and improvements to small water supply and sewage collection and disposal facilities, which would be subject to environmental screening and analysis acceptable to the Bank. 11. Contact Point: Task Manager Sonia Hammam The World Bank 1818 H Street, NW Washington D.C Telephone: (202) Fax: (202) For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending March 24,

7 Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID). If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -7-