FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED GRANT OUT OF NEPAL PUBLIC FINANCIAL MANAGEMENT (PFM) MULTI DONOR TRUST FUND (MDTF)

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1 Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED GRANT OUT OF NEPAL PUBLIC FINANCIAL MANAGEMENT (PFM) MULTI DONOR TRUST FUND (MDTF) IN THE AMOUNT OF US$ 0.87 MILLION TO NEPAL FOR STRENGTHENING CIVIL SOCIETY ORGANIZATION S USE OF SOCIAL ACCOUNTABILITY TO IMPROVE PUBLIC FINANCIAL MANAGEMENT IN NEPAL April 23, 2012 Social Development Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 2011) Currency Unit = Nepalese Rupees US$ 1.00 = NPR FISCAL YEAR FY 2012 ABBREVIATIONS AND ACRONYMS

3 ADB ANSA APM CSO CECI DDC DFGG DP EOP LDO LGAF LGCDP MLD Asian Development Bank Affiliated Network on Social Accountability All Party Mechanism Civil Society Organization Center for International Studies and Cooperation District Development Committee Demand for Good Governance Development Partner End of Project Local Development Officer Local Governance Affiliation Fund Local Government Community Development Program Ministry of Local Development MPM MTEF ORAF PDO PECSA PEFA PFM PRAN RDIF VDC WBI Multi-Party Mechanism Medium Term Expenditure Framework Operational Risk Assessment Framework Project Development Objective Program to Enhance Capacity on Social Accountability Public Expenditure and Financial Accountability Public Financial Management Program for Accountability in Nepal Rights, Democracy and Inclusion Fund Village Development Committee World Bank Institute Regional Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Isabel Guerrero Ellen Goldstein John Henry Stein Maria Correia Bhuvan Bhatnagar

4 NEPAL STRENGTHENING CSOS USE OF SOCIAL ACCOUNTABILITY TO IMPROVE PUBLIC FINANCIAL MANAGEMENT IN NEPAL DATA SHEET SOUTH ASIA SASDS Date: April 23, 2012 Country Director: Ellen Goldstein Sector Director: John Henry Stein Sector Manager: Maria Correia Project ID: TF , Team Leader: Bhuvan Bhatnagar Themes: Public Financial Management, Social Accountability Financing Plan (US$m) Source Local Foreign Total Public Financial Management MDTF (Note There is an additional $.7 million allocation from the MDTF for the Bank- Executed part of the project see Annex-4 for details.) TOTAL Estimated NLTA Disbursements (Bank FY/US$ million) FY Annual Cumulative Project implementation period: Start May End June 30 th, 2014 Expected Effectiveness Date: May 1, 2012 Expected Closing Date: June Does this project depart from the CAS in content or other significant respect? Yes ( ) No ( x ) Does this project require any exceptions from Bank policies? Yes ( ) No ( x ) Have these been approved by Bank management? N/A Is approval for any policy exception sought from the Board N/A Does the project include any critical risks rated substantial or high Yes ( X ) No ( ) Does the project meet the regional criteria for readiness for implementation Yes ( X ) No ( )

5 Project Development Objective: The development objective is to strengthen the transparency, efficiency, and inclusiveness of three specific areas of public financial management (PFM) in 10 districts of Nepal through fostering the use of different social accountability approaches by Nepali CSOs. The three PFM areas are: (a) national budget planning, dissemination, and analysis, (b) local (district, municipal and village) budget planning, dissemination and analysis, and (c) local monitoring of procurement, budget execution and service performance. Project Description: Component 1: Social Accountability in National Budget Preparation, Dissemination and Analysis: This will focus on expanding the transparency, awareness, and participation around national budgeting and financial reporting in Nepal. A total of 4 grants of about $50,000 are expected to be awarded under this component over the 26 month life of the project covering issues such as: (a) capacity building support to Members of Parliament; (b) gender and pro-poor independent budget analysis; (c) budget demystification and outreach through media; and (d) revenue monitoring and analysis by independent think tanks. Component 2: Social Accountability in Local Budget Preparation, Dissemination and Analysis: This will focus on the local budget planning and preparation process in the 10 target districts of the project. About 10 small grants (of approx. $15,000) will be awarded under this component covering activities such as (a) participatory planning and budgeting at the district and village development committee (VDC) and municipality level; (b) capacity building support to VDC/municipality members and district officials; (c) preparation and dissemination of simplified district budget plans; and (d) community radio/media programs around district and local budget issues. Component 3: Social Accountability in Local Procurement, Budget Execution, and Service Performance: The last component will focus on procurement monitoring, tracking of local expenditures, and assessments of the quality of sub-projects and service delivery at the local level in the 10 target districts of the project. About 20 small grants (of approx. $15,000) will be awarded under this component. These will cover activities such as: (a) procurement monitoring and disclosure/dissemination of bid results and awards for local procurements; (b) participatory expenditure tracking of local funds; (c) social audits of local service delivery or infrastructure sub-project investments; and (d) community scorecards on performance (governance and service provision) of VDCs/municipalities and district administrations. Which safeguard policies are triggered, if any? Significant, non-standard conditions, if any? none none

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7 Strengthening CSOs Use of Social Accountability to Improve Public Financial Management in Nepal Contents A. Strategic Context 1 1. Country context 1 2. Sector and institutional context 2 3. Higher level objectives to which the project contributes 6 B. Project Development Objectives 6 1. Project beneficiaries 7 2. PDO level result indicators 8 C. Project Description 9 1. Project financing 9 2. Project components Lessons learned and reflected in project design 12 D. Implementation Institutional arrangements Governance and accountability Results monitoring and evaluation 15 E. Appraisal Summary Institutional Financial management Procurement Sustainability Key risks 17 Annex 1: Results framework 19 Annex 2: ORAF 21 Annex 3: GAAP 24 Annex 4: The Bank executed part of the project 29 Annex 5: The competitive selection process for PRAN partners 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

8 A. Strategic Context A1. Country context 1. Nepal is undergoing a historic transition. In 2006, the opposing sides in the decade-long internal conflict signed a Comprehensive Peace Agreement which established a framework for the peace and reconciliation process and for defining Nepal s future constitutional, political and administrative structure. In 2008, a Constituent Assembly was elected to draft a new Constitution. The Constituent Assembly has transformed Nepal from a monarchy to a republic. In 2012, the new Prime Minister has issued a major action plan for addressing the monumental governance and corruption challenges in the country. 1 If implemented, this has the potential to have a game changing impact in Nepal. A historic socio-political transformation is underway. 2. Alongside these socio-political changes, has been impressive economic and human development. With a per capita income of US $642 (2011); recent living standard surveys show that poverty has declined in Nepal by about 30 per cent over the past 15 years. Despite the past conflict, real GDP growth between 2002 and 2011 averaged 3.8 percent. This growth was achieved in combination with relatively low inflation and stable domestic debt. More remarkable has been its achievements in reducing income poverty and improving social indicators such as life expectancy, fertility control, child mortality, literacy and enrollment rates, which in many cases exceed other countries inside and outside the region as indicated by progress toward meeting the MDG goals for Sustained expenditures on education have helped to increase gross primary enrollment from 66 percent in 2001 to 92 percent in 2009 and is on track for attaining the MDG target of 99 percent in Nepal has already attained the MDG of eliminating gender disparity in primary and secondary enrollment. With the sharp decline in infant mortality from 64 per 1,000 live births in 2001 to 46 in 2011, Nepal is on track to achieve the targeted two-thirds reduction from 1990 levels by Food security has also improved markedly, even for the very poor. 3. However, the forces of sweeping change that have opened opportunities for Nepal also pose challenges for the country. Overall, the political situation remains fluid and changes of government are frequent. The mandate of the Constituent Assembly has been extended four times in order to allow it to complete its work on the new Constitution. The current target for delivery of the new Constitution is May 28, The long period of instability has taken a toll on the people and the economy, leading many Nepalis to seek employment opportunities in other countries. The remittances these workers send home play a crucial role in the Nepal economy. The political instability, delayed conclusion of the peace process, and poor law and order conditions have imposed a high cost on Nepalis with peace dividends so far remaining limited. The business environment remains poor and private sector investment is relatively low despite opportunities in the hydropower, tourism, garment industry, and agriculture sectors. Nepal has therefore not been able to seize fully the opportunity provided by recent political changes. 4. Further, despite Nepal s sustained public spending in key priority areas the incidence of poverty remains high, and there is still serious inequality in the distribution of income. Corruption with its concomitant culture of impunity holds back further development. More importantly, the pursuit of a more equitable development agenda requires improving the ability of poor people to participate more fully in the development process, through access to better quality education, health, water, nutrition and local governance. 1 Good Governance Action Plan, 2012, Prime Minister s Office, Government of Nepal, January

9 5. Governance and accountability therefore underpin the agenda of the Government of Nepal (GoN) for building a new Nepal that is prosperous, peaceful and just. There is still a very long way to go. Strengthening Public Financial Management (PFM) through enhanced social accountability, which is the focus of this project, is a very important part of this journey. A2. Sectoral and Institutional Context Public Financial Management in Nepal 6. The institutional basis of public financial management (PFM) in Nepal is centered on the Ministry of Finance, its Budget Division, and the Financial Comptroller General s Office. A Taxpayer Office, the spending units of central ministries, and other agencies are also a part of the system. At the local level, line agency offices, the District Development Fund, the Village Development Fund, and the District Treasury Control Office play central roles in the PFM system. 7. Nepal continues to face a number of weaknesses in PFM. The 2008 Public Expenditure and Financial Accountability Assessment (PEFA) noted that fiduciary risk was high. Identified shortcomings with regard to the budget include an expansionary budget, very low capital formation, increasing recurrent expenditures, and weaknesses in implementation capacity due to the deteriorating law and order situation and the late approval of plans (World Bank 2010: 19). More specific concerns include: no advance preparation of sectoral target/indicators, budget allocation not linked with sectoral targets and priorities, specific projects included in the budget without a detailed study, and a concentration of capital expenditure at the last trimester of the budget year (NPPR 2009: 23). Monitoring and evaluation are seen to be particularly weak. 8. At the national level, the absence of an Auditor General for almost four years (due to the inability of political parties to agree on a candidate) has worsened already weak oversight mechanisms. Overall, public demand for information on public finances is weak, linked to limited CSO expertise on financial and budgetary analysis. As a result, independent monitoring of the budget at the national level is extremely limited. Relatively little attention has been given to building civil society capacity to monitor public budgets. Some initiatives have included a review of the national budget by the Society for Economic Journalists Nepal in 2006, a training program for CSOs on budget issues by the Citizens Poverty Watch Forum in the same year, and recent calls in the media for enhanced independent budget analysis as a key component of good governance (Bhurtel 2010). All these have been sporadic. More comprehensive analyses have been undertaken by Freedom Forum in the preparation of the Nepal report for the International Open Budget Initiative. However, according to Freedom Forum, the 2006 and 2008 country reports were not made public. This resulted in a lost opportunity to increase public debates on these issues. 9. At the local level, effective PFM, participatory governance and accountability are constrained from the outset by the lack of meaningful decentralization especially fiscal decentralization that has actually taken place, despite public commitments. According to a 2009 ADB assessment, the central government retains a very high decision-making role in public sector spending, with expenditure shares in poorer regions depending on personal influence (ADB 2009a Annex II: 26). According to a governance risk assessment (ADB 2009b), PFM issues in local bodies are characterized by excessive involvement of political parties in the selection and implementation of projects, increasing levels of mismanagement, and a lack of capacity to manage PFM protocols including revenue generation. Budgets were found not to be in line with actual revenue generation, with programs selected according to the support of political leaders and pressure groups despite revenue constraints. The link between 2

10 annual budgets and annual plans was not clear. Furthermore, many budgets were not passed on time. Weak financial management systems were evident in most local bodies, hindering their ability to link capital budgets to a multi-year perspective of project financing in line with periodic plans. 10. Lack of capacity is also a key issue at local levels. For example, the village development committee (VDC) and municipal secretaries have almost identical financial management responsibilities, regardless of size and capacity. These include: maintaining up-to-date accounts and records of income, expenditure, projects and properties; managing expenditures; arranging for audits of accounts and clearance of audit queries; and managing staff (ADB 2010 Annex II: 31). This lack of capacity is also compounded by limited institutional capacity of the Ministry of Local Development (MLD) which is responsible for the oversight of the local bodies. MLD lacks staff, skills, mandates and capacity to both monitor local bodies and implement a rapidly expanding program of activities. For example, even when districts have undertaken internal audits, those reports are rarely reviewed (ADB 2009b: 20). 11. Local bodies appear to follow the Public Procurement Act but weaknesses are evident. These include: a general lack of a proper procurement plans and procurement manuals; a lack of awareness of the new amendments; and no separate procurement units with trained procurement officers (ADB 2009b:27). There is also limited integration of procurement plans into financial management systems at the local level. Many problems related to transparency and corruption in procurement are apparent: (i) the ratio of bids submitted to documents distributed is very low, usually with submissions just meeting mandatory requirements; (ii) collusion is rampant with successful bids very close to the budgetary provisions; (iii) the practice of technical audits is nominal and there is very little monitoring of procurement; (iv) threats, intimidation, and extortion are common practices; and (v) bribes and corruption are accepted and taken for granted (ADB 2009b: 27). The Public Procurement Act of 2007 provides for blacklisting violators, but enforcement is weak. 12. The Government has recently dropped the All-Party Mechanism (APM) for oversight of district governments, including of their budgets, expenditures and service provision, since it is universally seen as corrupt and largely ineffective. This change may be positive, but it leaves an important governance and oversight vacuum at the local level which may need to be filled in the short term partly by civic engagement. The Role of Civil Society Organizations (CSOs) As the above description suggests, weaknesses prevail at both the national and local level in the overall PFM system. The Government of Nepal (GoN) has therefore initiated a range of supply-side reforms to address these, which include the following: 3 (a) Improvements in budgeting and implementing the Medium Term Expenditure Framework (MTEF) (b) The enactment of a new Public Procurement Act (c) The assessment of the Public Financial Management Performance Measurement Framework (PFMPMF) 2 The term CSO refers to not-for-profit, non-state organizations concerned with development. CBOs (communitybased organizations) refer to those at the community level, and NGOs (non-government organizations) refers to those operating at a larger (regional or national) level. CSOs can include professional associations, policy research and advocacy centers (think tanks) or independent media associations. 3 The World Bank also has two projects to support PFM reform funded under the PFM Multi-Donor Trust Fund. These are for (a) Strengthening the Office of the Auditor General and (b) Strengthening Public Financial Management Systems, Financial Reporting, and PFM Capacity Building. 3

11 (d) Improvement in financial MIS systems (e) The introduction of a Treasury Single Account (TSA) system for government payment and receipts processing to improve cash management (f) The adoption and implementation of National Public Sector Accounting Standards (NPSAS); and (g) The creation of a PFM Secretariat (PEFA) to coordinate the implementation of the PFM reform program. 14. There is recognition in the GoN that beyond these supply-side measures, sustainable improvement in PFM requires complementary demand-side efforts in the form of social accountability initiatives undertaken by CSOs. These include such mechanisms as participatory budgeting, independent budget analysis, procurement monitoring and PETS (public expenditure tracking surveys). These mechanisms use participatory and evidence-based approaches to point out to government what they said they would do, what entitlements have been agreed, and where these agreements have not been honored. Global evidence suggests that these demand side efforts can significantly complement efforts on the supply-side and enhance the effectiveness of PFM reforms While there is great scope for such techniques to be used widely in Nepal, this has not happened to date. This is in large part driven by weaknesses in civil society such as: (a) fragmentation and weak institutional coordination of CSOs; (b) politicization through cooption by and links to political parties and special interest groups; (c) non-existent or ineffectual links with state bodies; (d) weak internal governance accountability systems in CSOs; and (e) financial dependence on donors which distorts incentives and undermines legitimacy. In general, CSOs in Nepal have elected to work at the district and village level, and have developed expertise and experience at that level. There are not many CSOs which operate at the national or policy level, and those that do are more research organizations or think tanks rather than membership organizations with a solid constituency. 16. The Government of Nepal has passed and promulgated many strategies, acts and policies promoting social accountability (e.g. the 2012 Good Governance Action Plan, the 2008 Good Governance Act, the 2007 Right to Information Act, the 2001 Self-Governance Act) which have resulted in the prolific use of public audits, social audits, and public hearings. In general, however, these have not been implemented or have not been able to spur the expected demand-side action. A good example is the Right to Information Law, passed four years ago, and very relevant to CSOs intentions of improving PFM, particularly by accessing district and village budgets. In reality, the law has remained largely unused, and the information officers who would implement it have not been appointed, particularly in rural areas. The GoN has also conducted several public expenditure tracking exercises in key sectors and reviewed social accountability tools that engage civil society, while the Administrative Staff College s curricula already include social accountability training to prepare public officials to respond constructively to CSO initiatives. 17. Given the donor-dependent nature of NGOs and civil society organizations, the lack of historical attention by donors to civil society oversight of budgetary concerns is both an obstacle and an opportunity. Some initiatives have started recently. For example, WaterAid Nepal, based on its experience with budget advocacy, has recently produced a budget primer to equip civil society advocates with basic practical tools for budget analysis and engaging in the four phases of the budget cycle. While intended for those working in the water and sanitation sector, the primer is relevant to the 4 See J. Ackerman, State-Society Synergy for Accountability: Lessons for the World Bank, World Bank Working Paper No. 30, April 2004; and Social Accountability and the Public Sector, Social Development Paper No. 82, World Bank,

12 larger audience of civil society advocates working with communities (WaterAid 2010). Another example is the Nepal Policy Research Network that is supported by The Asia Foundation. Select INGOs and Development Partners (DPs) (especially Action Aid, SDC, DFID, and DANIDA-Hugou) have also actively supported social accountability work at the local level. The Nepali CSO, Pro-Public, has been an important actor in this field. Given the almost total financial reliance of CSOs on DPs, however, notable and worthwhile innovations in social accountability have often lasted only as long as the funds continued, and their momentum has ceased when funding ended. The scope to enhance and institutionalize the role of civil society in strengthening PFM through social accountability remains significant. The Program for Accountability in Nepal (PRAN) 18. Recognizing the need to build the capacity of civil society to undertake social accountability measures to strengthen governance, the World Bank agreed with the GoN to launch the Program for Accountability in Nepal (PRAN) in PRAN is a three year, $3m Trust Fund project of the World Bank in Nepal supported by the State and Peace Building Trust Fund. It aims to strengthen social accountability in Nepal by providing grants to CSOs, complemented by practical training, action learning, and networking opportunities aimed at developing the capacity of civil society and (where possible) government actors working with CSOs to promote social accountability. The logic behind PRAN is that training and mentoring in social accountability will allow CSOs to design practical programs, for which they can apply for PRAN grants. SA resources and networking with other CSOs addressing similar challenges will give the new activists important support. In this way a mutually reinforcing capacity building loop around social accountability can be developed. 19. Institutionally, PRAN is managed by the World Bank through a small Project Coordination Unit (PCU) housed in the Nepal Country Office. The implementation of its activities has been outsourced to four competitively selected CSO partner organizations. These are: (a) (b) (c) (d) Pro-Public, which manages capacity building and training work; Center for International Studies and Cooperation (CECI), which manages PRAN s competitive grant-making facility; South Asia Partnership (SAP)-Nepal, a network CSO that implements the program s networking and mentoring/coaching activities; and Total Management Services (TMS) which is in charge of the monitoring and evaluation (M&E) of the whole program. 20. Since its launch, PRAN has undertaken a range of activities including: five regional workshops (with participants from 43 districts) attended by 320 CSOs; three study tours to India, Bangladesh and Thailand; community scorecards for health in 4 districts; and 30 grants to CSOs for social accountability work. 5 PRAN has also established social accountability resource centers in each of the five development regions of Nepal with the support of local CSO networks in order to strengthen grassroots capacity and networking around social accountability. 21. PRAN has been working with related CSO programs by other donors such as: (a) the Local Governance and Community Development Program (LGCDP), (b) the Local Governance and Accountability Facility (LGAF), (c) the Rights Democracy and Inclusion Fund (RDIF), (d) the 5 PRAN has already begun work on PFM as it was one of its original priority themes. This has included symposia to introduce CSOs to different social accountability tools that can be applied in a PFM context. Some of the grants administered by PRAN in its initial round of funding have also focused on PFM-related initiatives. 5

13 European Instrument for Democracy and Human Rights (EIDHR), and (e) the Non-state Actors in Development Program (NSA). PRAN has, in collaboration with these bodies, initiated and maintained a mechanism for coordination between them, and published a brochure to clarify their different approaches to CSOs so that it can create synergy and enhance the effectiveness of its work across Nepal. 22. The proposed project is aimed at establishing a targeted and enhanced demand-side PFM initiative within the overall PRAN program. It will contain two parts one that will be recipient-executed by CECI (for competitive grant-making to finance social accountability initiatives in specific PFM themes) and a second Bank-executed part (for supporting capacity building functions). The proposed project thus follows the execution arrangements of PRAN which have been judged by a recent mid-term evaluation as fit for the purpose. 6 Retaining the same institutional architecture as PRAN will build on its accumulated institutional knowledge and experience and also ensure swift implementation of the MDTF program without high start up costs or delays. It will also allow subsidization of management and other costs. 23. While the current project paper is meant only for the recipient-executed part, the description of the project provided refers to the overall PFM program envisaged under PRAN. A3. Higher level objectives to which the project contributes 24. The project will develop the competence and capacity of CSOs in Nepal to make sure that Nepal s public finances are used effectively to promote development and fight poverty. By focusing on social accountability and the role of the demand-side of governance, it aims to empower Nepali citizens, particularly in rural areas, to have greater voice in decision making on PFM issues. The program will contribute to the Government s 9 th Plan which accords a key role to civil society in planning and implementing the development strategy, and the Government s 2008 Public Expenditure and Financial Accountability Assessment (PEFA). The project will also help the GoN to realize the goals of the Governance Act and the Right to Information Act which affirm the importance of government accountability and constructive citizen-state interaction using publicly available information. The project is also well aligned with GoN s three year interim plan which lists participatory monitoring as one of the three pillars of the Government s poverty monitoring. It will promote the social accountability principles and approaches which are outlined in the Prime Minister s recently issued strategy on governance and anti-corruption. Finally, it contributes to the Cross Cutting Theme 1: Strengthening Governance and Accountability that is part of the World Bank Interim Strategy Note of B. Project Development Objectives 25. The development objective of the current project is to strengthen the transparency, efficiency, and inclusiveness of three specific areas of public financial management (PFM) in 10 districts of Nepal through fostering the use of different social accountability tools by Nepali CSOs. The three PFM areas and the corresponding results indicators that will be focused on are (more detailed results indicators are in Annex-1): a. Budget preparation, dissemination, and analysis at the national level Enhanced capacity and awareness of budget preparation and analysis among Parliamentarians Greater analysis and awareness of gender and pro-poor content of national budget 6 PRAN, Draft Independent Mid-Term Review Report, John Clark, February 24,

14 b. Budget preparation, dissemination, and analysis at the local (district, municipal and village) level Increased citizen and civil society participation in local budget planning Increased awareness of local budget among ordinary citizens c. Monitoring of procurement, budget execution, and service performance at the local level Increased participation in monitoring of local procurement Improvement in service performance and asset quality Decreased leakages and inefficiencies in expenditures at the local level 26. Focusing the scope of the proposed project to specific PFM areas will provide a likelihood of greater impact and effective use of the limited financial and human resources available, rather than an open-ended thousand flowers bloom approach. These specific themes were selected for the following reasons. First is need. As noted in previous sections, there are inherent weaknesses in terms of transparency, participation and accountability in these areas that could be meaningfully addressed through social accountability initiatives. Second is capacity. While there is generally little CSO engagement in PFM, as noted earlier, engagement at the local level is higher and there exists some capacity of national think tanks and research agencies for independent budget analysis and dissemination. Therefore a concentrated focus on the local level could hold far more potential for impact. Third, each of these three areas have supporting strategies and legislation (e.g. Good Governance Action Plan, 2012; Good Governance Act, 2008) that provides both the mandate and a conducive enabling environment in which to institutionalize social accountability. Finally, each of these themes allow for linkage to Bank operations as there are initiatives such as the Strengthening Public Financial Management Systems (Treasury System, Financial Reporting, and PFM Capacity Building) project, the Strengthening the Office of the Auditor General Project, PEFA Secretariat support, and the Nepal Emerging Towns Project operating at the national and local levels on PFM related issues respectively. 27. The promotion of social accountability initiatives in each of these three themes will be achieved through competitive mid-sized grants to CSOs that will be undertaken through the Grant-Making facility of PRAN that is managed by the Center for International Studies and Cooperation (CECI), who will be the recipient of part of the MDTF Grant. Supporting the grant-financed initiatives will be a range of capacity building activities including training, networking, mentoring and coaching by both national and international social accountability practitioners. These will be provided through three other partners that form part of PRAN and financed through the Bank-executed portion of the MDTF grant (see Annex-4 for details on these supporting capacity building activities). Global experience with social accountability indicates that while grant-making is important for action learning, it is not sufficient by itself. CSOs in Nepal have confirmed the additional need for capacity building, knowledge and networking services to make these grants effective. B1. Project Beneficiaries 28. The PRAN program operates in 42 districts spanning five development regions of Nepal. These were selected based on geographic dispersion, caste and ethnicity distribution, human development index of the district, as well as the minimum conditions and performance measurement assessment of the local bodies. 7 For the proposed PFM program, the intention is to focus the geographic spread of the local PFM theme implementation to 10 districts. These will be selected using a range of objective criteria such as was applied for the broader cohort of 42. However, the possibility of random selection is also being discussed with the M&E partner TMS. Either way, the intention from a monitoring and evaluation (M&E) 7 For further details see Setting the Scene for PRAN booklet, World Bank and Pro Public,

15 standpoint is to be able to draw comparisons with a similar control group of districts to see if the changes in target districts are significant relative to others at the end of the project. Furthermore, by reducing the geographic coverage of the program, one can enable greater economies of scale and synergy in terms of not only the social accountability initiatives undertaken in these regions, but also the capacity building and networking support that will be provided by PRAN. 29. The population in these selected 10 districts will be the primary beneficiary of the proposed project as they are expected to have access to better information on, and greater voice in, budget preparation and execution at the local level through the social accountability initiatives that will be financed in these areas. They are also expected to benefit over time through better service delivery and reduced leakage of public resources. 30. At the same time, the general population of Nepal, particularly in Kathmandu, is expected to benefit from the national level social accountability initiatives that will be financed under the first theme of the project. This, in particular, will include women and vulnerable groups who through more targeted budget analysis and awareness may see enhanced or more efficient allocations and use of public funds to programs that support their development. It will also include Members of Parliament who will receive capacity building support to better undertake budget preparation and budget execution monitoring roles. 31. CSOs at both the local and national level that will receive capacity building and grant-financing support through the project are the other beneficiaries of the project. This will include the 35 or so CSOs who be awarded grants from CECI to undertake social accountability initiatives under the above three PFM themes. It will also include a range of other CSOs who will receive capacity building support on the chosen PFM themes through the Bank-executed segment of the MDTF grant. They will come from a universe of approximately 300 CSOs from all over the country which PRAN has identified as being the targets of its work at the district and village level. These CSO vary greatly with some having a very limited operational area, while others are federations of associations which are nationwide (e.g. FECAFUN and FEDWASUN). 8 B2. PDO Level Result Indicators 32. The following table provides the PDO level results outcomes and indicators, while Annex1 contains a more detailed results framework for the project. As noted, since the geographic targeting of the project will include 10 districts, possibly through random selection, it will allow for a control group of districts to be identified and compared with when measuring the values of several of the indicators at the local level. A baseline and end-of-project survey covering both target and control districts will be undertaken to help with this evaluation. 9 Project development Objectives The development objective is to strengthen the transparency, efficiency, and inclusiveness of three specific areas of public Project outcomes 1. Budget preparation, dissemination, and analysis at the National level Enhanced capacity and awareness of budget matters among Parliamentarians Project Outcome indicators Percent of MPs noting increased budget awareness and capacity for analysis by end of project 8 FECAFUN and FEDWASUN refer to the Federation of Community Forest Users in Nepal and the Federation of Drinking Water and Sanitation Users in Nepal respectively. 9 The PRAN program s existing M&E system, which is managed through the CSO partner TMS, will be utilized to administer these surveys. The baseline survey will be undertaken within 3 months of approval of the grant. 8

16 financial management (PFM) in 10 districts of Nepal through fostering the use of different social accountability approaches by Nepali CSOs. Greater analysis and awareness of gender and pro-poor content of national budget 2. Budget preparation, dissemination, and analysis at the Local (district, municipal and village) level Increased citizen and civil society participation in local budget planning Increased awareness of local budget among ordinary citizens 3. Monitoring of procurement, budget execution, and service performance at the Local level Increased participation in monitoring of local procurement Improvement in service performance and asset quality Decreased leakages and inefficiencies in expenditures at the local level Number of actions to enhance gender and pro-poor content of budgets as a result of independent analysis by CSOs Percent of citizens/civil society representatives that participated in local budget planning process in target districts Percent of citizens in target districts aware of local budget Percent of procurement transactions in target districts that are monitored by CSOs/third parties Percent of citizens in target districts noting improvement in service delivery and quality of infrastructure created by local government Percent leakage of public expenditure as measured through social audits in target districts C. Project Description C1. Project Financing 33. The project will be financed by a grant from the Multi Donor Trust Fund (MDTF) which has recently been set up for PFM activities in Nepal. The World Bank is taking the lead in coordinating donor support for the PFM agenda in view of its experience in designing and supporting implementation of PEFA reforms, working with key institutions of accountability, and engaging CSOs to strengthen oversight by citizens. This project will complement the supply side projects being supported by the MDTF in the areas of strengthening the PFM systems and the independent audit function of the Government, as well as other operations of the Government, Bank and donor partners which promote and support budget planning and financial management. See Section E 4 on Sustainability for more information on how links will be strengthened between demand and supply side work through this grant. 34. As noted earlier, the project consists of a Recipient Executed part (for $.8 million) that is being described in this paper and which will finance the actual social accountability grants to CSOs. In addition, there is the Bank-Executed part ($.7 million), which will finance the supporting capacity building activities that are further described in Annex-4. The total financing from the MDTF is therefore $1.5 million. Grant Financing Requests will be prepared for both the Recipient Executed and Bank Executed parts of the project. The Project Costs are summarized in Table 1. 9

17 Table 1 Project Cost and Financing (Recipient Executed) Component and Outputs Component 1: Social Accountability in National budget preparation, dissemination and analysis - 4 Grants of approx. $50k - Administrative and management costs Grant Financing through MDTF USD 2012 USD 2013 $150,000 $20,000 USD 2014 $50,000 $20,000 Recipient Executed (CECI) $200,000 $40,000 Component 2: Social Accountability in Local budget preparation, dissemination and analysis - 10 Grants of approx. $15k - Administrative and management costs 10 $15,000 $5,000 $90,000 $30,000 $45,000 $15,000 $150,000 $50,000 Component 3: Social Accountability in Local procurement, expenditure and service monitoring - 20 Grants of approx. 15k - Administrative and management costs $45,000 $10,000 $180,000 $30,000 $75,000 $20,000 $300,000 $70,000 Total $75,000 $500,000 $225,000 $800,000 Grand Total $800,000 C2. Project Components 35. The project components described below have been set around the three PFM themes that are the focus. For each of these components, there are two main clusters of activities: (a) Competitive Social Accountability Grants (Recipient-executed) The financing of the social accountability initiatives in each component will be done through PRAN s Competitive Grant- Making mechanism that is managed by CECI. This will be covered in the Recipient-Executed part of the MDTF grant. The choice of going through a competitive grant-making process rather than simply preselecting specific CSOs to undertake fixed activities through directed grants with fixed terms of reference has at least four advantages. First, the competitive process will likely foster better quality CSO proposals to engage in each of the three PFM themes. Second, allowing 10 It is expected that these costs will be higher for local level grants as compared to national grants for reasons of location and capacity. In addition, there will be some cross subsidization between Component 2 and 3 in terms of administering and managing local grants. 10

18 CSOs to prepare their own proposals instead of preparing terms of reference in advance will inculcate greater ownership and commitment among the CSOs. Third, there is a greater likelihood of innovations and home-grown solutions. Finally, one has the possibility for greater outreach and coverage of CSOs through competitive grants, since it will piggyback on the existing PRAN grant facility that already has national coverage. Going the route of directed grants to preselected CSOs, while perhaps more certain in terms of activities to be covered by the predetermined selection, sacrifices the advantages of the more demand driven approach that has been the hallmark of the PRAN program. (b) Supporting capacity building activities (Bank-executed) A range of capacity building activities will be implemented around the social accountability grants that will be routed through the Bank-executed portion of the MDTF grant. This will include training of trainers, organizing workshops and symposia for practitioners, on-the-job training, specialized training of targeted constituencies, learning trips, coaching and mentoring, knowledge management and networking, as well as the monitoring and evaluation and technical assistance to inform the program. Emphasis will be given to linkages with the key government agencies, particularly the PEFA Secretariat, the Office of the Auditor General, and their involvement in training initiatives. The overall project management of the PFM program through the PRAN Program Coordination Unit is also included here. The types of specific activities that will be undertaken in each component are outlined below, but a more detailed description can be found in Annex Given the above, two main clusters of activities, the three components of the project are as follows: 37. Component 1: Social Accountability in National Budget Preparation, Dissemination and Analysis. The first component of the project will focus on expanding transparency, awareness, and participation around national budgeting and financial reporting in Nepal. Four grants of about $50,000 each are expected to be awarded under this theme over the 26 month life of the project. Competitive grants will be solicited to cover activities such as: (a) Capacity building and technical assistance for Members of Parliament on understanding the budget process, including financial reporting (b) Gender and pro-poor independent budget analysis (c) Budget demystification and outreach through the media; and (d) Revenue monitoring and analysis by independent think tanks. 38. The Bank-executed capacity building support will include training to CSOs on working with Parliamentarians, specialized technical training on independent budget analysis, mentoring and coaching assistance from international CSOs (e.g. International Budget Project USA, Center for Budget Governance, etc.), and financial reporting and budget literacy training for journalists (see Annex 4). 39. Component 2: Social Accountability in Local Budget Preparation, Dissemination and Analysis. The second component of the project will focus on the local budget planning and preparation process in the 10 target districts of the project. Building on existing experiences of local CSOs and the mandated areas of transparency, accountability, and participation that are built into local PFM, about 10 small grants (of approximately $15,000) will be awarded under this component. The competitive grants will cover activities such as: (a) Supporting participatory planning and budgeting at the district and village development committee (VDC) and municipality level (b) Capacity building support to VDC/municipality members and district officials on budget planning and analysis (c) Preparation and dissemination of simplified district budget plans 11

19 (d) Community radio/media programs around district and local budget issues 40. The Bank-executed capacity building support under this component will include training to CSOs on participatory planning and budgeting at the local level, networking support for local CSOs working on participatory planning, development of simplified manuals and literature on local budget planning, training of local media, etc Component 3: Social Accountability in Local Procurement, Budget Execution, and Service Performance. The third component of the project will focus on procurement monitoring, tracking of local expenditures, and assessments of the quality of subprojects and service delivery at the local level in the 10 target districts of the project. About 20 small grants (of approximately $15,000) will be awarded under this component. The competitive grants will cover activities such as: (a) Procurement monitoring and disclosure/dissemination of bid results and awards for local procurements (b) Participatory expenditure tracking of local funds (c) Social audits of local service delivery or infrastructure sub-project investments (d) Community scorecards on performance (governance and service provision) of VDCs/municipalities and district administrations 42. The Bank-executed capacity building support under this component will include training on tools such as social audits, community scorecards, participatory expenditure tracking, etc.; development of simplified manuals and literature on these tools; mentoring and coaching around these social accountability initiatives; and support to networks of CSOs working on participatory procurement, service delivery, and expenditure monitoring. C3. Lessons Learned and Reflected in Project Design 43. The following are some of the key lessons that have been reflected in this proposed PFM MDTF initiative under PRAN, as well as some of the lessons and design features that are part of the PRAN program design as a whole: 12 Focusing on specific themes An important lesson from social accountability initiatives globally is that having a sectoral focus to this work ensures more effectiveness by concentrating interventions, training, and networking support. This is why PRAN itself focuses only on three themes PFM, municipal governance, and public service delivery. In the case of this MDTF project, this has been taken a step further by focusing the program on only three specific themes within PFM which are outlined in the components above. This way greater synergy in initiatives can be fostered. Narrowing the geographic scope Related to above, in the context of a small-scale grant program, it is much more effective to narrow down the geographic scope of interventions (specifically the local ones). This allows for a much greater likelihood of impact and reinforcement of different initiatives (e.g., participatory planning coupled with social audits) which would not be possible if the project was spread thinner to cover more districts. The MDTF program is therefore only focusing on 10 districts. 11 PRAN has already identified 20 social accountability tools for its programs as a whole, and those which are specifically relevant to PFM are the ones which will be chosen for the implementation of this project. 12 At the time of writing the PRAN has been operational in Nepal since July 2010 while CECI has been setting up grant-making procedures since Feb 2011 and making grants since August The Mid-Term Review (MTR) for PRAN was conducted in Jan-Feb

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