Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5042 Nigeria Second State Governance and Capacity Building Project

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5042 Nigeria Second State Governance and Capacity Building Project AFRICA Sub-national government administration (95%); Central government administration (5%) P FEDERAL REPUBLIC OF NIGERIA Federal Ministry of Finance IER Department, Finance Building Central Business Area Garki, Abuja Nigeria Tel: (234-09) ; Cell Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 9, 2009 Date of Appraisal September 15, 2009 Authorization Date of Board Approval November 24, Country and Sector Background 1.1 Federal political framework with significant autonomy to states: Nigeria is a federal system and the Constitution assigns significant powers, resources, responsibilities and autonomy to the sub-national levels of government, particularly the state governments. Under the revenue sharing formula currently operating in the country, about 54.68%, 24.72% and 20.60% of federation account revenues are allocated to the federal, state and local tiers of government respectively. Sub-national levels of government thus control close to half of the public purse and the quality of their public expenditure has significant effect, inter alia, on fiscal management, service delivery and poverty reduction in general. 1.2 Social and macroeconomic context: With the return to democratic civilian rule in 1999 and the return to political stability, significant progress has been made in macro-economic and public service reforms, as well as gradual institutionalization of good governance, especially at the federal level. The economy has experienced steady growth, especially in the non-oil sector with average growth rate of about 9 per cent per year in , compared to 2.9% in It is worth noting here that the overall growth rate has decelerated since 2008 due to the global financial crisis and combined with the decline in oil production and drop in oil and other commodity prices. Overall GDP growth declined from an average of 9.1% in to 6.1% in 2008 and projected to decline further to 2.7% and 4% in 2009 and 2010 respectively. With the decline in oil revenues and erosion of foreign reserves the fiscal balance which has been in surplus (about 5% of GDP in 2008) is projected to turn into a deficit of about 11.3% in 2009.

2 1.3 The Challenge of Governance and Public Financial Management: Corruption remains a major problem and worse at the sub-national levels of government, where public financial management systems are generally weak. The implementation of public sector governance reforms has also been relatively slow compared to progress made in More significantly, reforms at the federal level (e.g. procurement, fiscal responsibility and budget reforms) are not automatically applicable to sub-national levels of government; states have to institute their own reforms. Except for a few states (e.g. Lagos, Kano, Kaduna and Cross River State) sub-national levels of government, generally lag behind in reforms. Yet, regardless of Nigeria s federal system, the country has only one economy. The weaknesses in economic, fiscal and public financial management systems at one tier of government naturally impact on whatever efforts or accomplishments the other tier has made. It is also worth noting that even though Nigeria has a vibrant civil society, their capacity to engage government positively on policy and governance reforms and improve demand side governance on issues such as budget, procurement and monitoring and evaluation remains weak. 1.4 To better understand the issues and challenges in governance, especially at the sub national level, a number of analytical works, including state level Public Expenditure Reviews (PERs) and Public Expenditure and Financial Accountability review (PEFA), and Public Expenditure Management and Financial Accountability Review (PEMFARs) have been undertaken in selected states. These studies 1 and a baseline study undertaken for this project highlight a number of challenges and serious vulnerabilities including: (i) low integrity and credibility of the budget; (ii) the budget in most states is not guided by a clear development strategy in the period examined; (iii) inadequate predictability and controls of revenues in the period examined; (iv) Accounting, Recording and Reporting system is generally weak across states, and(vi) there are significant flaws in the scrutiny and follow-up of recommendations of audit reports by the state legislatures. 1.5 A major weakness in the human resource management is that most states do not have any manpower development plans and the civil services lack the capacity to effectively implement government programs. There are also no systems in place that enable linkage between the personnel records and the payroll and most records are kept manually. Reconciliation between the payroll and the personnel records is thus very difficult, with high risk of abuse and ghost workers. The result is a public service with limited professional skills and competence. 2 Objectives 1 See C. Nwoko et al (2008) Anambra State of Nigeria: PFM Performance Measurement, June EU-SRIP and World Bank; (2) Nwoko, C. And Oden, A.(2009) Bayelsa State of Nigeria: Fiscal Performance Analyses ; Taiwo, O. et al (2008) Ekiti State Public Expenditure Review, April 2008; Abubakar, H. & Yaru, M.A. (2009) Niger State Public Expenditure Management and Financial Accountability Review, March 2009; Taiwo, O. et al (2009) Kogi State Public Expenditure Management and Financial Accountability Review, June 2009; Nwoko, C. (2009) Plateau State of Nigeria: Public Expenditure Management and Financial Accountability Review (draft), March See also State Governance and Capacity Building Project II Baseline Assessment Report, 2009.

3 2.1 The project development objective is to improve effectiveness, transparency and quality in public financial management and human resource management systems in the participating states. 3 Rationale for Bank Involvement 3.1. The rationale for Bank involvement under SGCBP II arises from several counts. Firstly, it responds to requests received from several State governments 2 through the Federal Ministry of Finance. Some of these governments have demonstrated their commitment by agreeing to actions plans following PER/PEMFAR analytical work and some are making efforts to implement some of the recommendations. Secondly, and related to the above, while state governments have expended sizeable resources and efforts to improve their governance systems in the past year, the Bank s involvement will bring in wide-ranging international experience and needed technical assistance to the reform efforts of participating state governments Thirdly, the Bank s support will continue the thrust of improving state capacity for public financial and human resource management initiated under the first State Governance and Capacity Building Project (SGCBP) which is currently operating in 3 of the 36 states. Support to states to strengthen their PFM and procurement systems and practices fits in well with the Country Partnership Strategy and plans to introduce state level Development Policy Operations (DPOs). DPOs tend to work better when, inter alia, the overall fiduciary framework is strong enough to ensure funds will be used for intended purposes with less risk. Strengthening the states public expenditure and other governance systems will eventually give confidence to development partners to use country/state own systems with reduced fiduciary risk. Fourthly, the state (and the local government) is the tier of government closest to a greater majority of the citizenry and principally responsible for the delivery of basic services to the population. Therefore, the attainment of Nigeria s poverty reduction objectives and more generally the MDGs largely depends on the quality of public expenditure by state and local governments and their capacity to improve basic service delivery This project is consistent with the development objectives of the current administration s Seven Point Agenda (7PA), Vision , State Economic Empowerment and Development Strategy (SEEDS) and other state development strategies. It also contributes to the higher level objectives expressed in the second Nigeria Country Partnership Strategy (CPS II) of the World Bank, the African Development Bank (AfDB), UK Department for International Development (DfID) and United State Agency for International Development (USAID). Governance is a core theme of CPS II and State Governance and Capacity Building Project (SGCBP) remains the Bank s main instrument to supporting governance reforms and capacity development at the sub-national level. 2 As at August 2009, the following 12 states have made requests for Bank support through the Federal Ministry of Finance: Abia, Anambra, Bayelsa, Edo, Ekiti, Imo, Kebbi, Kogi, Niger, Ondo, Plateau and Yobe.

4 4 Description 4.1.The project will support 4 core states that meet the selection criteria. 4-5 other states will be supported under the state responsive component, based on the ability to meet the criteria, to enable them put in place the basic legal and institutional PFM and procurement structures and processes that will prepare them for a full package of support under the proposed third State Governance and Capacity Building Project in 2012/13. The project is designed around four components: the first three which are core will be implemented in the first four selected states (refereed to here as core states). The fourth component will be used to provide technical assistance support on basic PFM, including fiscal responsibility and procurement to states that did not meet the full criteria for selection. Funding from this component may also be used to provide additional financing for the three states (Bauchi, Cross River and Kaduna) which are currently implementing SGCBP I based on request and need Component 1: Public Financial Management Reforms ($51.7 million) aims to develop and modernize the PFM systems of participating states, with the objective of improving its efficacy and quality in managing public financial resources. To enhance the quality of public expenditure in the states, the component will support fiscal planning and standardization of PFM procedures, processes, and reporting among participating state governments for consistency with the federal government. Activities will include:(a) enactment and implementation of an organic public finance management legislation (including fiscal responsibility legislation); b) strengthening capacity for budget preparation and public investment planning, presentation, implementation and monitoring, (c) improvement in accounting and financial reporting; (d) strengthening internal and external audit and oversight role of the State Houses of Assembly; (e) improving tax administration (f) modernization and implementation of State Integrated Financial Management Information Systems (SIFMIS); (g) public procurement reforms and capacity building; and (h) pilot capacity building for selected local governments as an entry point for engagement with local governments. The component will mainstream independent monitoring into budget, procurement, audit and other PFM activities. These activities are in line with the follow-up action plans that are part of the PEFA/ PERs and PEMFARs undertaken by the potential candidate states. The PFM component will be coordinated with other development partners support in the selected states where applicable (e.g. with EU-SRIP in Anambra state and Yobe states) Component 2: Human Resource Management and Capacity Development ($15.3 million). Diagnostic work undertaken by the Bank and other development partners highlight the depth of human resources capacity and systemic weaknesses that undermine the credibility of PFM, payroll and personnel management systems. They also highlight the fact the wage bill constitute one of the biggest items of government expenditure and subject to weak controls and abuses with negative impact on the quality of public expenditure. The objective of this component will be to provide targeted capacity building to PFM-related ministries, departments and agencies, as well as strengthen training provision and personnel and payroll systems to minimize abuse and redirect potential savings to improve services. Activities include the conduct of a thorough assessment of existing skills and training needs of Ministries, Department and Agencies (MDAs); targeted short to medium term trainings, provision of logistic support, and development of service standards for selected MDAs and modernization of personnel records in the state public service.

5 4.4. Component 3: Monitoring and Evaluation System Development ($9.4 million). In most states M&E is either non-existent or even where they exist the emphasis is on project monitoring. One of the key challenges is how to monitor and measure the outcome of public expenditures, especially in big spending ministries, departments and agencies. This component will help to address these challenges by strengthening the capacity of state governments to effectively allocate resources, development M&E strategies to track outcomes of government programs and improve the quality of service delivery, using evidence generated from regular evaluation of programs. The focus will be on improving the legal and institutional framework for results-based M&E and building the institutional capacity for effective monitoring and management of development outcomes. It will support activities related to (a) diagnosis of existing M&E systems (b) design and implementation of a new M&E system (c) formulation of policies and drafting of enabling regulations (d) training and skills development for staff of State Planning Commissions and MDAs (e) establishment of an M&E secretariat to coordinate M&E activities across the state alongside capacity building and (f) pilot evaluations and service delivery satisfaction surveys for key government programs Component 4: Responsive Support for States ($15 million). Funding from this component will be used for two purposes. First, to provide support to states other than the core states. Support will be limited to strengthening basic PFM and procurement systems. Second, funding from this component will also be used to provide additional financing for the three states (Bauchi, Cross River and Kaduna) currently implementing SGCBP I on need basis. 5 Financing Source: ($m.) BORROWER/RECIPIENT 0 International Development Association (IDA) 110 Total Implementation The SGCBP will be implemented in the selected states but coordinated at both Federal and State levels: (a) Arrangements for Coordination and Support at the Federal Level: The overall Project coordination and technical support to participating states in the implementation of their respective subprojects will be the responsibility of a National Project Coordination Unit (NPCU) located in the Federal Ministry of Finance which will be supported by a technical group of consultants on PFM, HRM and IT. (b) Arrangements for the Project Implementation at State level: Each state will have the primary responsibility for the implementation of the project component activities. Activities will be carried out by beneficiary MDAs according to their respective areas of responsibility. To guide, support and oversee the Activity Executing Agencies (AEAs) in each participating state, there will be: (a) a high level State Project Steering Committee (SPSC) to provide oversight for the project and other governance reforms in the state; (b)

6 a State Technical Committee (STC) made of technical/professional heads of AEAs that will provide technical guidance; and (c) a State Project Coordination Unit (SPCU) that will be responsible for the day-to-day project management and monitoring in the state. It will be headed by a full time Project Coordinator/Manager. (c) Financial Management Arrangements: The Project Financial Management Units (PFMUs) and the Finance and Accounts Department (FAD) of the Federal Ministry of Finance (FMF) which are already in place will be responsible for managing the financial affairs of the project at the state and federal levels respectively. 7 Sustainability 7.1.The project design provides reasonable assurances regarding the sustainability of the activities supported and outcomes expected as shown in the commitment of the respective state governments which is demonstrated as follows: (i) the reforms supported in each of the components feature prominently in the SEEDS and other development strategies of the different states; (ii) the demand for the reforms supported by the project emanated from the states and much of the preparatory work has been carried out by agencies of the state governments; (iii) states have agreed to the action plans resulting from the PER/PEFAs and PEMFARs and some states have already initiated implementation of some activities within their competence; and (iv) the proposed new public management system and policies are relevant to the needs of the states in the medium to long term, particularly as they face increasing development challenges made more critical in the context of recent global financial crisis and its associated declining revenue inflows from federal allocations In spite of the above, one sustainability issue that remains is whether the States will maintain a strong political commitment for reforms throughout the life of the project and beyond given that the electoral cycle of the present state administrations will end in May A mitigating factor is that the governors in all but one of these states are currently doing the first of the constitutional two-term limit provision, though there is no guarantee of reelection. Furthermore, the objective is to start a reform momentum in each of the participating states that will be irreversible by working closely with senior technocrats in each of the states who will provide continuity to the reforms supported by the project. The experience of SGCBP I suggests that any new incoming state administration is likely to continue with the project. 8 Lessons Learned from Past Operations in the Country/Sector 8.1. The Project is a follow up to the State Governance and Capacity Project I which was approved on June 28, 2005, became effective on October 1, 2005 and is scheduled to close in March Owing to implementation difficulties, the project was restructured in November 2007 and experience gained from that exercise has duly guided the design of the new project to improve project implementation: (a) The preparation of SGCBP II adopted a more participatory approach, involving both the Federal Ministry of Finance and state government officials, thereby building sustainable

7 government ownership. The Project components, activities and expected outcomes are designed with due consideration to the implementation capabilities in the States. (b) SGCBP II will strengthen demand side governance by mainstreaming independent monitoring and public involvement in some activities. On the supply side, considering the erosion of the training capacity within the state civil services over the years, the project stresses the need for a well thought through training policy as well as focusing on training locally which is more cost effective. The project will support the rehabilitation of training institutions and development of curricula in key PFM areas in the participating states for sustainability. (c) Based on the experience of SGCBP I, the position of project coordinator will be on full time basis to ensure focus and avoid over-load. (d) To ensure accountability for the expected outcomes and to provide leadership and coordination for implementation of SGCBP II, key activities have been assigned to officials with the technical competence to drive the various components as component champions. 9 Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ X] [ ] Natural Habitats (OP/BP 4.04) [ ] [ ] Pest Management (OP 4.09) [ ] [ ] Physical Cultural Resources (OP/BP 4.11) [ ] [ ] Involuntary Resettlement (OP/BP 4.12) [ ] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [ ] Forests (OP/BP 4.36) [ ] [ ] Safety of Dams (OP/BP 4.37) [ ] [ ] Projects in Disputed Areas (OP/BP 7.60) * [ ] [ ] Projects on International Waterways (OP/BP 7.50) [ ] [ ] 10 List of Factual Technical Documents A. Relating to Project Implementation: Project Implementation Manual Detailed Project Costs Procurement Manual Baseline Study B. Bank Staff Assessment (including ESW): World Bank Nigerian Country Procurement Assessment Review World Bank Nigeria Country Financial Accountability Assessment * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

8 World Bank Nigeria State and Local Governance in Nigeria World Bank Lagos State Financial Accountability Assessment World Bank Lagos State Procurement Assessment Report World Bank/DFID Country Partnership Strategy ( ) World Bank Lagos State Finances Review and Agenda for Action World Bank Nigeria Competitiveness and Growth Country Economic Memorandum (CEM) World Bank Nigeria Fiscal Agenda for Change Public Expenditure Management and Financial Accountability Review (PEMFAR) World Bank/EU Anambra State Public Expenditure and Financial Assessment World Bank Ekiti State Public Expenditure Review World Bank Country Partnership Strategy II ( ) World Bank/AfDB Kogi State Public Expenditure Management and Financial Accountability Review World Bank Niger State Public Expenditure Management and Financial Accountability Review World Bank Bayelsa State Public Expenditure Management and Financial Accountability Review World Bank Plateau State Public Expenditure Review/PEFA World Bank Ondo State Public Expenditure Management and Financial Accountability Review and Integrated Fiduciary Assessment (forthcoming) World Bank Environmental and Social Management Framework (ESMF) C. Other related documents: National Economic Empowerment and Development Strategy (NEEDS) - National Planning Commission Abuja, 2004 Ekiti State Economic Empowerment and Development Strategy (EKSEEDS) 2005 Kogi State Economic Empowerment and Development Strategy (KOSEEDS) 2003 Yobe State Economic Reform Agenda (YOSERA/Yobe SEEDS) Anambra State Integrated Development Strategy (ANIDS) Ondo State Economic Empowerment and Development Strategy (SEEDS) 11 Contact point Contact: George Addo Larbi Title: Senior Public Sector Specialist Tel: / Fax: glarbi@worldbank.org Location: Abuja, Nigeria (IBRD)

9 12 For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: wb C:\Users\wb311812\Documents\WB-Nigeria\SGCBP II\PID\Project Information Document -- Appraisal Stagev1.docx 9/18/2009 4:35:00 PM