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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Water and Urban Unit Eastern and Southern Africa Africa Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT ONA LOAN IN THE AMOUNT OF US$80 MILLION TO THE REPUBLIC OF ZIMBABWE FOR THE URBAN SECTOR AND REGIONAL DEVELOPMENT (URBAN II) PROJECT (Loan ZIM) June 23, 2000 Report No: 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 March 2000) Currency Unit = Zimbabwe Dollar (Z$) Z$1.00 = US$ 0.03 US$ 1.00 = FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS CAS ERR FPP GDLF GoZ IBRD ICB ICR LAs LCB LGCDP MLGNH MLGRUD MPCNH NDF NGO NHF NORAD OED PCMU PSIP SIDA USAID Country Assistance Strategy Economic Rate of Return Financial Performance Plans General Development Loans Fund Government of Zimbabwe International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion Report Local Authorities Local Competitive Bidding Local Government Capital Development Project Ministry of Local Government and National Housing Ministry of Local Government, Rural and Urban Development Ministry of Public Construction and National Housing Nordic Development Fund Non-Governmental Organization National Housing Fund Norwegian Agency for Development Cooperation Operational Evaluation Department Program Coordination and Monitoring Unit Public Sector Investment Program Swedish International Development Authority US Agency for International Development Vice President: Callisto E. Madavo Country Director: Barbara Kafka Sector Manager: Jeffrey S. Racki Task Team Leader: James F. Hicks

3 FOR OFFICIAL USE ONLY CONTENTS Page No. 1. Project Data Principal Performance Ratings Assessment of Development Objective and Design, and of Quality at Entry Achievement of Objective and Outputs Major Factors Affecting Implementation and Outcome I 1 6. Sustainability Bank and Borrower Performance Lessons Learned Partner Comments Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents Annex 8. Borrower's Contribution to ICR Map: IBRD #21400R 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.

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5 Project ID: P Team Leader: James F. Hicks Project Name: Zimbabwe Urban Sector and Regional Development (Urban II) Project TL Unit: AFTU1 ICR Type: Core ICR Report Date: June 23, Project Data Name: Zimbabwe Urban Sector and Regional Development (Urban II) Project Country/Department: AFC03 Sector/subsector: Urban Development L/C Number: Loan 3079 ZIM Region: Africa KEY DATES Original Revised/Actual PCD: None Effective: 01/29/91 Appraisal: 11/88 MTR: l Approval: 06/01/89 Closing: December 31, 1996 December 31, 1999 Borrower/Implementing Agency: Other Partners: Government of Zimbabwe/Formally Ministry of Local Government, Rural and Urban Development (MLGRUD) and Ministry of Public Construction and National Housing (MPCNH). Ministries merged into Ministry of Local Government and National Housing (MLGNH) in Nordic Development Fund (NDF); Norwegian Agency for Development Cooperation (NORAD); United States Agency for International Development (U.S.AID) Although there was no specific requirement in the Loan Agreementfor a mid-term review, twice -yearly implementation review missions were held, and the mission of June 1994 addressed, with Government, the need to restructure the project due to the macroeconomic environment that had significantly reduced the availability of Central Governmentfunds to Local Authorities. The follow-up mission in October 1994further addressed these issues, and there was a subsequent restructuring of the project.

6 STAFF Current At Appraisal Vice President: Callisto Madavo Edward V.K. Jaycox Country Manager: Barbara Kafka Sven Sandstrom Sector Manager: Jeffrey S. Racki Isaac Sam Team Leader at ICR: James F. Hicks Jeffrey S. Racki ICR Primary Author: Christopher J. Banes 2. Principal Performance Ratings (S=Satisfactory, HS=Highly Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: HS Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: N/A Rapid Supervision Assessment: Satisfactory Satisfactory Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: (i) Provide support to urban areas to supply the additional services required to cope with rapid population growth: (ii) Strengthen the appraisal capacity of central and local government to determine the most rational and cost effective alternative investments in urban areas: (iii) Ensure the continued financial self-sufficiency of the local authorities: (iv) Improve maintenance to protect the capital assets of the local authorities: (v) Strengthen the human resource capacity of the local authorities: (vi) Maximize the role of private sector investors in urban housing: (vii) Assist with development of regional program focused on the smaller towns and rural growth points. 2

7 3.2 Revised Objective: Objective (vii) was revised at GOZ's request to focus on development of demonstration industrial "incubator" sites for indigenous, small scale enterprises in four urban councils of varying size (Bulawayo, Chitungwiza, Marondera and Rusape). The Loan Agreement was not amended to reflect the modified objective with regard to the design and implementation of regional development programs. This was because the description of the objectives in the SAR was deemed to be sufficiently broad such as not to warrant any formal change to the relevant project objective. 3.3 Original Components: The project was structured as a "sector" project with financing of the two main sub-components, primary infrastructure and urban housing related infrastructure (about 86% of the project at appraisal), through two sub-sector loans to the General Development Loans Fund (GDLF) and the National Housing Fund (NHF), available for all urban councils that met basic financial and management eligibility criteria. The sub-sector loans were to finance the foreign exchange costs of a time-slice of the Public Sector Investment Program (PSIP). Government was to appraise, issue borrowing powers and provide financing for individual projects put forward by the urban councils that successfully met established appraisal criteria. The project had a total of four components namely: (i) Primary Infrastructure (ii) Infrastructure for Servicing Residential Land (iii) Regional Development Program, and (iv) Strengthening Institutional Capacity 3.3 Revised Components: Not applicable. 3.4 Quality at Entry: (i) At the time of appraisal the Bank had no Country Assistance Strategy (CAS). However, the project supported the Government's program to decentralize and empower local communities by strengthening the capacity of local government bodies to sustainably manage economic and social development and by providing resources to relieve constraints in local infrastructure and services. This is consistent with the current CAS (see the Zimbabwe CAS dated May 1, 1997, para. 57-Report No ZIM). (ii) At the time of appraisal the Bank had no specific safeguard policies with regard to such matters as environmental assessment and involuntary resettlement. However given the fairly stringent requirements that already existed in Zimbabwe at the time of appraisal, particularly regarding water abstraction and wastewater disposal, and given Zimbabwe's water-scarce environment, the project's investment components had to, and did, meet such requirements. There was no involuntary resettlement in the project. 3

8 (iii) The design of the project (a sector project), albeit ambitious, was sound. Bank preparation missions worked with the Ministry of Local Government and National Housing (MLGNH, previously two ministries) to develop databases and modalities for preparing development plans and financial performance improvement plans, as well as detailed implementation criteria and arrangements. Working with the Program Coordination and Monitoring Unit (formed under the First Urban Development Project and reporting to an inter-ministerial Steering Committee), the Bank team was able to contribute to project design support for a more rigorous appraisal of municipal infrastructure investment proposals and close monitoring of investment implementation. Strengthening of the human resource capacity of Local Authorities (LAs) through training to enable them to provide more efficient infrastructure and service delivery, and support for greater involvement of the private sector in housing delivery were important objectives of the project. The private housing finance institutions (i.e. Building Societies) were built into the project's design. To address concerns regarding employment and development outside of the larger cities and towns, the regional development component was included. (iv) Considering that (a) the project required restructuring (disbursement percentages were increased twice, primarily because of GOZ financial constraints, which also had the effect of slowing progress, as the pace of implementation generally depended on the release of government counterpart loan funds to LAs) and (b) the macroeconomic climate has continued to worsen over the more recent years of the project, then perhaps the assumptions regarding the macroeconomic future of Zimbabwe were too optimistic at appraisal, or the possible risks of poor macro fundamentals were not adequately identified. 4. Achievement of Objective and Outputs 4. 1 Outcome/achievement of objectives: The project is considered satisfactory in the achievement of most of its seven objectives. (i) Cities and towns (21 urban councils) have benefited from the development of primary infrastructure (over 200 schemes for road rehabilitation/provision, water supply, sewerage and sewage treatment have been completed), urban services have been stabilized and improved and to date in the order of 30,000 stands for low and middle-income housing have been provided, all to cope with increasing urban population growth. (ii) Project appraisal processes and capacity, both in MLGNH and the participating councils (21 of the 23 urban councils), have been strengthened through the adoption of more rigorous appraisal procedures. (iii) Financial and technical management processes have been strengthened and many urban councils are now planning strategically, linking urban council operational plans and financial performance plans and including statements of vision, mission and objectives. The financial viability of councils had been preserved, and in some cases improved, during a period of currency devaluation, high inflation and high interest rates. However in 1996 central 4

9 government placed responsibility for provision of primary health care and education delivery responsibilities on to local government without providing concomitant funding and this, and the general, more recent, rapidly deteriorating economic/financial situation in the country is now undermining earlier gains made. (iv) Provision of plant and equipment and initiatives, albeit limited, to involve the private sector in operation and maintenance of some municipal services (e.g. water supply in Gweru, refuse collection in Harare) has improved maintenance of services and capital assets in the urban councils. (v) The human resource capacity of the urban councils has been strengthened through a manpower development program that included technical assistance and training. Investment programming, project appraisal, financial management and urban service operation and maintenance requirements were all initiatives financed under the project using the NDF funds. Active fora of Town Engineers and Town Treasurers assisted in the institutional development program. (vi) Through (a) early support to building societies, (b) the support for expanding housing infrastructure and (c) support for the survey and registration of housing stands, the project assisted in enhancing the role of the private sector in urban housing for the lower income households. (vii) This final objective that was to assist with the development of regional development programs focused on smaller towns and rural growth centers (a relatively minor objective for this comparatively small component of the project) was revised, at the request of government, in order to assist with the development of demonstration incubator industrial sites aimed at "indigenous" small-scale entrepreneurs in four towns of varying size. This revised objective was also satisfactorily achieved. 4.2 Outputs by components: Primary Urban Infrastructure The primary infrastructure component has been implemented satisfactorily. For a period of almost ten years the Project has supported government loans to the urban councils (through the General Development Loans Fund) for the implementation of the bulk of their respective municipal infrastructure capital works programs. Various of the discrete projects making up programs were priority elements of council development plans and indicative investment programs, a sample of which were reviewed during the appraisal of the project. All 21 (of 23) participating Councils carried out urban infrastructure works and urban services and maintenance activities through the Project. A total of 180 contracts to a value of Z$1,703 million (US$45 million) were awarded. In addition, 66 Force Account sub-projects for primary infrastructure works were completed to a value of Z$220 (US$5.8 million). 5

10 Housing and Related Serviced Residential Land The housing infrastructure component has been implemented satisfactorily. For a period of almost ten years the Project has supported government loans to the urban councils (through the National Housing Fund) for the implementation of the bulk of their respective council housing site infrastructure programs. As with the primary infrastructure component various of the discrete projects making up programs were priority elements of council development plans and indicative investment programs, a sample of which were also reviewed during the appraisal of the project. a. Housing Infrastructure Approximately 30,000 stands had been serviced by councils under the project by December 31, Sub-projects to a total value of approximately Z$478 million were either completed or nearing completion, with Z$232 million by Force Account and Z$246 million by contract. Approximately 26,400 stands had been allocated, and of these buildings had commenced on about 18,000 with approximately 6,900 occupied. Building and occupation of houses on serviced stands slowed in latter years due to the worsening economic and financial environment with Building Societies lending little for low-income housing. Because of this situation, since mid-1998 no new housing infrastructure schemes were supported under the Project. At appraisal it was estimated that the number of persons likely to benefit from the plot delivery program was approximately 500,000 occupants and lodgers. It is estimated that at December 31, 1999 some 300,000 had probably benefited. Nevertheless, given the worsening economic situation throughout the project and more particularly in recent years with increasing urban poverty, the housing component is still regarded as having been satisfactory. b. Housing Finance During the life of the project, 29,328 mortgage applications were received by the building societies to a value of Z$879 million (US$26 million equivalent) against a project target of 30,000. Some 22,432 mortgages were approved to a value of approximately Z$570 million (US$16 million) against a target of 24,000. For the past two years building societies have lent very little to urban poor families, as families have been unable to meet society lending requirements due to the worsening economic situation, including high inflation. Building societies also have become decapitalized (see Section 6.1.c regarding sustainability) and are not providing finance to any significant number of households, of what ever income. Until recently the housing finance component was operating satisfactorily, albeit relying significantly on relative cheap, external funds (U.S.AID Housing Guarantee funds). No new housing plot delivery programs were cleared for support under the program after mid- 1998, given this situation and the fact that many allottees could not afford to purchase plots or to finance mortgages required for home construction. Although the recent period of high inflation has undermined outputs of the housing finance component during this period, an important, overall output has been confirmation (to Government and to the private financial sector) that the private financial sector (primarily the 6

11 building societies) can be responsive to the mortgage finance requirements of lower income households. Despite some initial skepticism that the private financial sector could be responsive, this output was initiated under the Urban I Project (with pilot Councils) and consolidated under the Urban II Project. c. Community Facilities Under this component a number of community facilities, including primary schools, a nursery school, and community health clinics were constructed with project funds in several city councils and municipalities as part of housing development schemes. See the table below. As of June 1999 City Council/Municipality Z$ million US$ million Bulawayo Gweru Harare Mutare Hwange Victoria Falls d. Electricity Supply This original sub-component of the project was dropped at a fairly early stage when the Zimbabwe Electricity Supply Authority informed the Bank that it had sufficient own-source revenues and thus did not require IBRD funds. Regional Development Program This component was recast during the project at the request of government and it was agreed that it would consist of a demonstration project in 4 councils where industrial "incubator" sites would be serviced. This was to support development of small-scale indigenous entrepreneurs. Four councils of varying size were selected by government to participate, namely Bulawayo, Chitungwiza, Marondera and Rusape. Good progress on the component was made in Bulawayo where the contract for provision of serviced industrial "incubator" sites was completed and demand for them was such that the council, with its own funds serviced further sites. The sites in the other council areas with the exception of Chitungwiza, were substantially finished and contracted works paid for prior to December 31, Implementation of the revised component is considered satisfactory. Given that the component was restructured then the original sub-components, namely; (a) Preparation of the Combination Development Plan and Investment Strategy for the Greater Harare Metropolitan Area; (b) Development of Secondary Cities and Towns along the Bulawayo/Harare/Mutare Corridor; and (c) Development of Regional Growth Centers, were not proceeded with. 7

12 Institutional Development Although some aspects of the institutional development program have moved slowly, mainly due to staffing constraints within the financial advisor's section of MLGNH, generally the component has been implemented satisfactorily. a. Strengthening the Management of Public Investments in the Urban Sector In support of a principal project objective of strengthening the capacity of central and local government to determine the most cost-effective investment in the urban sector, technical assistance was provided to the MLGRUD, through the PCMU, and to the MPCNH until shortly before its merger with MLGRUD, to review capital development plans and to appraise sub-project proposals. This assistance was provided with funding by NDF (and later NORAD, including the municipal engineering technical assistance provided to PCMU), and it proved to be very effective and is continuing. The quality of sub-project submissions from the urban councils, often prepared by consultants engaged by the councils, improved during the course of the project as did the appraisal process which was carried out in a structured way with guidelines and appraisal checklists established for the various sized sub-projects. An institutional development sub-component comprised the establishment, in MLGNH, of a financial database for all Local Authorities. This proceeded very slowly due to staffing constraints within the Financial Advisors' section of the MLGNH, where it appeared impossible to attract sufficient numbers of competent financial staff on government salaries offered. Another sub-component was a computerized Loan Management System, established in 1997 within MLGNH, although it has not been operated effectively due to the same staffing constraints noted above. The PCMU also assisted the Financial Advisors' section in MLGNH in keeping abreast of the loans made by MLGNH to respective local authorities. In addition to the longer term technical assistance noted above, other discrete studies were carried out during the course of the project with the objective of strengthening the management of public investments in the urban sector. These included studies regarding the potential for expanding private sector participation in infrastructure provision in general, and specifically of solid waste management services in Harare. b. Strengthening the Institutional Capacity of Local Authorities The technical assistance provided to, and general strengthening of, the respective ministries and particularly the PCMU assisted the urban councils as much as central government in improving the quality of plans and sub-project proposal submissions that underwent more rigorous review than had hitherto been the case prior to the project. 8

13 The need for council plans to be prepared and continually updated was continually focused upon by MLGNH/PCMU and, although some councils did not consider this a priority, as at December 31, 1999 thirteen Councils (Bindura, Chegutu, Chinhoyi, Gwanda, Harare, Kadoma, Kariba, Kwekwe, Marondera, Masvingo, Norton and Redcliff, Victoria Falls) had submitted updated draft Strategic Plans to the MLGNH. The financial management capacity of the urban councils has been strengthened and, until the problem of unfunded mandates became more serious in the last two years (primarily in the health sector) urban councils were becoming increasingly independent of central government in financing their recurrent expenditures. Initiatives introduced through the project included an insistence on councils preparing up-to-date audited accounts and on the agreement of 5-year financial performance plans (FPPs). These FPPs provided a structured and integrated framework in which to appraise new investments and to assess their likely affordability as well as providing the MLGNH a basis for reviewing bids for PSIP allocations, annual budget submissions and tariff increases. The capacity building initiatives in support of the FPP process centered on improving financial management systems, such as the implementation of new computer based accounts and training. Computers and the new accounting system (PROMUN) were successfully installed in 20 councils participating in the project component. The task was officially completed on December 31, At December 31,1999, 16 Councils had substantially implemented the system. Two Councils, Harare and Bulawayo, established their own systems. New computer servers and software were procured through the project and installed by the end of December 1999 in order to make the PROMUN computerized accounting system Y2K compliant. c. Program Coordination and Monitoring The PCMU, established under Urban I, was effective in being the linkage between the urban councils and central government as well as between central government and the Bank. It has been instrumental on moving the project forward and helping the urban councils in their understanding of both central government and World Bank requirements in terms of such matters as sub-project submissions, contract management and procurement as well as being the responsible agency for dealing with reimbursement applications including checking of statements of expenditure for Force Account works and disbursement issues. d. Strengthening of Urban Transport Planning and Management At an early stage of implementation government decided that it no longer required IBRD funds to support further technical assistance for the Urban Transport Unit established in the MLGRUD (MLGNH). This small TA and training component was thus never proceeded with. 9

14 4.3 Net Present Value/Economic rate of return: In late 1999 an assessment of the impact of projects in a sample of six urban councils was carried out. Flows of economic benefits and costs generated by both primary and housing infrastructure schemes together with impact of investments on the environment and on poverty reduction were determined. In general it was concluded that the project had, to a great extent, accomplished what it had set out to do in assisting urban councils with the provision/rehabilitation of infrastructure. Significant investments were made in roads and water supply. However the largest primary infrastructure investment was in sewerage and sewage treatment, where ERRs were not calculated, indicating the focus urban councils placed on health, environment and serving the urban poor. Zimbabwe's urban residents have very high access to both potable water and waterborne sewerage and sewage treatment facilities with 98% having access to potable water and 84% to sewerage. High sewage effluent standards are required and are generally achieved reflecting the protection required for Zimbabwe's water-scarce environment. At appraisal, ERR estimates were made for housing related infrastructure components. Housing related infrastructure comprised 67 percent of the total project costs estimated at appraisal. Included in the capital costs were all on-site infrastructure anticipated, house construction investments and 30% of primary infrastructure (the remaining 70% of primary infrastructure investments related to city wide improvements). The ERR estimated at appraisal was 20% for these investments. In 1999, actual housing related infrastructure investments financed under the project were examined for a sample of three Councils (Bulawayo, Gweru-and Bindura). This expost analysis provided ERR estimates comparable to those estimated at appraisal, ranging from 18% to 72%. The weighted average ERR for the three Councils was 24.3%. The PSIP hurdle rate for infrastructure investments is 12%. 4.4 Financial rate of return: Financial rates of return were not calculated at appraisal for this sector operation. However a fundamental objective of the project was the introduction of council Financial Performance Plans (FPP) intended to operate over a 3-5 year period. An important objective of an FPP was to facilitate the shift by local authorities from a deficit status to a surplus status for each operating account. The intention of the FPPs was not necessarily to preclude any capital expenditures under a deficit situation but to make sure that such expenditures were in the context of a plan (FPP) that would result in the local authority having a current account surplus within the threefive year period. It was agreed that annual financial targets of all FPPs would be designed to ensure that at a minimum, on an annual basis, total revenues for each of the principal service accounts would be sufficient to meet a range of expenses that were listed in the SAR. These financial targets of most urban councils were generally met. 4.5 Institutional development impact: As detailed in 4.2 Institutional Development, the ID impact has generally been significant. In most urban councils there is now a greater ability to make effective use of available human and financial resources. Within the MLGNH, through the PCMU and elsewhere, there is a greater 10

15 appreciation of the need to analyze more rigorously projects put forward by councils for loan funding together with the capacity to be able to do this. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The project design assumed that there would be co-financing from both KFW and SIDA. This did not transpire although subsequently the Nordic Development Fund (NDF) replaced part of this earlier envisaged co-financing for technical assistance and training. Latterly through the final two project extensions, with NDF funds fully utilized, NORAD supported municipal engineering technical assistance to the PCMU. 5.2 Factors generally subject to government control: The project was late in starting up by about two years. The primary reasons for this delay were the; (i) delay that some Councils experienced in meeting the initial project participation criteria; (ii) inadequate professional capacity in some urban LAs to prepare detailed project proposals which were to undergo much more rigorous scrutiny by MLGNH before loan funding was approved; (iii) lack of funds for LAs to engage consultants to assist in preparation of such proposals (the initial disbursement percentage was only 20% for works, and there was no Loan category for Consultants Services). At the time of appraisal, GOZ wished to keep borrowing to a minimum and there was a reluctance to borrow Loan funds for consultants and training. Periodic delays occurred because of significant backlogs in registering land titles of the serviced plots financed under the project for low-income households. In Zimbabwe, land titles are assured by the state, through the Surveyor-General's Department, and these titles are a prerequisite for mortgage finance. Backlogs prevented, temporarily, receipt by the target households of the benefits of housing related infrastructure financed under the project. The main cause of these backlogs was staffing constraints in the Surveyor-General's Department and, earlier in the project, the obstacles placed by the Department on engagement of private surveyors to assist with surveys and registrations. Substantial devaluations of the Zimbabwe dollar resulted in less requirement for the loan's U.S. dollars. Thus, devaluations made a significant contribution to the need to extend the closing dates of the project. 5.3 Factors generally subject to implementing agency control: A major factor affecting the pace of implementation was the delay by a number of councils in meeting the basic eligibility criteria for entry into the program. This eligibility criteria centered primarily on the financial health of the respective council and the general management of its affairs. In addition, some councils had difficulties in accessing land for housing development. 11

16 Other factors included the time taken for preparation (feasibility, engineering and bid documents) of components and then their procurement. It took some while for councils to understand and accept Bank procurement requirements. 5.4 Costs andfinancing: Macroeconomic problems and the shortage of government funding for the Public Sector Investment Program (PSIP) restricted project counterpart funding, and this delayed many subprojects. Furthermore, many sub-components that commenced often slowed due to funding shortages. A further result of erratic annual allocation and subsequent release of funds was that more sub-projects than anticipated were carried out through Force Account. Councils perceived that force account arrangements allowed more flexibility in implementation and served as a hedge against somewhat unpredictable flow of funds from PSIP. The project funding agreed at appraisal was for IBRD to finance only foreign exchange costs. This was an important principle for Government at that time. The Loan Agreement established that IBRD would fund only 20% of works expenditures, and 50% of local expenditures and 100% of foreign expenditures for goods. During project implementation, in response to the worsening macro-economic climate and the increasing difficulty this caused in providing local counterpart financing, the Loan disbursement percentages for works were increased twice, in 1995 from 20% to 30% and then, in 1997 from 30% to 50%. 6. Sustainability 6.1 Rationale for sustainability rating: For this project, evaluation of sustainability may be separated into three key categories. First is the issue of sustainable financing of council investments for the primary urban infrastructure component and for the housing and related serviced residential land component. Second is the sustainability of these investments by councils, through proper operation and maintenance. Third is sustainability of the financing of shelter (including basic infrastructure) so that the primary urban infrastructure component and the housing and related serviced residential land component for low income households may provide sustainable benefits to these households, and that this three-pronged "model" may be sustained beyond the project. Each of these categories is examined below. (a) Sustainable financing of council investments. At the time of project appraisal, the accepted way for local authorities to finance infrastructure development was either through ownsource revenues or by applying to either of the central government loan funds for projects included in the PSIP. By submitting project details, which were fairly loosely appraised by MLGNH, local authorities received borrowing powers to access either of the General Development Loans Fund or the National Housing Fund, depending on the type of subproject. Whereas the system had worked reasonably well for some years, PSIP funds were lent at subsidized interest rates, when compared to commercial terms and conditions. Under the project, the rigor of appraisals for financing under PSIP was increased. However, with a 12

17 worsening macroeconomic situation, funds became more and more scarce, and it became increasingly more difficult for central government to provide such concessionary funding. Thus, the basic instrument (PSIP) for lending to local authorities for infrastructure and services under the project over time proved to be not sustainable. Furthermore, particularly during the latter years of project implementation, a broad consensus emerged within the Government, the councils and the private capital markets, that not only was central government, though PSIP, not a sustainable, primary source of local government investment finance, it also was not a desirable source of investment finance for councils that should be creditworthy. It should be noted that U.S.AID made a significant contribution to this consensus, through its support to the Municipal Finance Working Group that brought together Central and Local Government representatives and those of the private financial sector. Thus, although the PSIP as primary financing instrument for local infrastructure is broadly recognized as not sustainable, during project implementation, and with the valuable support of U.S.AID, alternative local infrastructure finance instruments from the private sector (primarily from pension funds and insurance houses) were identified. In April 2000, the proposed Local Government Capital Development Project (LGCDP) was successfully negotiated, as the primary follow-on to the Urban II Project, and it has as its comerstone the accessing of local, private sector financing for municipal infrastructure, and the phasing out of PSIP for local investment finance. (b) Sustainability by councils. The local authorities collect property rates to cover maintenance of non-remunerative services and user charges for services (e.g. water) consumed by direct beneficiaries. In normal circumstances the local authorities manage to operate and maintain facilities and services, although funds set aside for maintenance are frequently not enough. The problem for the urban councils has been exacerbated, however, by central government because of the unfunded mandates placed upon them. Urban Councils are now responsible for funding primary health and education (formally provided with central government assistance) but they have not been given the requisite funding or powers to raise revenues to fund the sectors affected. Thus, council resources are stretched such that funding for new development and maintenance of existing assets is threatened. At this time the capacity of urban councils to sustain investments provided under the project is open to question, and it is unlikely that the investments will be adequately sustained without this issue being addressed. Again, the proposed LGCDP has a component that aims to address the restructuring of the local authorities in order that they are able to become creditworthy. The issue of the unfunded health and education mandates is one that is under discussion with central government. (c) Sustainability of shelter finance. As noted under 4.2(b) above, the project has demonstrated that the private financial sector (primarily the building societies) may be a sustainable source of finance under conditions of reasonable macro fundamentals. Over 22,000 mortgages were approved by the building societies under the project. This is a clear indication that the private financial sector was willing to lend to low income households. Part of this willingness may be attributed to the remarkable priority that low income households place on housing finance. Low income households proved that they had a better record of prompt mortgage repayments, compared to higher income groups (perhaps because of the income expected to flow to low income households from the renting of rooms). U.S.AID household 13

18 surveys have shown that sampled low income households make every effort to be timely in meeting their housing related payments, even at the expense of reducing their expenditures for food. However, there is a fundamental issue regarding the sustainability of this mortgage finance. The mortgage loan deposit interest rates of the building societies are effectively "capped" through agreements with Government, and these rates are lower than those of commercial banks. The so called "Mortgage to Deposit" difference (returns from deposits in building societies vs. returns from commercial bank deposits) used by Habitat to reflect the sustainability of mortgage finance was negative in Zimbabwe every year over the period , ranging from -2.3 percent in 1996/97 to percent in Excluding these extremes, the average difference over the period was -12 percent (data from Reserve Bank). The fact that the building societies were able to attract deposits sufficient to fnance over 22,000 mortgages under the project indicates that some investors place a high premium on the perceived, low risk of building society deposits, yet the mortgage to deposit difference in 1999 of over 20 percent clearly is not sustainable as the building societies have become decapitalized. The effective capping of mortgage interest rates results in an implicit subsidy through these rates that is unlikely to be sustainable (see Lessons Learned below). The sustainability rating of this project generated considerable debate among the ICR team. The instrument for financing of council investments, the PSIP, is broadly recognized to be not sustainable, yet Government has already agreed to move to capital market instruments that are likely to be sustainable. Sustainability of the councils' investments has generally had a good track record under the project, but the recent imposition on councils of unfunded mandates has undernined this sustainability. Government has recognized this issue and agreed to address it effectively as part of the proposed (and successfully negotiated) Local Government Capital Development Project. The capping of mortgage loan interest rates clearly is not sustainable. But, the potential for a sustainable housing finance market for low income households clearly has been demonstrated, with financial institutions willing to lend, and low income households demonstrating the ability to repay mortgage loans, even with great sacrifice. It is important to place the Urban II project as part of a learning process provided by a broader program of support by the Bank, including the Urban I and II Projects, the Rural District Council Pilot Project, and the proposed Local Government Capital Development Project (that incorporates lessons learned regarding sustainable local infrastructure finance and unfunded local mandates). In summary, sustainability depends on the likelihood of: * Replacing the PSIP with access to capital markets based on creditworthiness of councils; * Resolving the issue of unfunded mandates undermining the sustainability of council investments; and * Removing mortgage interest caps so that willing lenders and willing borrowers may sustain the housing finance market (with possible subsidies to low income households). The ICR team's judgement is that there is a reasonable likelihood that these three lessons learned will be implemented in the medium term, if the current uncertainties may be resolved and a longer term development agenda may be established. Therefore, on balance, the ICR team has concluded that a rating of Likely Sustainability is appropriate for this project. 14

19 6.2 Transition arrangement to regular operations: Infrastructure sub-projects have expanded service coverage, and all are in operation. No special transition arrangements have been necessary. New and rehabilitated facilities have been considered in annual maintenance planning and in financial planning, as required under the eligibility requirement of an appropriate Financial Performance Plan (FPP). Existing performance indicators would apply as for all urban council infrastructure facilities. To ascertain whether infrastructure provided through the project, and indeed all urban council infrastructure, is being operated and maintained effectively and, whether appropriate general revenues and/or user charges are being recouped to adequately cover such operation and maintenance, the proposed Local Government Capital Development Project is expected to include a small component for such monitoring. A future impact evaluation by OED would be prudent during the second year following full completion of all sub-projects (after completion of defects liability periods for all contracts) and such that budgets allocated for operation and maintenance and funds released could be monitored. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance in project identification, preparation and appraisal was generally satisfactory. The project built on the experience of the first Urban Development Project (Urban 1), which supported investments in four cities. There was a clearly identified need to support the whole of the country's urban sector. There was adequate involvement and consultation with potential beneficiaries (22 urban councils existed at appraisal). All urban councils were visited, and discussions on their investmenft needs and programs were held. 7.2 Supervision: Over the course of the project, which was extended three times (see Aide-Memoires of supervision missions of January, 1996, September 1997 and April 1998), the Bank had at least two supervision missions per year. In addition, support was available at the Resident Mission in Zimbabwe for resolution of procurement issues and on general project issues. However, there were some shortcomings at different times on the Bank side with regard to delays in reviewing documents and giving necessary clearances (no objections) and in dealing with disbursement issues that arose. 7.3 Overall Bank performance: Overall Bank performance was considered satisfactory and supervision missions were welcomed by government as a means of assisting in the resolution of more difficult issues first hand in the field. The Bank managed to achieve some mission member continuity throughout the course of preparation and implementation. 15

20 Borrower 7.4 Preparation: The Borrower's performance during preparation was satisfactory with few problems encountered by missions during the preparation cycle. 7.5 Government implementation performance: The start-up of the project was delayed (24 months between appraisal and effectiveness) as a result of apparent government reluctance to borrow IBRD funds and the slow pace in meeting certain conditions for effectiveness (such as FPPs, audits and staffing adequacy). Also, Government and the Bank did not "compromise" in the rigor required for meeting these effectiveness conditions. However once the project commenced, performance was satisfactory. 7.6 Implementing Agency: The urban councils were the implementing agencies responsible for planning, design, procurement and implementation of sub-projects. They generally performed satisfactorily. Lessons learned among councils were actively disseminated through national professional organizations, particularly the Town Clerks' Forum, and the Town Treasurers' Forum. PCMU was also a key implementing agency. Its responsibilities included: appraising subprojects; reviewing plans, designs and bid documents; monitoring financial performance; project budgeting and discussions with other government ministries, primarily Finance and the National Economic Planning Commission; checking local authority statements of expenditure and preparing applications for disbursement of loan funds from the Bank; organizing and overseeing institutional development initiatives; monitoring preparation and submission of audits; and preparing comprehensive semi-annual reports including key monitoring indicators. The PCMU, established under Urban I, performed all these tasks competently and throughout had effective management and good staff continuity. 7.7 Overall Borrower performance: Overall Borrower performance was considered satisfactory. 8. Lessons Learned a. General -- Role of a Project Implementation Unit (PIU) outside of the civil service structure. Many Bank projects have been criticized for supporting the creation and financing of PIUs that are not sustainable and that create tensions with civil servants that receive less remuneration and have less supportive working environments than PIUs. This project has such a unit, the PCMU. 16

21 The main lesson learned about the appropriateness of PCMU's role and structure depends on evaluation of two key aspects: (a) the long-tern development role of the project's implementation arrangements; and (b) the need for inter-ministerial coordination and collaboration in implementing the project's development objectives. (a) The key functions of PCMU are summarized in section 7.6 above. It may be noted that most of these functions are not part of the core responsibilities of central governmnent in a policy environment of decentralization. There are exceptions, including the monitoring of councils' financial performance. However, most of PCMU's responsibilities under the project should be considered transitory, adapting as decentralization policies are designed, implemented and refined. Decentralization became a key policy objective of Government during project implementation. Thus, a transitory PCMUJ that has not been part of the civil service system seems justified in the case of this project. However, if the long-term development policy had evolved to be a highly centralized public sector, then the core functions of PCMU arguably should have been supported as part of the civil service system, presumably within the MLGNH. In summary, a key lesson leamed is that appropriate implementation arrangements for support to local governments depends on the long-term policy for the accountability and autonomy of local governnents. If this policy is for central control over local governments, then the functions of PCMU should have been consolidated within the civil service of central governnent. If, however, the broader policy is for increasing accountability and autonomy of local governments, then a transitory project implementation agency, such as the PCMU, outside of the civil service system, is justified. For the follow-on project, the Local Govermnent Capital Development Project currently conceived as an Adaptable Program Credit and the Bank's exit strategy for support to the local government sector. it is expected that most of the PCMU's functions eventually would be contracted out to the private sector, in clear recognition of the transitory role of such an entity during implementation of a broad decentralization policy. (b) Although Zimbabwe has a Ministry for local government, it is clear that local government responsibilities also depend on other line ministries, as well as the Ministry of Finance. Thus, an inter-ministerial Steering Committee was established for project oversight. One of the reasons that PCMU was created was the need to respond to the requirements of this Steering Committee. To have had PCMU as part of the civil service system would have required a decision designating a "lead" Ministry for the Steering Committee or the creation within civil service of an additional entity. The decision to have PCMU as a separate entity outside of the civil service system responded to the need of Government to not make that decision at the time of the project's launch. As noted above, the subsequent policy drive for decentralization of the public sector has resulted in the lesson learned that central government civil service "institutionalization" of support to local government investment programs generally are not justified, and that transitory institutional arrangements for decentralization policy initiatives (such as those for PCMU) are justified and required. -- Role of a Central Government Institution for Funding of Local Government Investments. The Public Sector Investment Program (PSIP) was the key source of counterpart funding under the project. A key lesson learned is that the mixing of fiscal and financial policies of central government in intergovernmental relations is not sustainable and not desirable in implementation 17

22 of sound decentralization policies. The PSIP has been a type of central government "Municipal Development Fund" for financing local investment programs observed in many Bank local government projects. At best, such funds should be transitory and not the monopoly supplier of investment funding for local governments. Zimbabwe has as one of its key development policies the decentralization of the public sector. To be effective, this policy should clearly distinguish between fiscal policies for decentralization and policies for financing of local investments. To be sustainable, decentralization policies must ensure that local governments have the fiscal potential to become creditworthy (policies on assignment of expenditure responsibilities, local fiscal base and intergovernmental fiscal transfers). Local government investment finance should come primarily from the private financial sector, especially in a country such as Zimbabwe with liquid and well managed financial market players, many of whom (such as pension funds and insurance houses) are seeking to match long term liabilities with long term assets, such as financing instruments for municipal infrastructure. In complement, local government investments may be financed partially or totally by clearly defined fiscal transfers designed to support implementation of national policies, such as policies for local capacity building and community participation. The proposed LGCDP seeks to implement these key lessons learned. -- Capacity Constraints at the Local Government Level. Local capacity varies significantly according to local jurisdiction size, economic base, and the quality of local civil service. Local government projects need to recognize this diversity in capacity and to include mechanisms to improve this capacity. Fundamental capacity reforms may need to examine the viability of some local governments, and the possible need to re-define local government responsibilities and jurisdictions. The roles of the local public sector and the private sector may need to be reevaluated, with the possible "crowding in" of private sector capacity under rules of the game established by local public government. Unfumded mandates must be addressed urgently, and considerable council restructuring will be to required to restore affected councils to fiscal soundness. -- Role of a Central Ministry Responsible for Local Government Policies. In a policy environment of centralized responsibilities, with deconcentration and/or delegation to local govermment of central responsibilities, a central ministry has key command and control responsibilities for implementation of central government policies. In a policy environment of increasing devolution of responsibilities to local governments, a central ministry has radically different responsibilities, including ensuring that local governments have the fiscal, financial and institutional capacities to discharge the responsibilities mandated to them, and that central government may monitor and evaluate how local governments are implementing these responsibilities. During implementation of the Urban II project, a policy shift began to emerge, from an emphasis on "command and control" to more devolution, and the considerations of this shift and lessons learned have attempted to be incorporated in the design of the proposed LGCDP. -- The Importance of Professional Networkingfor Dissemination of Lessons Learned. Under the Urban II project such networking and dissemination have proved to be very important and effective. This reinforces lessons learned in other local government projects, such as in Brazil and the Philippines (see OED report "Developing Towns and Cities: Lessons Learned from Brazil and the Philippines", 1999). 18

23 b. Fiscal and Financial -- Distinction between Fiscal and Financial Instrument for Support to Local Government. As noted in the general issues discussed above, these instruments need to be carefully separated, with appropriate policy and implementation arrangements being formulated and implemented. This is the case for the sustainability of financing for both infrastructure and housing investments. Providing subsidies through interest rates distorts undermines the functioning of the financial sector and will not be sustainable without fiscal financing that hence may not be used for alternative purposes. If policy requires subsidies, it is better to fund them directly through fiscal instruments. -- Funding Capacity. To the extent feasible, funding capacity should not be based on a local jurisdiction being "rich or poor". Rather, under the decentralization policy being developed by Government, fiscal capacity should be "equalized" across all jurisdictions through the appropriate assignment of local fiscal instruments and the formulation and implementation of appropriate intergovernmental fiscal arrangements. Thus, under the decentralization "vision" being developed, funding capacity should be distinguished according to (a) the fiscal capacity (local and intergovernmental) to properly provide, operate and maintain basic infrastructure and services for all Zimbabweans, independently of the local jurisdiction in which they reside, and (b) the capacity to leverage good local fiscal performance with additional resources for the financing of investments targeted on growth and poverty reduction coming from the private financial sector. -- Standardized Local Government Budgeting, Financial Reporting and Auditing Requirements. In order to implement a decentralization policy based on enhanced local accountability and responsibility based on national (and international) standards, generally accepted norms for financial management need to be agreed and implemented. A key lesson learned is that these standards should be consistent with the central government's due diligence requirements, as well as those of potential private sector partners in the provision of local infrastructure and services. c. Technical -- Technical Appraisals. The technical appraisal process introduced for Urban II sub-projects has disciplined Council engineers, made them more cognizant of financial realities and improved the prioritization of sub-projects within Councils. The introduction of appraisal requirements, linked to sub-project value, has lessened the work required in proposal preparation time for the Councils (or their consultants) and in proposal appraisal time for the PCMU. -- Force Account. Force Account for routine infrastructure projects is generally preferred by Council Engineering Departments as it is considered faster (no tendering and evaluation procedures), it can respond better to erratic budget allocation releases from the GDLF and the NHF and it provides Council staff with "hands-on" experience. However little analysis on the actual costs of Force Account and comparison with Contractor costs appears to be carried out. Force Account may have a role to play but transparency is important and its costs should be ascertained. 19

24 -- Procurement. The need for more standardized bid documents and for an appraisal of major sub-project proposals to be carried out is now well understood by LA Engineers. LAs have also adopted the Bank's SBD and the PCMU have reviewed LA documentation (sub-project proposals, bid documents and tender evaluation reports) on behalf of GOZ and World Bank. Thus significant experience has been gained by LAs and the PCMU in procurement matters. However LAs and PCMU considered the Bank's constant refinements to procurement documentation and requirements for review were overly bureaucratic, time consuming and involved councils in increased costs. A lesson learned is that the Bank needs to establish fundamental procurement "rules of the game" that may be sustained over full project implementation, without disruptions in project implementation arrangements. -- Rehabilitation and Maintenance. Many of the main infrastructure networks in Zimbabwe's cities and towns are aging and thus rehabilitation of infrastructure should remain a priority. -- Demand Management. Demand management before supply increase is considered particularly important given Zimbabwe's water scarce and fragile environment. d. Housing Related -- Consolidation of Private Sector and non-governmental organization (NGO) Role in Housing. Since the slump in the housing finance and housing construction industry of the early 1 990s, mortgage lending to low-income borrowers has increased substantially. Also, an increasing number of private high-density housing developments are being implemented as collaborative efforts between Local Authorities, private developers and contractors, and building societies. In addition, Local Authorities and building societies are presently exploring the potential of working with cooperatives and the first experimental projects are underway. This new role of Local Authorities as partners in the housing provision process requires some further adjustments in the planning, allocation and supervisory functions carried out by Local Authorities. The supervisory and regulatory functions of Central Government are equally important to maintain a healthy and competitive housing and infrastructure finance system. -- Income Levels and Affordable Housing Options. The major constraint in the delivery of houses for lower income households remains the discrepancy between presently offered and acceptable housing options and income and savings levels of a large proportion of urban households. The consensus among major public and private actors in the housing sector is that it is extremely difficult, given present standards and related construction prices, and the inflationary environment, to provide home-ownership options to households with incomes below those presently reached in the major urban centers. Alternative housing options that increase the self-help component in house-construction and use of alternative micro-finance options through intermediary non-governmental organizations or cooperatives may provide some gains in further penetrating the lower income market and should be explored particularly for smaller urban areas and rural councils. Direct subsidies to low income households (rather that subsidized mortgages) also may be desirable. In addition, alternatives to housing ownership by the very poor should be explored. 20

25 -- User-Friendliness of the Land Allocation, Mortgage Origination and Repayment Process. While the present system of housing infrastructure and superstructure financing is fairly well established at the macro-level, it is still a bewildering process for many low-income households to go through. Local Authorities, District Councils and Building Societies have to streamline procedures for allocation of land, the origination of mortgages and servicing of the different loans for land and housing. -- Land Availability and Tenure. The existing supply of land in the hands of many councils was becoming exhausted and major land acquisitions have, or would soon, become necessary. -- Survey, Examination and Titling procedures. The current procedures (and/or their operation) of the Surveyor General's Department have to be streamlined if delays in plot consolidation and occupancy, and the attendant costs to Local Authorities and beneficiaries alike are to be avoided. -- Waiting Lists and Effective Demand. Although waiting lists are used widely by local authorities, building societies and international agencies as an indicator of demand for homeownership by different income categories, they do not contain adequate information on household income, preferences and savings to form the basis for major investment decisions on present low-income housing projects with narrow income specifications. This is, of course, particularly the case where the size of planned projects is relatively close to the total number of households on the list in that income bracket. -- Waiting Lists and the Plot Allocation Process. While waiting lists provide a sense of fairness in the distribution of scarce housing resources in urban areas, the present process of plot allocation through the waiting lists requires adjustment in the light of the increasing participation of private and non-governmental actors in the provision of medium and high density housing. -- Servicing Standards. In recent years central government has done much to reduce housing costs by relaxation of hitherto entrenched planning and engineering standards. Such standards should continue to be rigorously examined with the objective of generating further cost savings. 9. Partner Comments (a) Borrower/implementing agency: (i) In general, the original objective of providing sufficient primary infrastructure, housing infrastructure and urban services in the LAs has been satisfactorily achieved and all the local authorities are now in a better position to embark on further development in order to meet population increase. (ii) The original objective of strengthening the capacity of central and local government institutions was satisfactorily achieved, since a more rigorous appraisal exercise has now become the norm before any project to be funded through PSIP is approved. Most of the councils are now using strategic planning for their future developments. 21

26 (iii) The objective of ensuring that the LAs have continued self-sufficiency was satisfactorily achieved in that LAs came out of a deficit situation. However, due to factors outside their control all LAs are now having cash flow problems thereby overshadowing the already achieved objective of making surpluses. (iv) Councils now have much better infrastructure than was the case before the project. All councils have benefited from the project through purchases of the requisite vehicles, plant and equipment to enable them to undertake proper maintenance of their infrastructure. Thus, the objective of helping councils to protect their capital assets through improved maintenance-related activities has been satisfactorily achieved. (v) The objective of strengthening the human resource capacity of LAs was satisfactory achieved as all LAs are now well positioned to maintain their infrastructure services. Their financial management has improved remarkably. However, the drawback is that despite the amount of capacity building given to LAs through the project, LAs are failing to retain trained staff due to poor conditions of service. This problem has led to some of the LAs failing to produce the audited accounts as stipulated in the Urban Councils' Act. (vi) Over 30,000 plots for low income housing were serviced during the implementation of the project and support was given to the Building Societies in order that they gave greater focus to providing housing finance for the low income. To a great extent the objective of maximizing the role of the private sector in housing and relieving the burden on government was thus achieved. However, with the macro-economic climate worsening throughout the project period, Building Societies ran short of Mortgage funds, and beneficiaries found it evermore difficult to obtain, and afford, mortgages resulting in a slow pace in the construction of houses. (vii) The original objective for the pilot regional development component was revised. The revised objective to provide industrial incubator sites for the small scale entrepreneur was satisfactorily achieved in Bulawayo, Rusape and Marondera but not yet in Chitungwiza (which failed to receive acceptable bids). However, work is continuing through the Council's Force Account operation. (viii) The Borrower is considered to have performed satisfactorily and the project generally implemented satisfactorily although because of, predominantly, start-up delays the project was extended three times (1 year each). (ix) The Bank, and other donors, are also considered to have performed satisfactorily overall although the Bank's review and approval process regarding procurement documentation was, on occasions, considered to have taken too long and there were also incidences of disbursement problems which could have been resolved more expeditiously. (b) Cofinanciers: Not applicable. 22

27 (c) Other partners (NGOs/private sector): Not applicable. 10. Additional Information Not applicable. 23

28 Annex I Page I of 2 Annex 1. Key Performance Indicators/Log Frame Matrix A. Submission of Audited Accounts A. 1. % submitted by March 31, 1997 for FY95/96 15% 15% A.2. % submitted by March 31, 1998 for FY96/97 15% 5% A.3. % submitted by March 31, 1999 for FY97/98 100% 5% B. Institutional Capacity Building B. 1. Training days C. Financial Performance C. l. % of LAs achieving annual surplus for FY97/98 100% 72% C.2. % of LAs with accumulated surplus at June 30, % 45% D. Housing Infrastructure D. 1. Number of plots serviced 32,000 30,289 D.2. Number of plots allocated 32,000 28,500 D.3. Number of plots with building started 20,000 19,754 D.4. Number of plots occupied 15,000 15,640 D.5. Cost per plot/m2 (in ZS) D.6. Sub-projects appraised number D.7. Contracts issued - NumberNalue (Z$) 21/Z$181,241,000 24/ZS389,928,838 D.8. Force Accounts Awarded - NumberNalue (Z$) 30/Z$227,710,000 32/Z$237,461,000 E. Housing Finance E. 1. Applications for Mortgages - NumberNalue 26,000/Z$780 million 29,328/ Z$879m E.2. Approved Mortgage - NumberNalue 20,000/Z$800 million 22,432/Z$570m E3. Beneficiary Incomes Z$O - Z$8,450 ZSO - ZSI 1,000 F. Primary Infrastructure and Urban Services F. 1. No of sub projects appraised F.2. Contracts issued - NumberNalue 189/Z$I,556,784, /Z$1,702,857,000 F.3. Tenders approved - NumberNalue 137/Z$1,662, /Z$1,702,857,000 F.4. Force Accounts awarded -NumberNalue 77/Z$252,883,000 75]Z$281,355,000 F.5. Size of PSIP allocation (Target FY2000) N/A N/A G. Annual Disbursements G. I. % of overall disbursements 85% 94% G.2. Annual expenditures by LAs Allocations FY99 N/A N/A Actual Spent FY99 Z$810 million ZS960 million H. Impact of the FPP H. I. % of councils which have a strategic plan 100% 66% H.2. % of councils using it as a strategic tool 100% 66% H.3. % of councils whose financial performance has Improved due to the strategic plan 100% 66% H.4. % of councils whose financial performance has improved Due to previous strategies (e.g. FPP) 100% 66%

29 Annex I Page 2 of 2 o,tonme / hipact Xfftators.,bJn~~trMatx PrJteStB ~in pt E;Rt AtIL EstlumMe 1. Extent of use of standardized accounting and budgeting systems 1.1. % of councils using the standardized accounting and budgeting systems 100% 100% 1.2. % of councils using the computerized accounting package 100% 100% 1 End of project

30 Annex 2 Page I of 3 Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appramsa Actuil/at*st Etimate Percentag of PLoj~ct Cqt00ji Ry:2: T C:mpenent L : ;L0C:Cf; US000;X;0V00000:002 USmi 0 ion:us $million (a) HOUSING INFRASTRUCTURE (i) Land Acquisition 0.92 (ii) On-Site Infrastructure Land Preparation Cadastral Survey % Roads & Storm Water % Sewerage % Street Lighting % Water Supply % (iii) Design & Supervision % Subtotal % (b) HOUSING FINANCE (i) Provision of Mortgages % (ii) Computer Equipment % Subtotal % (c) COMMUNITY FACILITIES (i) Schools, Clinics % (ii) Design & Supervision Subtotal % (d) ELECTRICITY FACILITIES (i) Electricity Infrastructure (ii) Design & Supervision 1.48 Subtotal (e) PRIMARY INFRASTRUCTURE (i) Infrastructure Works Roads & Storm Water % Water Supply % Sewerage % (ii) Design & Supervision % Subtotal % (f) URBAN SERVICES & MAINTENANCE (i) Vehicles, spares, plants, equip % (ii) Supervision 2.03 = Subtotal % (g) REGIONAL DEVELOPMENT PROGRAM (i) Technical Assistance & Studies 4.25 (ii) Vehicles & Equipment 0.22 (iii) Pilot Capital Development Fund % Subtotal %

31 Annex 2 Page 2 of 3 ApprIsAl 4UIIt Estimate Percetage of ; Estimate Appraisal P*t C #y _ US $tiioom US SmilUon (h) INSTITUTIONAL DEVELOPMENT (i) Ministry of Local Govemment Appr. Supp./Trng. & Studies % Local Authority Training % PCMU Technical Assistance % UTU Technical Asst.lTrng Vehicles & Equipment * % (ii) Min. of Pub. Const. & Nat. Hsg. Appr. Supp./Trng. & Studies Vehicles & Equipment * Now MLGNH % Subtotal % Total Baseline Cost % Physical Contingencies % Price Contingencies % Total Project Costs % Total Financing Required % Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) POuxw >egtlu- CW ( Total Cost 1. Civil Works (6.00) (35.6) (6.00) (47.6) 2. Vehicles & Equipment TA & Training (20.4) (12.0) (32.4) House Construction Loans Land Acquisition Total _ (26.4) (47.6) (6.0) (80.0) lcompetitive bidding in accordance with cofmanciers' rules and regulations. 2 Force Account

32 Annex 2 Page 3 of 3 Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1. Civil Works (13.21) (13.67) (0.00) (26.88) 2. Vehicles & Equipment TA &Training (40.41) (40.41) House Construction Loans (0.00) (0.00) (0.00) (0.00) Land Acquisition (7.78) (0.00) (7.78) (0.00) (0.00) Total (61.41) (13.67) (0.00) (75.07) Project Financing by Component (in US$ million equivalent) Co;''' uw''\t Appraisal0N--l 's' mat AiIalAts a e =rai Gov =ao Coa ak 4t Cols.aswk Gov Cl.. Low/Moderate Income Housing On-site Infrastructure % 24% - Housing Finance % Computer Equipment % - - Community Facilities % 31% Electricity Supply Primary Infrastructure % 38% Urban Services & % - Maintenance Regional Development % 4% Institutional % Development 'Competitive bidding in accordance with cofinanciers' rules and regulations.

33 Annex 3 Page I of I Annex 3: Economics Costs and Benefits Econo'nicRate of Rdu I'll met ApPM'isal tt tx t Housing Infrastructure Component

34 Annex 4 Page 1 of 2 Annex 4. Bank Inputs (a) Missions: Identification1PMeparation Appraisal/Negotiation Supervision /89 1 Urban Planner I I Supervision 2 04/13/ OA, I Sanita,y Eng. 2 S Supervision 3 11/02/92 1 Urban Specialist 3 3 Supervision 4 07/11/ TM, I Ec, I FA 3 3 Supervision / TM, 2 EcoFA 3 3 Supervision 6 10/31/ TM, I Municipal Eng. S S I FA, I Ec Supervision 7 06/15/ TM, I PO, I Municipal S S Eng., 1 Ec, I FA S S Supervision 8 01/26/ TM, 2 Economist, I S S Municipal Eng. Supervision 9 08/02/ TM, 1 Municipal Eng., 1 S S FA Supervision 10 02/20/ TM, 1 OA, 2 DO, 1 S S Municipal Eng., I Ec, I LGS Supervision /19/ T A Municipal S S Eng., I LGS Supervision / TL, I TM, I OP, I S S Municipal Eng., I LGS Supervision I TM, I OP, I LGS, I PO, I S S Municipal Eng., Supervision / TM, I OP, 2 PO, I LGS, I S S Municipal Eng., ICR 11/ I Task Manager S S I Operations Officer I Municipal Engineer, I Program Assistant Staff Skills: Performance Ratings: Type of Problems: Ec = Economist I - Minor or No Problems LP: Labor Problems OP = Operations Officer 2 - Moderate Problems CC: Compliance with Legal Covenants DO = Disbursement Officer 3 - Major Problem EN: Environment (incl. social issues) FA = Financial Analyst S - Satisfactory PMP: Project Mgt Performance TM = Task Manager HS - Highly satisfactory PP: Procurement Progress LGS = Local Gov't Specialist U- Unsatisfactory 11: Institutional Issues PO = Procurement Officer La = Lawyer OA = Operations Analyst

35 Annex 4 Page 2 of 2 (b) Staff St age oct Cycle A eae _'_._:_-_._._-_'_-_-No '-weeks -.- US$ (0) Identification/Preparation Appraisal/Negotiation Supervision ICR * * Total *The Time Recording System (TRS) does not provide a distinction of staff week time between supervision and preparation of the ICR. Therefore, the category "Supervision" above includes both implementation supervision as well as the time and resources required to prepare this ICR.

36 Annex 5 Page 1 of I Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) []Macro policies [ ]H [ ]SU [X]M [ N [ ]NA []Sector Policies [] H [X]SU []M [ ]N [ NA f] Physical [ ]H [X]SU []M [ IN [ NA []Financial [ ]H [ ]SU [X]M [ IN [ ]NA [ Institutional Development [] H [X] SU [] M [J N [ ]NA [ Environmental Social [IPoverty Reduction [ ]H [ ]SU [X]M [ IN [ ]NA [ Gender [ ]H [ ]SU [X]M [ ]N [ ]NA [ Other (Please specify) [IPrivate sector development [ ]H [XI SU [ ]M [ ]N [ ]NA []Public sector management [ ]H [XI SU [ ]AM [ IN [ ]NA [ Other (Please specify)

37 Annex 6 Page 1 of 1 Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating []Lending S [ISupervision S [] Overall S 6.2 Borrowerperformance Rating [IPreparation S [] Government implementation performance S [] Implementation agency performance S [ Overall S

38 Annex 7 Page I of I Annex 7. List of Supporting Documents Staff Appraisal Report - May 8, 1989 Semi-Annual Report from Programme Coordination & Monitor Unit (PCMU) dated December 31, 1999 Transferring Urban II Lessons Learned to the Design of Rural District Councils Capacity Building Project (RDCCBP) and Local Government Development Project (LGDP), Final Report, May 1997, Banes Dawes Associates World Bank Final Review Mission Aide Memoire - October 28-November 11, 1999 Techfin Report

39 Annex 8 Page 1 of 11 Annex 8. Borrower's Contribution to ICR Urban Sector and Regional Development (Urban II) Project Loan 3079-ZIM Zimbabwe Second Urban Development Project (Urban II) was designed following staff appraisal Report No Zim of May 8, The project was financed by IBRD 3079-Zim loan agreement between the Zimbabwe Govemment and the World Bank. The project was co-financed by Nordic Development Fund and later Norwegian Agency for Development Cooperation. The following abbreviations have been used in this evaluation report: * LAs Local Authorities * FPP Financial Performance Plan * MLGNH Ministry of Local Government and National Housing * MoF Ministry of Finance * NEPC National Economic Planning Commission * NDF Nordic Development Fund * NOK Norwegian kroner * NORAD Norwegian Agency for Development Corporation * PCMU Programme Co-ordination and Monitoring Unit * PSIP Public Sector Investment Programme * SDR Special Drawing Rights * US$ US Dollar WB World Bank * Z$ Zimbabwe Dollar The World Bank loan agreement was US$ 80,000,000, NDF's budget was SDR and NORAD took over from NDF for a budget NOK 2,910,000. The following were the balances as at 30 April Category Amount in US$ Allocated Amount Disbursed % Disbursed US$ 1(a) Civil Works (A&B) ,614,178 88% I(b) Electrical Reticulation I (c) Civil Works - Part E (Reg) ,044 5% 1 (d) Budiriro 5 housing scheme/ Ncema Water Works ,146,000 50%/o (Originally Urban I projects spilling into Urban II) 2(a) Vehicles, Equipment ,413, % 2(b) Equipment for Part B %/0 2( c) Electrical Reticulation (A&B) /c 2(d) Building Societies ,784, % 2(e) Vehicle & Equipment (E+F) ,327 21% 3 Unallocated /e 4 Special Account Total World Bank US$ 80,000,000 US$ 75,077,191 94% Total NDF SDR 4,400,000 SDR % Total NORAD NOK 2,910,000 NOK 2,730,000 94% Notes to the Table: Part A = Primary Urban Infrastructure and Urban Services Maintenance Part B = Serviced Urban Residential Land and Related Community Services. Part E = Pilot Regional Development Program Part F = Project Administration and Monitoring

40 Annex 8 Page 2 of 11 I. Original objectives The original objectives of the Urban II project as outlined in the Staff appraisal report of 8 May 1998 were as follows: (i) (ii) (iii) (iv) (v) (vi) (vii) provide support to urban centres in supplying additional urban services and housing that will be required as a result of the projected doubling of the urban population over the next 7 to 10 years; strengthen the capacity of central and local Government institutions to determine the most cost-effective investments in the urban sector and establish the most efficient scheduling for these investments; ensure the continued financial self-efficiency of the urban local authorities, including maintenance of appropriate cost recovery and revenue generating capabilities; protect the capital assets of urban authorities through improved maintenance-related investments; strengthen the human resource capacity of local authorities to enable them to efficiently deliver, operate and maintain urban services on a sustained basis; maximize the role of non-governmental, private sector, investors in housing, particularly building societies, as a means of relieving the financial burden on Government: assist with the design and implementation of regional development programs focussed on the secondary cities, small town and rural centres as alternatives to the major cities, emphasizing in particular the promotion of employment creation in the urban areas to absorb the growing labor force. 2. Actual achievements Following is an assessment on the achievements made on the original objectives of the Urban II programme, and reasons for those achievements will be stated as well. (i) Provide support to urban centres in supplying additional urban services and housing that will be required as a result of the projected doubling of the urban population over the next 7 to 10 years. Because there had been very limited finances available for the local authorities to implement any primary infrastructure and housing schemes after Zimbabwe obtained her independence in 1980, there was a great need in the local authorities to augment the water and sewer supply schemes. Also a great part of the road networks was in need of rehabilitation and repair. Hence the major portion (60%) of the Urban II projects was within the primary infrastructure/off-site services. Many of the LAs now have adequate water and sewer supply systems catering for the expected development for another five to ten years. However, the improvement of the road infrastructure did not receive sufficient attention during the programme before the financial year due to limited capital budget resources.

41 Annex 8 Page 3 of 11 Conclusion: In general the original objective ofproviding sufficient primary infrastructure in the LAs has been satisfactorily achieved and all the local authorities are now in a better position to embark on further housing developments in order to meet the ever increasing demandfor more housing schemes. Regarding the issue ofproviding houses for the low income population the objective of providing serviced stands were satisfactorily met with more than stands serviced, and 50% of these stands were actually developed and occupied. However, the rather slow pace in the construction of houses has been mainly caused by problems in obtaining mortgages from the building societies, and the general adverse economic conditions coupled with soaring interest rates prevailing in the country, discouraged many potential stand owners from entering into new loans. (ii) strengthen the capacity of central and local Government institutions to determine the most cost-effective investments in the urban sector and establish the most efficient scheduling for these investments; At the beginning of the Urban II programme most of the councils did not have sufficient and professional staff to carry out the necessary planning of projects especially in the two departments of Engineering and Treasury. There was no proper system for the appraisals of projects and PSIP funds were often allocated to projects that had not been thoroughly evaluated and reviewed. During the first half of the project period relevant persons from all the participating local authorities attended tailored training courses, both locally and abroad through funds from NDF Credit. This was geared to strengthen councils' ability to carry out sufficient planning and preparation of project proposals. However, it should be mentioned that the smaller local authorities which qualified for Urban II after 1996, did not benefit from the above training exercise. With the assistance from the World Bank's mission, more rigorous and standardized procedures for project proposals and appraisals were introduced in 1995 to ensure that projects were cost-effective before they were accepted for implementation under the Urban II programme. There was some initial resistance from some of the councils in using the new procedures, but they eventually accepted these new procedures as a necessary precaution to be taken before any project was actually implemented. Furthermore strategic planning exercise was introduced in , assisting councils in prioritizing the implementation of projects to ensure that their development objectives were being met. Conclusion: The original objective of strengthening the capacity of central and local government institutions was satisfactorily achieved, since a more rigorous appraisal exercise has now become the norm before any project to be funded through PSIP is approved. Most of the councils are now using strategic planningfor their future developments. (iii) ensure the continuedfinancial self-efficiency of the urban local authorities, including maintenance of appropriate cost recovery and revenue generating capabilities; The financial performance of LAs has significantly improved since the project started in 1991, largely due to the introduction of the 5-year Financial Performance Plan. Most of the LAs are making surpluses in rates, water, sewerage, refuse, and housing accounts. However,

42 Annex 8 Page 4 of 11 all LAs are making deficits in their health account due to the levels of levies that are controlled by Government. The LAs are given the mandate to run health services without the accompanying resources. This has resulted in other viable accounts funding the health deficits, resulting in cash flow problems in all LAs. Despite the fact that all LAs are now performing better than before the project started all LAs are having cash flow problems due to the unfunded health mandate. Further, LAs have problems with revenue collection as debtors are not honoring their obligation to LAs largely due to the adverse macro-economic environment prevailing in the country. Conclusion: The achievement was satisfactory that is of LAs coming out of the deficit situation, however, due to factors outside their control all LAs are having cash flow problems thereby overshadowing the already achieved objective of making surpluses. (iv) protect the capital assets of urban authorities through improved maintenance-related investments; Urban II programme implemented road rehabilitation projects and several existing water and sewage works were either rehabilitated or augmented during the programme. The Urban II programme has facilitated four major contracts for the purchase of necessary vehicles, heavy plant and maintenance equipment for all the councils to be used for both construction works and also for the necessary operation and maintenance of the infrastructure. Nineteen of the participating councils procured specialized operation and maintenance equipment for water, sewer and public lighting. It is expected that councils will use such equipment to better advantage in the improvement and maintenance of their infrastructure services. Conclusion: The achievement was satisfactory and councils now have much better infrastructure than was the case before. Furthermore, all councils have benefitedfrom the programme through purchases of the requisite vehicles, plant and equipment to enable them to undertake proper maintenance of their infrastructure. (v) strengthen the human resource capacity for local authorities to enable them to efficiently deliver, operate and maintain urban services on a sustained basis; As mentioned under point (ii) above special tailored training courses were held for the relevant personnel in the local authorities in the field of urban planning, detailed designs, contract management, and general operation and maintenance of municipal infrastructure. Furthermore local training seminars in project / contract management have been held for the project co-ordinators in the local authorities. Specialized training in the operation of sewage treatment works has been offered to operators/engineers in councils constructing more advanced Biological Nutrient Removal (BNR) sewage treatment works. In addition to this specialized training most of the local authorities have sent their staff in charge of the water and sewage works, to the general training in operation of water and sewage works being offered by the Water and Sanitation Institute at the University of Zimbabwe. Furthermore the Institutional Capacity Development Component of Urban II programme has assisted councils in understanding the importance of having enough and qualified personnel to run the urban services, and work out proper operation and maintenance routines and

43 Annex 8 Page 5 of 11 budgets. However, one worrying factor in this regard is the current revenue scarcity in most of the councils which may result in councils being tempted to reduce the costs of operation and maintenance. If this occurs, the lifespan of the investments made under the programme will obviously be affected. Furthermore, some of the local authorities have no proper human resource plans on how to attract and retain qualified and experienced key personnel, hence the turnover of the professional staff has been high, creating problems in the execution of the urban services in some councils. Through the NDF institutional development component, all LAs staff managed to get the necessary training to enable them to effectively undertake appraisal of Local Authority projects, preparations of FPPs and some strategic plans and finally the production of final accounts and submissions of audited accounts. At the start of the project some LAs were 3-5 years behind with their audits and that has been reduced to about months at the closure of the project. The specific training was given to Housing, Engineering and Treasury departments. Under this institutional component, the MLGNH's staff also benefited through training and acquisition of computers and this has enhanced maintenance of sustainable good and effective local governance. During the implementation of the project, a number of studies were carried out and these have helped to strengthen the LA capacity to operate council's affairs effectively. For instance one such study, the Commercialization study, has concluded that LAs must shed off all non core activities and put their core competencies to the core business of councils. The Promun accounting system, which was purchased through the NDF institutional component, has really strengthened the financial reporting system of LAs. However, despite the fact that LAs capacity was generally strengthened, the strengthening of institutional capacity of the Urban Transport Unit in MLGNH was not fulfilled as the Ministry discontinued with this Unit in Conclusion: The achievement was satisfactory as all LAs are now well positioned to maintain their infrastructure services. Theirfinancial management has improved remarkably. However, the drawback is that despite the amount of capacity given to LAs through the project, LAs are failing to retain trained staff due to poor conditions of service. This problem has led to some of the LAsfailing to produce the audited accounts as stipulated in the Urban Councils 'Act. (vi) maximize the role of non-governmental, private sector, investors in housing, particularly building societies, as a means of relieving the financial burden on Government: This objective was achieved because the Building Societies and on-site contractors were involved in the urban housing plots were actually serviced against a target of plots. Conclusion: The achievement was satisfactory in that a lot ofplots were serviced during the implementation of the project. However, Building Societies ran out of Mortgage funds resulting in a slow pace in the construction of houses. (vii) assist with the design and implementation of regional development programmesfocussed on the secondary cities, small town and rural centres as alternatives to the major cities,

44 Annex 8 Page 6 of 11 emphasizing in particular the promotion of employment creation in the urban areas to absorb the growing labor force. The original objective was revised so it would not include the rural growth centres and focus was skewed towards the small informal urban sector. This included the construction of incubator sites, i.e. shells for small to medium enterprise developers. Harare, which was originally part of this project, withdrew and Chitungwiza replaced it. However, already now Harare City Council, after visiting Bulawayo's functioning factory shells, decided to also embark on a similar project. The project was implemented right at the end of the project resulting in some towns failing to realize the expected incomes from the incubator occupiers. Because of the late implementation of this project, the general impact is not yet known. However, it is generally believed that the construction of factory shells will assist the councils in promoting the small-scale industrial sector. Conclusion: The objective was satisfactorily achieved in Bulawayo, Rusape and Marondera but not in Chitungwiza (whichfailed to receive responsive bidsfrom the contractors as the targeted contractors were not used to World Bank's regulations andprocedures. The councilfinally optedfor the use of the same type of structures of the factory shells as being used by Marondera and Rusape, and decided to carry out the works byforce account.) The full impact of this project can only be determined after evaluating over a period of time, as this is a pilot scheme. 3. Borrower's own performance The "Borrower" for Urban II programme was the Government of Zimbabwe (Ministry of Finance), while the planning agency was National Economic Planning Commission (NEPC) and the implementing agency was the Ministry of Local Government and National Housing (MLGNH). The Programme Co-ordination and Monitoring Unit (PCMU) was the project management unit working on behalf of MLGNH for the Urban I and II programmes. While only 4 local authorities participated in the Urban I programrne 21 eligible local authorities benefited from participation in the Urban II programme. In the following, the performance by the various parties of the Borrower has been evaluated. The evaluation has been divided into weaknesses and strengths: (i) Strengths * The Ministry of Local Government and National Housing established a Programme Coordination and Monitoring Unit (PCMU) with professional staff to be in charge of the implementation and monitoring of the Urban II programme. Despite some initial problems in establishing the Programme Co-ordination and Monitoring Unit with qualified staff, the unit soon experienced a very stable staff situation, which resulted in valuable experiences gained under the programme being retained within the implementation unit and hence could be shared with local authorities. This resulted in a more speedy and efficient way of implementing the programme.

45 Annex 8 Page 7 of II * Since the Urban II programme in most of the urban councils was the major source for securing substantial funds for implementing municipal infrastructure, councils were very positive and committed to the execution of the programme. * Although Central Government had limited PSIP funds to implement Urban II programme, there was normally positive support and commitmento honor the allocations as pledged, especially for primary infrastructure projects. However, the situation was often quite different when it came to allocations for on-site housing projects, which did not always come as had been planned. * The establishment of an inter-ministerial steering committee overseeing the implementation of the Urban II programme created a good relationship between the Government and the implementing agencies. This establishment gave the various ministries involved in the Urban II programme a good opportunity of following the whole programme, and gave also all the parties an opportunity to discuss and solve various problems which arose during the implementation period. * Although the initial professional implementation capacity in the participating Local Authorities was limited, councils soon managed to employ the necessary qualified staff including a project co-ordinator in each LA. This, together with the training facilities offered under the Urban II programme, resulted in substantial improvement of the implementation capacities in councils, assisting in the overall accomplishment of the whole programme. However, this positive effect was lost in some councils that experienced high turnover of professional staff due to poor conditions of service. (ii) Weaknesses * Since the Urban II programme was prepared and appraised more than 10 years ago, the economic situation in Zimbabwe has changed drastically. Because of the adverse development in the macro economic environment during the course of the Urban II programme, the country's ability to provide the necessary local upfront funding for the projects via the Public Sector Investment Programme gradually worsened. This resulted in limited PSIP allocations for the Urban II programme and became a restraining factor for the pace of implementation of the whole programme. Many projects had to be phased over several years in order to secure sufficient funds. Furthermore, the severe depreciation of the local currency during the programme period reduced the PSIP allocations in real terms, slowing down the rate of loan disbursement. To alleviate this problem and allow Zimbabwe Governmento benefit from the whole loan amount, the loan agreement was amended in 1997 to increase the reimbursement percentage by the World Bank from 30% to 50%. Furthermore, Zimbabwe Government and World Bank subsequently agreed on three one year's extensions of the Urban II programme, (1997,1998 and 1999). * Insufficient initial professional capacity in local authorities to prepare project proposals and tender documentation and lack of funds to pay for the necessary consultancy services hampered the physical start of the Urban II programme by approximately 2 years. The lack of professional and managerial capacity in some smaller councils resulted in further delay in qualification for participation in the project. Originally the loan agreement did not include any consultancy services, since those costs were supposed to be paid by the local authorities. However, as the general economic situation deteriorated in the country, councils were not able to pay for such services from their own coffers. In a bid to solve the problem of payment for necessary consultancy services, the World Bank's mission facilitated in the amendment of the loan agreement in 1994 to increase the reimbursement rate for local costs from 20% to 30%, in order to reimburse the government for consultancy services. After this problem had

46 Annex 8 Page 8 of 11 been successfully resolved, councils could utilize the PSIP allocations to also pay for necessary consultancy services, and that speeded up the preparation and implementation of the projects significantly. * Actual disbursements from National Housing Funds for on-site housing schemes were normally done very late in the financial year, and sometimes some of the allocated funds were not disbursed at all. This resulted in frustration in the local authorities, and unnecessary delays in the implementation of housing projects. This was also the reason why the relative high proportion of on-site housing projects were implemented by force account and councils could also adjust the pace of the implementation with the actual funds received. * Non-granting of exemption for import duty and taxes for some goods purchased by the LAs caused confusions and funding problems for some of the councils. The same practice for granting of exemption should have been upheld throughout the Urban II period to maintain consistency since this was incorporated in the original contract as signed between the Government and World Bank. * The Reserve Bank's regulation of not paying local contractors/suppliers in foreign currency even in cases where much of the materials were brought from abroad, caused severe problems for some contractors with on-going contracts during the period of the weakening Zimbabwe dollar. Conclusions: In general the Borrower performed satisfactorily and the programme was implemented successfully during the programme period, although the programme period was extended by 3 years due to various reasons as stated above. 4. World Bank's performance (i) Strengths The Bank's vast and worldwide experience was an asset and a reassurance during the implementation of the programme, both to the government, PCMU and the local authorities. Procurement workshops conducted by World Bank/PCMU enhanced the understanding of World Bank's procurement documents. * The regular visits by the Bank's mission proved to very fruitful, and many practical implementation problems were discussed and resolved during those visits. The fact that the staffing of these visits was stable and some had also participated in the initial preparation and appraisal of the programme gave a very good continuation and understanding of the problems the programme was facing. The mission was also able to follow up problems with World Bank Washington if they could not be resolved during the visits. The mission also gave important advice on establishing and maintaining useful tracking tables for project implementation. The following issues were discussed with the Bank's mission team and this resulted in their being formally incorporated in the Urban II programme:: * Inclusion of consultancy fees in the project costs, by increasing the reimbursement percentage from 20% to 30% (1994). * Revised and adopted procedures for appraisal of sub projects (1995).

47 (ii) Annex 8 Page 9 of II * Increase of the reimbursement from 30% to 50% due to the general depreciation of the local dollar to enable the Zimbabwe Government to fully utilize the whole amount as set aside in the loan agreement (1996). * Increase of the threshold for internal handling by PCMU without any prior approval by the Bank from US$ to US$ , resulted in reduced lead time in the preparation of documents for many projects and hence a speedier implementation of those projects (1996). * Practical solution to reimbursements by the World Bank on civil contracts where the contract price was stated in two currencies (1997). * The World Bank showed an objective approach to the many environmental changes occurring in Zimbabwe during the Urban II period, and demonstrated in many cases a willingness and ability to make the necessary amendments to the loan agreement. This assisted the Government in implementing and accomplishing the Urban li programme through the varying and often difficult environment. * The certainty that necessary foreign currency was always available, provided that all the World Bank's procurement procedures were followed, was a great help in the planning and accomplishment of the Urban II programme's objectives. * The local World Bank's office in Harare assisted PCMU positively in discussions on practical implementation problems and general procurement issues. Weaknesses * The rather rigid rules and procedures of the World Bank's procurement system caused a lot of initial problems for councils and consultants in understanding and adapting to the Bank's guidelines. This resulted in many revisions of tender documents being made, delaying the start up of several sub projects. However, after World Bank's / PCMU's procurement workshops, both the consultants and the councils became conversant with the standard bidding documents to be used for the various types of contracts. * The many changes / amendments made to the Bank's standard bidding documents frustrated most of the local authorities, consultants and PCMU, and caused a lot of extra work delaying the preparation of tender and contract documents. However, for the last few years there have been less changes to the documents, and most of those implemented have been issued on diskettes so all the parties involved could easily upgrade the documents. * In some cases the World Bank did not acknowledge use of practical engineering judgements in contract management. This caused general concern amongst the local authorities, consultants and contractors. As an example when the local currency heavily depreciated in November 1997, the on-going fixed price contracts were severely affected, especially those contracts where imported goods had been priced in local currency. However, the World Bank ruled out that since the contracts were signed as fixed price contracts, it was impossible to compensate the contractor for the depreciation of the local currency. * The frequent changes of the World Bank staff members especially in the procurement office at times caused confusions in knowing whom to approach when guidance was needed in certain cases, and often the people assigned to certain tasks were on missions and could not be reached. The time required for the World Bank to review and approve tender and contract documents was generally too long, and this delayed the starting up of many projects. Attempts by the World Bank in involving the Bank's local office staff to scrutinize all the documents before forwarding the documents to Washington, in order to reduce the review works in

48 Annex 8 Page 10 of 11 Washington, did not result in any reduction of review time. This was mainly due to the fact that the persons at the local office were not approved procurement persons and hence the procurement office in Washington had to do the same review works as earlier. Instead of reducing the review time, the involvement of the local office in some cases resulted in longer delays than normal. Conclusion: Generally the World Bank performed satisfactorily during the Urban IIperiod, although the above issues need to be addressed in future projects. 5. Lessons learnt /recommendations for new projects In general the implementation of the Urban II programme went smoothly despite the following experiences from the programme which should be considered in future programmes: * Any changes / amendments to the Standard Bidding Document should be issued on diskette for easier revision of the bidding documents. Also all the implementing agencies of World Bank funded programmes should be advised when changes are made. This would ensure always use of the latest versions of the standard bidding documents. * Payment terms (number of days) for foreign currency have to be revised to cater for the actual time required to get the payments through the system. (Contractor - Project Manager - Council - PCMU - World Bank-Contractor) to reduce interest charges on late payments, which can not be paid by the project's account and hence have to be settled from council's own resources. * A lot of councils and consultants have complained about the strict qualification criteria for the annual turnover for a bidder to be viewed as responsive (2,5 times the annual project costs), which they alleged being unnecessarily barring smaller companies from bidding on contracts based on World Bank's guidelines. These information criteria should be reviewed for each new programme in order to try and encourage participation by local smaller contractors, if possible. * World Bank's guidelines generally recommend fixed price system for contracts with duration of up to 18 months. However, the Urban II programme has shown that fixed price contracts should only be used as long as the economic situation in a country is stable. At the initiation of the programme there was quite a bit of resistance against embarking on fixed price contracts, however, the councils soon realized that it was much easier to prepare budgets and secure sufficient funds for fixed price contracts and hence accepted such contracts. The fixed price system, however, discouraged some contractors from participating under the programme, since they were not used to and not willing to accept the fixed price system, and the few received bids were often overpriced to cushion the contractors from loosing out in cases of price escalation. * The high price increase experienced in Zimbabwe during the last two years, forced the project to include price variation clauses in all new contracts, and this resulted in difficulties for the councils in budgeting for the works to be done. Many of the tendered prices came much higher than the budgeted amounts, and in several cases the intended works had to be scaled down or the contracts retendered. * The World Bank's insistence on using the general price increase formulae as included in the standard bidding documents caused a lot of problems in the implementation of price

49 Annex 8 Page 11 of 11 variation contracts. This was because the indices were not always updated and published regularly every month. This created a lot of arguments between the contractors and the consultants when it came to calculation of the actual price increases. Most consultants and contractors expressed preference for the continuing use of the "proven cost system" which had been in use in Zimbabwe for a long period, however, the Bank did not accept that. Alternative ways of calculating price variations than the World Bank formulae should therefore be addressed and accepted in cases where the indices are not published regularly. * The World Bank's central filing system appeared not to be functioning well, and this sometimes caused frustrations and disappointment at PCMU during the implementation of the programme, especially when it came to procurement / payment issues. Several times World Bank Washington requested PCMU to provide documentation, which in fact had already been submitted to the Bank, and PCMU then had to resubmit the documentation. This consequently resulted in delays in the handling process of the affected projects/payments. * The World Bank should decentralize some of its operational decisions to their local office. The same office should be given a special threshold for the local World Bank Office for handling and giving No-objections of tender documents and tender evaluation reports. This threshold should be higher than that for internal handling by the Borrower, and only contracts higher than this local threshold should be sent to World Bank, Washington for approval and No-objections. In this way the World Bank's local office can really play a vital role and be a facilitator in implementation of future World Bank funded projects. * On a more positive note the World Bank has shown foresight in identifying successor projects to ensure continuity in the provision of municipal services (Urban I - Urban II - Local Government Capital Development Programme). This has already and will indeed continue to assist the local authorities to cope with the demand for infrastructure due to the ever increasing urban local authorities' population. * During the Urban II programme the project experienced several contract management problems caused by poor relationship between the Project managers (consultants) and the councils. In some cases the councils did not participate enough in the designs and preparation stage of the contract documents, resulting in costly decisions made by consultants without the council's consent. It should be mentioned that Urban II initiated dialogue between the councils and the Consulting Engineer's Association in order to revise and improve upon the current forms of contracts and conditions being used for consultancy services. The councils felt that the old forms of contract were too consultant friendly and did not sufficiently take care of the council's interests, i.e. fee structuring system, ownership of designs and calculations, and financial liability due to consultant's faulty designs. It has been recommended to councils that for future projects the contracts for consultancy services have to be more balanced and fair to all parties.

50

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