FOR OFFICIAL USE ONLY

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT FEDERAL REPUBLIC OF NIGERIA INFRASTRUCTURE DEVELOPMENT FUND PROJECT (LOAN 2925-UNI) Water and Urban Group 2 Africa Region December 19,1997 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 Currency Unit = Naira 1987 US$1 = : = = = = = = = ABBREVIATIONS AND ACRONYmS CBN FMBN FMF FMWH IBRD ICR IDF LG NMB NNPC O&M PFI PIU PSP SAR SPO Central Bank of Nigeria Federal Mortgage Bank of Nigeria Federal Ministry of Finance Federal Ministry of Works and Housing Intemational Bank for Reconstruction and Development Implementation Completion Report Infrastructure Development Fund Local Government Nigerian Merchant Bank Nigeria National Petroleum Corporation Operation and Maintenance Participating Financial Intermediary Project Implementation Unit Private Sector Participation Staff Appraisal Report Standing Payment Order Vice President: Jean-Louis Sarbib Director: Yaw Ansu Sector Manager: Letitia A. Obeng Task Manager: Alan Carroll

3 FOR OFFICIAL USE ONLY TABLE OF CONTENTS PREFACE EVALUATION SUMMARY INTRODUCTION PROJECT OBJECTIVES AND COMPONENTS IMPLEMENTATION EXPERIENCE AND RESULTS PROJECT SUSTAINABILITY ASSESSMENT OF OUTCOME AND KEY LESSONS LEARNED ii iv iv PART I: PROJECT IMPLEMENTATION ASSESSMENT 1 PROJECT BACKGROUND I STATEMENT AND ACHIEVEMENT OF PROJECT OBJECTIVES 1 MAJOR FACTORS AFFECTING THE PROJECT 6 PROJECT SUSTAINABILITY 9 BANK PERFORMANCE 9 BORROWER PERFORMANCE 10 ASSESSMENT OF OUTCOME 13 FUTURE OPERATION 14 KEY LESSONS LEARNED 14 PART II: STATISTICAL TABLES 17 Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Cost Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table I1: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions APPENDIX A: BORROWER'S COMMENTS ON DRAFT ICR APPENDIX B: BORROWER'S EVALUATION OF THE PROJECT 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.

4

5 IMPLEMENTATION COMPLETION REPORT NIGERIA INFRASTRUCTURE DEVELOPMENT FUND PROJECT LOAN 2925-UNI PREFACE This is the Implementation Completion Report (ICR) for the Infrastructure Development Fund Project (IDF) in Nigeria, for which Loan 2925-UNI in the amount of US$69.5 million was approved on March 29, 1988 and became effective on May 29, The loan was closed on June 30, 1997, 30 months after the original closing date of December 31, On January 1, 1996 US$7.5 million of the loan was canceled. As of the date of this ICR, US$60.68 million had been disbursed. Data collection and drafting of the ICR were carried out by a team composed of Jonadab Metibaiye (Civil Engineer, World Bank Resident Mission, Abuja), Oluwole Komolafe (Consultant Financial Analyst/Economist), and David Garnvwa (Consultant Urban Planner). The ICR was finalized by Alan Carroll (Senior Urban Development Specialist, AFTU2). It was reviewed by Jerome Chevallier (Acting Country Director, AFC12 and Manager, Operations Support, AFTS3). The Federal Ministry of Works and Housing (FMWH) submitted comments on the draft ICR and prepared its own project evaluation report. These appear in Appendices A and B, respectively. FMWH's conclusions about the project's outcome and lessons are similar to those of the World Bank. FMWH takes issue with the Bank's view of its (FMWH's) performance, pointing to its successful management of investment programming studies and its issuance of a National Urban Policy. FMWH also feels that the Bank exercised excessive control over project supervision, especially procurement.

6

7 IMPLEMENTATION COMPLETION REPORT NIGERIA INFRASTRUCTURE DEVELOPMENT FUND PROJECT LOAN 2925-UNI EVALUATION SUMMARY INTRODUCTION 1. The Infrastructure Development Fund (IDF) project was the fourth urban infrastructure project supported by the World Bank in Nigeria. The prior projects covered sites and services developments for lower income households (Bauchi State 1977 and Imo State 1986) and solid waste and drainage (Lagos State 1985). 2. The IDF loan was signed on August 4, 1989 and became effective on May 29, The IBRD provided a loan of US$69.5 million, of which US$36.5 million was allocated to pre-appraised sub-projects in three States, US$26.7 million to sub-projects to be identified and appraised during project implementation in other States, and US$5.3 million to technical assistance through the Federal Ministry of Works and Housing (FMWH). PROJECT OBJECTIVES AND COMPONENTS 3. The primary objective of the project was to initiate the establishment of a mechanism for financing urban infrastructure using selected merchant banks to identify, appraise, supervise and cofinance sub-projects executed by the States. This was referred to in the Staff Appraisal Report (SAR) as a "wholesaling mechanism". The implementation of the IDF was intended to help States (a) to manage, maintain and consolidate existing urban infrastructure and services, (b) to improve financial management and resource mobilization, and (c) to improve infrastructure investment planning and programming. 4. The project included: (a) a line of credit to five selected Nigerian merchant banks to finance pre-appraised infrastructure sub-projects in Benue, Gongola and Ondo States and future merchant bank-appraised State infrastructure sub-projects; (b) funding for FMWH to implement (i) training of merchant banks and States in infrastructure project selection, appraisal and supervision; (ii) consultant services to undertake performance audits and studies of IDF Project Guidelines; (iii) training and studies to assist FMWH to monitor and post evaluate infrastructure projects and programs; (iv) training and studies to assist States to prioritize infrastructure investments; (v) studies to restructure the Federal Mortgage Bank of Nigeria (FMBN); (vi) studies to prepare future projects; and (c) vehicles and equipment for IDF support activities.

8 - ii - 5. The on-lending arrangement was originally structured such that IBRD loan funds- -equivalent to 75 percent of the cost of the sub-projects--were to be channeled to States through the merchant banks, known as Participating Financial Institutions (PFIs). The PFIs were to make financial contributions of 10 percent of the sub-project costs and were to bear the credit risk on the portion of the loan on-lent through them and on their own exposure to the project. The States were to contribute 15 percent of the costs of the subprojects from their own resources. IMPLEMENTATION EXPERIENCE AND RESULTS Financial Objectives 6. The establishment of the IDF mechanism reflected a broad conception of the financial objectives of the project, which included: (a) to monitor and improve the creditworthiness of State Governments, (b) to develop a relationship between State governments and the Nigerian capital market, and (c) to help States improve their fiscal revenue base, thereby moving urban services toward financial sustainability. These objectives appeared to be well founded, achievable and relevant to the realities of the sector at the time they were formulated. The PFIs, which were found to be capable and well managed at the time of appraisal, proved during project implementation not to be effective institutions for urban infrastructure financing. 7. In the end, the wholesaling mechanism for infrastructure financing was not established. State governments did not become more creditworthy, and the transparency of State fiscal affairs did not improve. Soon after Board approval, the Nigerian banking system, including the merchant banks, went into crisis, eliminating any possibility of developing a role for the capital market in public infrastructure financing. 8. Although the on-lending sequence and terms described above were agreed at negotiations, in which all parties were represented, the PFIs subsequently refused to accept the credit risk of funds on-lent to the States and would not enter into subsidiary loan agreements, which were a condition of IBRD loan effectiveness. The major causes were the rapid deterioration of the Nigerian economy and the emergence of the banking sector crisis, both soon after Board presentation. 9. In response to the failure of the original financing arrangements, the lending and legal agreements were modified to channel the loan funds directly to the State governments, thus making the States the primary obligors on the loan with the responsibility of bearing the credit and foreign exchange risks. States retained the option of borrowing 10 percent of project costs from the PFIs at the market rate. However, the States did not do so, choosing instead to increase their counterpart fund contributions from 15 percent to 25 percent. The PFIs were thus relieved of the responsibility of making financial contributions to the project.

9 - iii - Institutional Objectives 10. Delivery of urban services: The project was designed to reinforce infrastructure provision through Nigeria's mainstream public and private institutions. The country's severe macroeconomic and governance problems, which started soon after Board approval and continued during the project's entire implementation period, defeated attempts to improve the efficiency and sustainability of infrastructure provision. 11. State public agencies: To the extent that staff of the State Ministries of Finance, Works, and others involved in the project gained on-the-job training and experience in areas such as project administration, works supervision, property taxation, solid waste management, and vehicle and equipment maintenance, these entities have been strengthened. New tenement rating and collection agencies were created in most of the States. However, little or no formal training of State personnel took place. 12. Merchant banks: While some PFIs were able to acquire experience in the administration of externally funded projects, they did not develop the capacity to identify and appraise public infrastructure investments. 13. FMWH: FMWH did not provide pro-active leadership or coordination. It failed to utilize most of the funds allocated to it for implementing training programs. 14. Nigerian consultants and contractors: In some cases their capacity was enhanced by working within the more disciplined technical and financial controls of a World Bankassisted project. Physical Objectives 15. Although the actual cost of the State sub-projects totaled US$67.3 million compared with the appraisal estimate of US$91.0 million, the project can be said to have achieved most of its construction objectives. In addition to covering the three Phase I States, the project extended to eight other States in Phase II. A total of 92 km. of urban roads and 122 km. of drainage were upgraded or rehabilitated in eight states. The project financed the laying of 28 km. of water transmission mains and 91 km. of water distribution pipelines in three states. The numbers of sub-projects implemented by type were: 23 road and drainage, 12 water supply (including a major system in Edo State), four solid waste collection, six electricity distribution, one industrial estate, one sites and services project for housing, infrastructure for one major regional market, infrastructure for a government housing estate, and infrastructure for a transport terminal. 16. The loan was extended three times from its original closing date of December 31, 1994 to the final closing on June 30, 1997, mainly to allow ongoing works to be completed. Almost all the works suffered from construction delays due to poor performance of contractors and consultants, governance problems, turnover of State administrations, and weak management by some States and merchant banks. At loan

10 - iv - closing, nine sub-projects remained between 90 and 98 percent completed. One roads and drains sub-project in Kogi State was only 80 percent completed at loan closing. 17. Despite the extent of the works constructed, they generally have not produced a substantial improvement in the quality of urban services because (a) in many cases the investments were too limited in scope and too widely scattered to make an impact and (b) operation and maintenance of the facilities has been inadequate or non-existent. PROJECT SUSTAINABILITY 18. The project failed to establish a sustainable financing mechanism for urban infrastructure. As explained above, this was due mostly to macroeconomic and governance factors not subject to the project's control. However, in hindsight, the project's design did not adequately take into account some of these major risk factors which were foreseeable. 19. The sustainability of the physical improvements financed through the project is unlikely. None of the States presented a project sustainability plan by the loan closing date. The original design assumed that technical assistance would produce increased general revenues and tariffs for operation and maintenance. In reality, tenement rate (property tax) collections in Benue and Gongola States (now Adamawa and Taraba) during 1992 to 1997 were less than 10 percent of projected levels. Though the project helped establish property rating and valuation systems in Bomo, Ondo, Kogi and Yobe States, collections had not commenced at loan closing. Tariff increases for water and waste management were small or non-existent. The main factors behind this failure were: * Absence of political incentives to raise taxes and tariffs. * Lack of confidence by the public that higher taxes and tariffs would result in better services. * Inadequate involvement of users in investment decisions. * Marginalization of Local Governments in the current governance system, and their inability to take over operation and maintenance of facilities. * Inefficient revenue collection mechanisms, and absence of legal action against defaulters. ASSESSMENT OF OUTCOME AND KEY LESSONS LEARNED 20. Outcome: The project's outcome is unsatisfactory, as it failed to achieve its objectives. The infrastructure financing system involving merchant banks was not

11 - v - established; in fact, it never got off the ground. Although a considerable number of physical facilities were put in place, the institutional and financial mechanisms for their sustainability is lacking. The project did not contribute to promoting greater fiscal responsibility or self-reliance by the States. Adequate counterpart funds were mobilized for the project, but this was achieved through automatic deductions from Federal transfers, which had no effect on States' fiscal discipline. A limited amount of capacity building was achieved, mainly on-the-job, but this was undermined by Nigeria's severe governance and economic problems. FMWH failed to implement systematic training programs. The capacity for coordination and monitoring of urban development programs at the national level remains weak. 21. Even after the wholesaling mechanism fell apart, the Bank and the Government still considered it worthwhile to continue the project because of the expected benefits of the physical investments and the prospects for capacity-building. The primary focus of the project shifted away from the financial/fiscal system and to the infrastructure subprojects. By the time it became clear that even the sustainability of the physical investments was unlikely, it was too late to renege on the majority of the financing commitments (although $7.5 million was eventually canceled), as the Government felt obliged to fulfill strong expectations among the Phase II States that they would obtain a share of the project financing. 22. In several States, notably Benue and the former Gongola, the project achieved a significant concentration of physical improvements in roads, water supply, drainage, and solid waste management. However, the impact of the works in Ondo and most of the Phase II States was minimal because the project's resources were dispersed among numerous, scattered sub-projects. The exception in Phase II were Yobe and Taraba, in each of which the sub-projects were concentrated in two smaller towns. 23. Risk Assessment and Appropriate Project Design: In 1997 the World Bank places much more emphasis on serious risk assessment of proposed operations than it did ten years ago, when the IDF project was appraised. The major factors that undermined the IDF--macroeconomic decline, political problems, financial sector vulnerability, public sector weakness, marginalization of Local Governments--could have been identified and taken into account in the design of the project. Presumably, today's World Bank would be unlikely to undertake a project of this magnitude and innovativeness in such an environment. Rather, the Bank might reduce the scale of the project, set more realistic objectives, and support pilot efforts to test new approaches. 24. Concentration or Dispersal of Investments: Even if the States and Local Governments had been able to properly operate and maintain the project's investments, their impact was undermined by their dispersal among many States and urban centers. In the future, a clear policy needs to be adopted. On the one hand, an investment planning and programming approach may be used to focus packages of investments with a "critical mass" of expected impact in certain locations. On the other hand, a demand-driven approach could be adopted which would not necessarily maximize impact, but rather

12 - vi - promote other objectives such as improving State and Local Government capacity, subproject sustainability, or poverty alleviation. 25. Assisting States that Show Commitment: The approach used in Phase II of the IDF project--to assist States that demonstrate initiative and commitment--has been positive. Funds were channeled to States that promptly submitted acceptable proposals and arranged for counterpart funds to be earmarked. This approach may be replicated. 26. Operation and Maintenance: Future investments will need to be selected and scaled in proportion to the likelihood that they will be adequately operated and maintained. One avenue is to promote a much greater degree of involvement by Local Governments, community groups, and end-users in the planning and design. Another approach is to select investments only where implementing agencies have committed themselves to complying with rigorous fiscal and tariff improvement programs. It may also be useful to have implementing agencies earmark funds for O&M in advance, placing them in separate accounts or funds. Finally, future urban infrastructure programs should take the fullest possible advantage of opportunities for shifting the incentives for sustainable service provision to private enterprise. 27. Community Participation and Management: As long as governance systems remain fragile and unaccountable, and as long as public sector capacity remains weak and virtually non-existent at the Local Government level, there may be little alternative in Nigeria but to rely on community initiative and management for improving the delivery and sustainability of local services. Models along the lines of Social Investment Funds may have relevance in this context. Even after the viability of Local Governments is restored, community participation and management will remain important to supplement public sector capacity and ensure that programs are demand-responsive. 28. Private Sector Participation in Infrastructure: Although the IDF project used private contractors and consultants extensively and relied on merchant banks for financial administration, it did not promote private sector participation (PSP) in the delivery of urban infrastructure per se. The project worked with the existing parastatals and government agencies for implementing its investments in water supply, electricity distribution, and waste management. In fairness, the project was designed before PSP became part of the mainstream infrastructure development strategy of the Bank. Future assistance should seek to promote a range of PSP mechanisms, from the simple contracting of specific services to full divestiture. This is compatible with programs to strengthen urban management at the State and Local Government levels. 29. Policy and Institutional Reforms: Nigeria has a large reform agenda to carry out in urban development. The IDF generated a number of lessons about the institutional and financial framework:

13 - vii - * An effective Federal-level urban policy and coordinating agency is needed. The recently-issued National Urban Development Policy calls for a National Urban and Regional Development Commission which may be able to fulfill these functions. * The Federal Ministry of Finance and Central Bank should develop their capacity to monitor the indebtedness and counterpart funding commitments of States. * The Urban Development Bank of Nigeria needs to be placed on a sound financial and managerial footing. Its mandate should be reviewed to ensure that it supports the transition of States and Local Governments toward reliance on the financial market. * Reform of public utilities, to make them autonomous, commercially viable, and subject to competitive market incentives, needs to be undertaken. * A reform of the fiscal transfer system should be considered, as the large size and unconditional nature of the current Federation Account transfers create a disincentive for State and Local Government revenue mobilization. Also, the flow of transfers needs to be made transparent and predictable. * The Federal Government needs to put policies in place that will lead toward the use of the domestic capital market for urban infrastructure. Macroeconomic stability is paramount. The Government also needs to come to grips with the crisis of the banking sector, restoring a credible and effective regulatory system. * The restoration of capable Local Governments should be among Nigeria's highest priorities. Several issues need to be addressed once conditions permit Local Governments to assume their constitutional functions: (a) defining their responsibilities clearly, (b) making revenue transfers to them adequate and predictable, (c) providing incentives, through the transfer system, for them to increase their internal revenues, and (d) restoring their technical and administrative staff capacity.

14

15 IMPLEMENTATION COMPLETION REPORT NIGERIA INFRASTRUCTURE DEVELOPMENT FUND PROJECT LOAN 2925-UNI PART I: PROJECT IMPLEMENTATION ASSESSMENT PROJECT BACKGROUND 1. The Infrastructure Development Fund (IDF) project was the fourth urban infrastructure project supported by the World Bank in Nigeria. The prior projects covered sites and services developments for lower income households (Bauchi State 1977 and Imo State 1986) and solid waste and drainage (Lagos State 1985). 2. The IDF loan was signed on August 4, 1989 and became effective on May 29, The IBRD provided a loan of US$69.5 million, of which US$36.5 million was allocated to preappraised sub-projects in three States, US$26.7 million to sub-projects to be identified and appraised during project implementation in other States, and US$5.3 million to technical assistance through the Federal Ministry of Works and Housing (FMWH). STATEMENT AND ACHIEVEMENT OF PROJECT OBJECTIVES Objectives 3. The primary objective of the project was to initiate the establishment of a mechanism for financing urban infrastructure using selected merchant banks to identify, appraise, supervise and cofinance sub-projects executed by the States. This was referred to in the Staff Appraisal Report (SAR) as a "wholesaling mechanism". The implementation of the IDF was intended to help States (a) to manage, maintain and consolidate existing urban infrastructure and services, (b) to improve financial management and resource mobilization, and (c) to improve infrastructure investment planning and programming. 4. The SAR presented an ambitious "long-term lending strategy" as follows, of which the IDF was to be the first stage: * Support the establishment of a sustainable wholesaling mechanism to fund priority urban investments. * Promote fiscal self-sufficiency at the State level. * Support the States in making fiscal adjustments. * Develop a market for State and Municipal bonds. * Promote a more efficient, equitable, and sustainable delivery of urban services.

16 -2- Project Description Through the participating financial institutions (PFIs), introduce financial discipline into the State and Local Government systems. 5. The project included: (a) a line of credit to five selected Nigerian merchant banks to finance pre-appraised infrastructure sub-projects in Benue, Gongola and Ondo States and future merchant bank-appraised State infrastructure sub-projects; (b) funding for FMWH to implement (i) training of merchant banks and States in infrastructure project selection, appraisal and supervision; (ii) consultant services to undertake performance audits and studies of IDF Project Guidelines; (iii) training and studies to assist FMWH to monitor and post evaluate infrastructure projects and programs; (iv) training and studies to assist States to prioritize infrastructure investments; (v) studies to restructure the Federal Mortgage Bank of Nigeria (FMBN); (vi) studies to prepare future projects; and (c) vehicles and equipment for IDF support activities. 6. The on-lending arrangement was originally structured such that IBRD loan funds-- equivalent to 75 percent of the cost of the sub-projects--were to be channeled to States through the merchant banks, known as participating financial institutions (PFIs). The PFIs were to make financial contributions of 10 percent of the sub-project costs and were to bear the credit risk on the portion of the loan on-lent through them and on their own exposure to the project. 7. The States were to contribute 15 percent of the costs of the sub-projects from their own resources. Achievement of Objectives Financial Objectives 8. The original on-lending sequence and terms are illustrated in Figure I below. Although this scheme was agreed at negotiations, in which all parties were represented, the PFIs subsequently refused to accept the credit risk of funds on-lent to the States and would not enter into subsidiary loan agreements, which were a condition of IBRD loan effectiveness. The major causes were the rapid deterioration of the Nigerian economy and the emergence of a banking sector crisis, both soon after Board presentation. Figure 1 Original On-lending Arrangement World Bank Federal Gov't PFIs 8.23% 8.23% 8.23%+3.5% 20 yr, 5 yr grace 20 yr, 5 yr grace 15 yr, 3 yr grace Forex risk on State Credit risk on PFI

17 9. In response to the failure of the original financing arrangements, the lending and legal agreements were modified to channel the loan funds directly to the State governments, thus making the States the primary obligors on the loan with the responsibility of bearing the credit and foreign exchange risks (see Figure 2). States retained the option of borrowing 10 percent of project costs from the PFIs at the market rate. However, the States did not do so, choosing instead to increase their counterpart fund contributions from 15 percent to 25 percent. The PFIs were thus relieved of the responsibility of making financial contributions to the project. Figure 2 Revised On-lending Arrangement World Bank Fed. Gov't States 8.23% 75% of Subproject cost 10% of Subproject Cost 20 yr, 5 yr grace 7 to 15 yr, 3 yr grace Forex risk on State Marketerms Market Rate Credit Risk: 10% on PFI, 90% on Credit Risk on PFI FGN 10. The major differences between the earlier legal and on-lending arrangements entered into at the loan negotiations in May 1987 and the later amendments are as follows: * The Deed of Guarantee Agreement between the Federal Government and the PFIs replaced the Project Agreement between the PFIs and the World Bank. v v The Co-Financing Agreement between the PFIs and the State governments replaced the Sub-Loan Agreement. PFIs were no longer on-lenders and consequently were not required to bear the credit risk on the IBRD loan. * By the Deed of Guarantee, the PFIs were to bear 10 percent of the credit risk of the sub-loans and also the credit risk on their 10 percent contribution to the State. * The Federal Government was to bear 90 percent of the credit risk of the sub-loans while the States were to bear the full foreign exchange risk. 11. It was agreed that the above arrangements would apply to both the pre-appraised subprojects (referred to as Phase I) in Benue, Gongola and Ondo States and the sub-projects that were to be identified and appraised by the PFIs (referred to as Phase II). This was based on the assumption that the PFIs would be willing to accept the credit risk on the sub-projects which they had identified and appraised. Reaching agreement on the above and reflecting it in the legal documents caused 26 months to elapse between Board presentation and loan effectiveness. However, it then transpired that the PFIs would not accept the risk on these sub-projects either, and the loan agreement had to be further amended in 1992, a process which took an additional 13 months.

18 The establishment of the IDF mechanism reflected a broad conception of the financial objectives of the project, which included: (a) to monitor and improve the creditworthiness of State Governments, (b) to develop a relationship between State governments and the Nigerian capital market, and (c) to help States improve their fiscal revenue base, thereby moving urban services toward financial sustainability. 13. These objectives appeared to be well founded, achievable and relevant to the realities of the sector at the time they were formulated. The PFIs, which were found to be capable and well managed at the time of appraisal, proved during project implementation not to be effective institutions for urban infrastructure financing. This was due to both exogenous macroeconomic problems and the banks' own mis-management (see below). 14. In the end, the wholesaling mechanism for infrastructure financing was not established. State governments did not become more creditworthy, and the transparency of State fiscal affairs did not improve. The Nigerian banking system, including the merchant banks, went into crisis, eliminating any possibility of developing a role for the capital market in public infrastructure financing. Institutional Objectives 15. The project's main institutional objectives were: (a) training of merchant banks and States in the selection, appraisal, and supervision of infrastructure projects; (b) improvement of the efficiency, equity, and sustainability of urban services; and (c) development of FMWH's capacity to monitor and post-evaluate infrastructure projects and programs. 16. Delivery of urban services: The project was designed to reinforce infrastructure provision through Nigeria's mainstream public and private institutions. The country's severe macroeconomic and governance problems, which started soon after Board approval and continued during the project's entire implementation period, defeated attempts to improve the efficiency and sustainability of infrastructure provision. 17. State public agencies: To the extent that staff of the State Ministries of Finance, Works, and others involved in the project gained on-the-job training and experience in areas such as project administration, works supervision, property taxation, solid waste management, and vehicle and equipment maintenance, these entities have been strengthened. New tenement rating and collection agencies were created in most of the States. However, little or no formal training of State personnel took place. 18. Merchant banks: While some PFIs were able to acquire experience in the administration of externally funded projects, they did not develop the capacity to identify and appraise public infrastructure investments. 19. FMWH: FMWH did not provide pro-active leadership or coordination. It failed to utilize most of the funds allocated to it for implementing training programs.

19 20. Nigerian consultants and contractors: In some cases their capacity was enhanced by working within the more disciplined technical and financial controls of a World Bank-assisted project. Physical Objectives 21. The main physical objective of the IDF was to rehabilitate or construct new urban infrastructure. At appraisal, it was envisaged that the project would primarily finance urban roads, water supply, drainage, electricity distribution, solid waste management facilities, markets, and transport terminals. 22. Although the actual cost of the State sub-projects totaled US$64.7 million compared with the appraisal estimate of US$91.0 million, the project can be said to have achieved most of its construction objectives. In addition to covering the three Phase I States, the project extended to eight other States in Phase II. A total of 92 km. of urban roads and 122 km. of drainage were upgraded or rehabilitated in eight states. The project financed the laying of 28 km. of water transmission mains and 91 km. of water distribution pipelines in three states. The numbers of sub-projects implemented by type were: 23 road and drainage, 12 water supply (including a major system in Edo State), four solid waste collection, six electricity distribution, one industrial estate (Ikere in Ondo State), one sites and services project for housing (Karu in Plateau State), infrastructure for one major market (roads, water, electricity, drainage, sanitation, and others for the Orba Market in Enugu State), infrastructure for a government housing estate (Udoka in Anambra State), and infrastructure for a transport terminal (in Maiduguri, Bomo State). 23. The loan was extended three times from its original closing date of December 31, 1994 to the final closing on June 30, 1997, mainly to allow ongoing works to be completed. Almost all the works suffered from construction delays (see below, Major Factors Affecting the Project). At loan closing, several sub-projects remained between 90 and 98 percent completed (Ondo State: Ikare stream channelization and Okitipupa roads; Kogi State: Idah roads and drains; Anambra State: Okpoko roads and drains, Udoka housing estate; Bomo State: Maiduguri motor park, Gwange roads and drains, Bama roads and drains, and Biu roads and drains). One sub-project, the Kabba roads and drains in Kogi State, was only 80 percent completed at loan closing. In most cases, poor performance by contractors was a major cause of delays. 24. Despite the extent of the works constructed, they generally have not produced a substantial improvement in the quality of urban services because (a) in many cases the investments were too limited in scope and too widely scattered to make an impact and (b) operation and maintenance of the facilities has been inadequate or non-existent. 25. Data tables were complied for this ICR on the status and costs of all the physical works at loan closing. The tables show the original vs. actual quantities completed, the original vs. actual duration, the original vs. actual costs, and comments on key factors that delayed implementation. These data are available in the project files.

20 Cost Effectiveness and Impact Based on the inventory of physical sub-projects prepared for this ICR, an overall rating was given to each State's package of sub-projects according to its economic impact and its effect on poverty alleviation. These ratings are based on the type, scale, location, and operational status of the sub-projects. Out of the eleven States, five obtained little economic impact and seven achieved little effect on poverty alleviation (though this was not a major project objective). In only two cases--anambra-okpoko (roads) and Enugu (market)--were the economic and poverty alleviation impacts judged to be high. The following are the main factors accounting for these results: * Geographical dispersion of sub-projects within States * Even within urban centers, infrastructure sub-projects were often too limited in scale. * Local Governments, communities, and users were not adequately involved in planning and implementation. * The transfer of projects from States to Local Governments and communities in many cases has not been effected, resulting in an absence of operation and maintenance. * Cost recovery and recurrent financing provisions have been inadequate. * In some cases, sub-projects of dubious economic and social justification were selected. In Ondo, the project financed a large industrial estate at Ikere, which is unlikely to attract firms. In Anambra, the project financed the infrastructure for a high-standard, heavily subsidized government housing estate at Udoka. 27. The economic analysis done at project appraisal used 1986 base costs of works plus costs of design, supervision, management, maintenance, and physical contingencies. Benefits were quantified for roads sub-projects in terms of vehicle operating cost savings and for water subprojects in terms of the economic value of water consumed. Sensitivity analysis was performned for a variation in costs of between -30 percent and +30 percent. An economic rate of return (ERR) of 26 percent for the investments as a whole in Phase I was obtained. It was expected that an ERR of at least 20 percent would be obtained for the Phase II sub-projects that were to be appraised by the PFIs. MAJOR FACTORS AFFECTING THE PROJECT Factors Not Subject to Government Control 28. Performance of contractors and consultants: In Benue and Gongola States, the engineering consultants efficiently carried out the preparation of contract documents and selection of contractors and suppliers. Contracts were awarded promptly, and in Gongola all contracts were completed on schedule. However, many States had to contend with poor performance by contractors and consultants. Common problems included faulty design work

21 -7- (e.g. omission of important elements from bills of quantity), failure to deploy adequate personnel, poor site management, poor financial management (in spite of adequate payments), faulty construction work, and poor communication between contractors, consultants, and implementing agencies. Factors Subject to Government Control 29. Macroeconomic problems: Nigeria experienced high inflation, massive depreciation of its currency, and declining real output and income during the project implementation period, due to inappropriate macroeconomic policies. 30. The devaluation of the Naira (from less than N. 3.50/US$1 in 1986 to N. 85/US$I in 1995) raised the costs of imported materials and equipment used in the project. The high inflation (averaging 45.6 percent per year over ) contributed to the collapse of the banking system. Currency devaluation and inflation greatly escalated the nominal value of counterpart fund contributions required from the States, requiring sub-projects to be reduced in scope. The reduction in the scope of projects as a result of budget constraints adversely affected the sub-projects. For example, the leak detection programs, which were integral parts of all water sub-projects, were eliminated. 31. Devaluation and inflation also increased the nominal value of the PFIs' financial contributions to levels far above their capacity. This was an important factor in their rejection of the wholesaling mechanism. 32. Another negative aspect was the erosion of profit of the business sector when such profits were converted to other currencies. A tendency was observed for contract bids to be inflated so as to hedge against expected inflation and devaluation losses. 33. Governance problems: The inability to consummate the promised transition to civil rule, coupled with lack of transparency in public sector management at all levels, severely eroded confidence of the public in governmental authority, accountability, and effectiveness. The period of project identification to loan signing ( ) witnessed three changes of government at the national level. The implementation period ( ) encompassed three other governments and a precarious political climate. 34. The weakness and marginalization of Local Governments (LGs) within Nigeria's governance system during the project period meant that many of the investments would be unsustainable. LGs were generally not involved in the planning and design stages of the subprojects, and even if they were, they remained institutionally and financially incapable of handling mandated functions such as maintenance of urban roads and drains and collection of solid wastes. 35. Inconsistency of policies and mechanisms: The frequent policy changes of succeeding governments sent conflicting policy signals and created confusion. The economy was by turns regulated, deregulated, and partially regulated. Changes of government produced changes of key decision makers at the Federal and State levels. This severely undermined the attainment of institutional objectives, as these are by definition of a long-term nature. Frequent, unpredictable

22 changes of State leadership produced several instances of questioning by new State Administrators of key decisions made by their predecessors concerning the IDF project. This caused very long implementation delays, notably in Ondo (two years) and Edo (one year). Ondo State had five administrations between project appraisal and loan closing. 36. Adequacy of counterpart funds: This was a positive factor in the project. The Nigerian Merchant Bank (NMB), one of the early PFIs, convinced the Federal authorities to put in place a Standing Payment Order (SPO) to ensure a secured and uninterrupted monthly flow of counterpart payments by the States. The SPO is a "deduction at source" from the State's fiscal allocations out of the Federation Account. The success of the initial SPO arrangement encouraged other States to enter into similar arrangements with their PFIs. Except in one or two States, where the arrangements were temporarily suspended by new Administrations, the SPO arrangement was a successful aspect of the project. 37. Scarcity of bitumen: In every State, bitumen was required for rehabilitation and upgrading of roads under the project. The supply of bitumen is controlled by the Nigeria National Petroleum Corporation (NNPC), which raised the price from N. 1,600 per ton in mid to N. 12,000 per ton in mid In March 1997 bitumen became virtually unavailable due to the breakdown of the NNPC Refinery in Kaduna. At the same time, the many road works being implemented simultaneously by various government agencies across the country further escalated the price of bitumen well above the official price. The bitumen problem alone resulted in a substantial escalation of project costs. Factors Subject to Implementing Agency Control 38. Delays in processing of legal documents: The PFIs' rejection of the original financing arrangements required an amendment to the main Loan Agreement. It took the Federal Ministry of Finance (FMF) 15 months to process the amendment. There was also an eight month delay by FMF in concluding the Sub Loan Agreement (SLA) between the Federal Government and the States for the Phase II sub-projects. 39. State staff performance, training and turnover: Several of the State Project Implementation Units (PIUs) performed very well, notably Benue and Gongola. These States had a total of 24 works, goods and consultancy contracts. Some states had high turnover of Project Directors. This led to changes of authorized signatories and consequently delayed payments to contractors and progress of works. FMWH's failure to utilize the training funds provided in the project meant that most of the PIU staff lacked training in Bank procurement, disbursement, and financial management procedures. Improper documentation and lack of understanding of project objectives and Bank guidelines on the part of State staff caused implementation delays. Apart from the foreign contractors and some of the local contractors on the Gongola and Benue civil works, most of the contractors depended on interim certificate payments to fund their work. Delays by the PIUs in processing contractors' payments--which occurred all too frequently--therefore meant that the works contract periods were not enforceable. 40. Poor management by merchant banks: Macroeconomic problems contributed to, but were not the only reason for, the rejection of financial participation and risk-sharing by the PFIs. The crisis of the banking sector was also brought on by the banks' own mis-management. Most of

23 9- the PFIs that were favorably appraised at the beginning of the project experienced large staff turnover, staff poaching, and dilution of professionally trained and experienced staff. PROJECT SUSTAINABILITY 41. The project failed to establish a sustainable financing mechanism for urban infrastructure. As explained above, this was due mostly to factors not subject to the project's control. However, in hindsight, the project's design did not adequately take into account some major risk factors which were foreseeable: macro-economic decline, political instability, loss of confidence, and governance problems. 42. The sustainability of the physical improvements financed through the project is unlikely. The original design assumed that technical assistance would enable States and Local Governments to increase general revenues and tariffs for operation and maintenance. In reality, tenement rate (property tax) collections in Benue and Gongola States (now Adamawa and Taraba) during 1992 to 1997 were less than 10 percent of projected levels. Though the project helped establish property rating and valuation systems in Borno, Ondo, Kogi and Yobe States, collections had not commenced at loan closing. Tariff increases for water and waste management were small or non-existent. The main factors behind this failure were: * Absence of political incentives to raise taxes and tariffs. * Lack of confidence by the public that higher taxes and tariffs would result in better services. * Inadequate involvement of users in investment decisions. * Marginalization of Local Governments in the current governance system, and their inability to take over operation and maintenance of facilities. * Inefficient revenue collection mechanisms, and absence of legal action against defaulters. 43. None of the States presented a project sustainability plan by the loan closing date. 44. Roads, drains, water systems, and waste management facilities in Gongola, Benue and Plateau States financed through the project were completed between 1992 and Information on the operational condition of these investments were collected for this ICR. Most of the facilities have started to show signs of failure. Roads have developed pot holes, and the drains are silted up and overgrown with weeds. The majority of the solid waste management vehicles and equipment are non-functioning. BANK PERFORMANCE 45. The World Bank's performance in project identification, preparation, appraisal and implementation was generally satisfactory. However, the failure of the project to achieve its

24 - 10- objectives raises questions about the extent to which the Bank adequately evaluated the project's risks. When it was appraised and reviewed by the Board, the project was regarded as innovative and ambitious. 46. The SAR did say that the establishment of the wholesaling mechanism was a high-risk component. According to the SAR, "the main risk is that the merchant banks, although generally well-managed, may not prove to be effective institutions for the financing of urban infrastructure." In case of failure of the financing mechanism, the SAR stated, "State subprojects with high rates of return would still have been completed; the Federal Government would not be left with an institution to dismantle." Other risks mentioned in the SAR were the failure of States to repay loans due to exogenous factors; the failure of States to satisfy subloan financial and institutional conditionality; and implementation delays due to institutional weakness. 47. These observations notwithstanding, during project preparation and appraisal the Bank had a "bullish" view of Nigeria's development prospects. The debate within the Bank focused on how to structure the financial intermediation arrangements. Various alternatives were examined, including an all-public sector approach. The merchant banks were subjected to detailed scrutiny and were found to be financially sound and well-managed. At negotiations, the merchant banks appear to have agreed to commitments whose implications they only understood subsequently. In retrospect, it appears that the Bank agreed to a structure based too much on wishful thinking and not enough on a realistic assessment of the risks. 48. It seems fair to say that the Bank also over-estimated the commitment and implementation capacities of FMWH and the States. The Bank's appraisal did not take Nigeria's political and governance situation into account. 49. The Bank assumed that the FMWH and the PFIs would carry out the majority of the detailed supervision of such a large, multi-state project. This would enable the Bank to conduct its own supervision efficiently and effectively. However, neither the FMWH nor the PFIs performed supervision satisfactorily (see below). The burden fell back on the Bank, which was able to maintain a creditable supervision effort during the life of the project. At least two formal supervision missions per year were carried out throughout the entire period of implementation between 1987 and In addition to the full supervision missions, a Municipal Engineer based in the Bank's Resident Mission carried out day-to-day liaison with States, PFIs, and Federal agencies, followed up on action plans and decisions, and conducted at least two additional field visits per year to each State. The Bank's enforcement of loan covenants was generally satisfactory. BORROWER PERFORMANCE Federal Ministry of Works and Housing 50. The performance of the FMWH is rated satisfactory in project preparation but deficient in project implementation. Notably, FMWH took the lead in ensuring that investment prioritization studies required for the project were carried out in conjunction with the States and Local Governments. However, FMWH did not provide adequate leadership and direction in project

25 implementation. Though FMWH officers participated in all the formal supervision missions with the Bank, their contributions were quite limited. In July 1993, FMWH engaged the services of a consultant to assist in project supervision and financial monitoring. This consultant substantially improved the quality and timeliness of supervision. Apart from this, the FMWH played a generally passive, reactive role. It did not address policy areas such as property taxation and waste management. FMWH paid little attention to institutional development at the State and Local Government levels. Although FMWIH was provided with adequate funding under the project to organize training and other capacity-building activities, only a fraction of these funds were actually used. Federal Ministry of Finance and Central Bank 51. As mentioned above, the FMF's weak capacity proved costly in terms of delays in project implementation. When the PFIs reneged on the negotiated financing mechanism soon after Board approval, it became necessary to rely on the FMF to process an amendment to the Loan Agreement and new Sub Loan Agreements to comply with the conditions of loan effectiveness. Poor management by FMF produced a 26 month delay before the loan could be declared effective. It took another 15 months to resolve amendments to the main Loan Agreement after the PFIs refused to accept the revised scheme in which they would cover a reduced degree of risk. 52. Per the Loan Agreement, the Central Bank of Nigeria (CBN) was expected to establish and maintain a control account for the project and annually monitor the performance of the PFIs. In practice the CBN did not do any of these things and was not involved in project implementation. States 53. Preparation and appraisal: Adamawa, Anambra, Benue, Edo, Plateau, Taraba, and Yobe States and FMWH are rated as having performed satisfactorily during project preparation and appraisal. The performance of Borno, Enugu, and Kogi States was deficient during this phase, in that the staff assigned to the project were not well prepared, and State officials did not take timely decisions. Ondo State performed deficiently in this phase due to prolonged insistence of the new State leadership on unacceptable changes to decisions taken by the preceding administration. 54. Implementation: All the States except Bomo and Kogi performed satisfactorily in the implementation phase, in the sense that they handled the physical works implementation and financial record-keeping acceptably. Borno and Kogi States had serious difficulties due to poor working relationships among top State officials, staff of the implementation units, contractors, and consultants. 55. The following problems affected all the States during project preparation and implementation: Bureaucratic inefficiency within the State government.

26 - 12- * Inadequate delegation of authority leading to slowness in taking critical decisions. Frequent relocation of the project implementation unit in different Ministries and changes of project staff. * Interference in day to day management of the project and in contract awards by State government functionaries, leading to delays in procurement and subsequently in subproject execution. * Lack of adequate training of State personnel and therefore lack of requisite knowledge of World Bank guidelines and procedures Participating Financial Institutions 56. After they had withdrawn from direct financing, the PFIs were to perform two major functions under the IDF project. One was the provision of banking-related services, including managing the project and special accounts and assisting the State governments with project accounting and auditing. The other was the provision of technical assistance to the States in the form of appraising Phase II sub-projects, assisting in the preparation of terms of reference, and providing comments on technical documents. 57. Despite the difficult environment, the PFIs performed the banking services aspect of the project fairly adequately. They assisted in mobilizing counterpart funds from the States. They impartially monitored the operation of the special accounts, thereby avoiding some of the problems that usually arise when States use state-owned banks for their special accounts. Some of the PFIs also assisted in project monitoring, particularly in following up on agreed activities after supervision missions. 58. The performance of the PFIs with respect to technical services was, however, grossly inadequate. Technical documents which should have been reviewed by the PFIs were usually passed to the World Bank without substantive action. 59. The appraisal verified that the initial set of PFIs that started the IDF project (Continental, Icon, International Merchant Bank, NAL, and Nigeria Merchant Bank) had the expertise and experience to fulfill all the major functions under the project. As the environment changed dramatically after appraisal, both the original banks and the banks that subsequently joined the project as PFIs became incapable of playing the roles envisioned and were reduced to little more than financial administrators. 60. The problems of the PFIs may be summarized as follows: * The severe deterioration of the Nigerian economy starting in the late 1980s (stagnating industrial output, high inflation, negative interest rates, shrinking consumer purchasing power and demand, high unemployment, grossly devalued national currency, and declining transparency and accountability) reduced the

27 availability of good credits and bankable projects and resulted in poor utilization of loanable funds and high arrearage of credits. * The liberalization of bank licensing in 1990 produced an enormous increase in the numbers of commercial and merchant banks and tertiary financial institutions. The proliferation of banking institutions diluted the stock of professional bankers, with less experienced staff occupying senior management positions in many banks. The banks experienced large staff turn-over and poaching. * The large escalation in the project's nominal local currency costs due to inflation and devaluation made it difficult for the PFIs to contribute their shares of the financing. The PFIs claimed that such contributions would exceed prudent exposure to a single borrower. * Having backed out of making any financial commitments to the project, the PFIs had little interest in providing technical services. In addition, the fee structure for the PFIs under the project furnished no incentive for good performance in providing technical services. * The PFIs did not receive adequate training in World Bank procedures before they were invited to perform their roles as PFIs. The few that were trained tended to lose capacity due to rapid turnover that characterized the banking sector. v v Because of the country's economic crisis and their own mis-management, many banks became insolvent starting in the early 1 990s. Because they withdrew from financial participation in the project, the PFIs had no leverage over the State governments, and thereby they could not instill financial discipline in the States' affairs. 61. It must be noted that the original banks continued to perform better than those which joined the project in mid-stream. The latter lacked the benefit of participating in loan negotiations and of having established an in-house unit for implementing this type of project. During the preparation of the present ICR, it was found that most of the PFIs did not have copies of the project's SAR, Bank procurement guidelines, or Bank accounting and auditing guidelines. Virtually all of the PFIs' staff assigned to the IDF had spent less than one year on the project, and none had received training on how to handle Bank-assisted projects. ASSESSMENT OF OUTCOME 62. The project's outcome is unsatisfactory, as it failed to achieve its objectives. The infrastructure financing system involving merchant banks was not established; in fact, it never got off the ground. Although a considerable number of physical facilities were put in place, the institutional and financial mechanisms for their sustainability are lacking. The project did not contribute to promoting greater fiscal responsibility or self-reliance by the States. Adequate

28 -14- counterpart funds were mobilized for the project, but this was achieved through automatic deductions from Federal transfers, which had no effect on States' fiscal discipline. A limited amount of capacity building was achieved, mainly on-the-job, but this was undermined by Nigeria's severe governance and economic problems. FMWH failed to implement systematic training programs. The capacity for coordination and monitoring of urban development programs at the national level remains weak. 63. Even after the wholesaling mechanism fell apart, the Bank and the Government still considered it worthwhile to continue the project because of the expected benefits of the physical investments and the prospects for capacity-building. The primary focus of the project shifted away from the financial/fiscal system and to the infrastructure sub-projects. By the time it became clear that even the sustainability of the physical investments was unlikely, it was too late to renege on the majority of the financing commitments (although $7.5 million was eventually canceled), as the Government felt obliged to fulfill strong expectations among the Phase II States that they would obtain a share of the project financing. 64. In several States, notably Benue and the former Gongola, the project achieved a significant concentration of physical improvements in roads, water supply, drainage, and solid waste management. However, the impact of the works in Ondo and most of the Phase II States was minimal because the project's resources were dispersed among numerous, scattered subprojects. The exceptions in Phase I1 were Yobe and Taraba, in each of which the sub-projects were concentrated in two smaller towns. FUTURE OPERATION 65. None of the States submitted plans for the operation and maintenance of the facilities financed through the project. 66. Two revenue-earning sub-projects are likely to be adequately operated and maintained through user fees: the Orba Market in Enugu and the Karu sites and services project in Plateau. 67. The roads, water systems, drains, and solid waste facilities--which represent the bulk of the project's physical investments--are unlikely to be maintained because of inadequate mobilization of tax and tariff revenues by States and Local Governments. KEY LESSONS LEARNED Risk Assessment and Appropriate Project Design 68. In 1997 the World Bank places much more emphasis on serious risk assessment of proposed operations than it did ten years ago, when the IDF project was appraised. The major factors that undermined the IDF--macroeconomic decline, political problems, financial sector vulnerability, public sector weakness, marginalization of Local Governments--could have been identified and taken into account in the design of the project. Presumably, today's World Bank would be unlikely to undertake a project of this magnitude and innovativeness in such an environment. Rather, the Bank might reduce the scale of the project, set more realistic objectives, and support pilot efforts to test new approaches.

29 Supervision of the IDF project, covering as it did 11 States and 49 sub-projects (with an even greater number of individual consultancy and civil works contracts), was an enormous challenge. Clearly, future projects and programs must be dimensioned on the basis of a realistic assessment of the capacity for adequate supervision. Concentration or Dispersal of Investments 70. Even if the States and Local Governments had been able to properly operate and maintain the project's investments, their impact was undermined by their dispersal among many States and urban centers. In the future, a clear policy needs to be adopted. On the one hand, an investment planning and programming approach may be used to focus packages of investments with a "critical mass" of expected impact in certain locations. On the other hand, a demanddriven approach could be adopted that would not necessarily maximize impact, but rather promote other objectives such as improving State and Local Government capacity and ownership, sub-project sustainability, or poverty alleviation. Assisting States that Show Commitment 71. The approach used in Phase II of the IDF project--to assist States that demonstrate initiative and commitment--has been positive. Funds were channeled to States that promptly submitted acceptable proposals and arranged for counterpart funds to be earmarked. This approach may be replicated. Operation and Maintenance 72. Future investments will need to be selected and scaled in proportion to the likelihood that they will be adequately operated and maintained. One avenue is to promote a much greater degree of involvement by Local Governments, community groups, and end-users in the planning and design. Another approach is to select investments only where implementing agencies have committed themselves to complying with rigorous fiscal and tariff improvement programs. It may also be useful to have implementing agencies earmark funds for O&M in advance, placing them in separate accounts or funds. Finally, future urban infrastructure programs should take the fullest possible advantage of opportunities for shifting the incentives for sustainable service provision to private enterprise. Community Participation and Management 73. As long as governance systems remain fragile and unaccountable, and as long as public sector capacity remains weak and virtually non-existent at the Local Government level, there may be little alternative in Nigeria but to rely on community initiative and management for improving the delivery and sustainability of local services. Models along the lines of Social Investment Funds may have relevance in this context. Even after the viability of Local Governments is restored, community participation and management will remain important to supplement public sector capacity and ensure that programs are demand-responsive.

30 -16- Private Sector Participation in Infrastructure 74. Although the IDF project used private contractors and consultants extensively and relied on merchant banks for financial administration, it did not promote private sector participation (PSP) in the delivery of urban infrastructure per se. The project worked with the existing parastatals and government agencies for implementing its investments in water supply, electricity distribution, and waste management. In fairness, the project was designed before PSP became part of the mainstream infrastructure development strategy of the Bank. Future assistance should seek to promote a range of PSP mechanisms, from the simple contracting of specific services to fill divestiture. This is compatible with programs to strengthen urban management at the State and Local Government levels. Policy and Institutional Reforms 75. Nigeria has a large reform agenda to carry out in urban development. The IDF generated a number of lessons about the institutional and financial framework: * An effective Federal-level urban policy and coordinating agency is needed. The recently-issued National Urban Development Policy calls for a National Urban and Regional Development Commission which may be able to fulfill these functions. * The Federal Ministry of Finance and Central Bank should develop their capacity to monitor the indebtedness and counterpart funding commitments of States. * The Urban Development Bank of Nigeria needs to be placed on a sound financial and managerial footing. Its mandate should be reviewed to ensure that it supports the transition of States and Local Governments toward reliance on the financial market. * Reform of public utilities, to make them autonomous, commercially viable, and subject to competitive market incentives, needs to be undertaken. * A reform of the fiscal transfer system should be considered, as the large size and unconditional nature of the current Federation Account transfers create a disincentive for State and Local Government revenue mobilization. Also, the flow of transfers needs to be made transparent and predictable. * The Federal Government needs to put policies in place that will lead toward the use of the domestic capital market for urban infrastructure. Macroeconomic stability is paramount. The Government also needs to come to grips with the crisis of the banking sector, restoring a credible and effective regulatory system. * The restoration of capable Local Governments will involve: (a) defining their responsibilities clearly, (b) making revenue transfers to them adequate and predictable, (c) providing incentives, through the transfer system, for them to increase their internal revenues, and (d) restoring their technical and administrative staff capacity.

31 PART II: STATISTICAL TABLES

32 :

33 Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies Sector Policies E [I l Financial Objectives 0x El Institutional Development E J 0 0 Physical Objectives ixi E E E Poverty Reduction l l El X Gender Issues l l E X Other Social Objectives El E El l Environmental Objectives El ix Public Sector Management l l x E Private Sector Development. i E El Other (specify) E E E E (Continued) B. Project Sustainability Likely Unlikely Uncertain (if) (if) (if) El I~~ ~~~~x] El Highly C. Bank Performance satisfactory Satisfactory Deficient Identification (if) (if) i (if) El Preparation Assistance a ix E Appraisal Supervision a ixi E [E ll D. Borrower Performance satisfactory Satisfactory Deficient Preparation (if) E (if) [ (if) El Implementation ED E Covenant Compliance El El Operation (if applicable) E El Highly Highl E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory (if) (if) (if) (i) El El [ El

34 Table 2: Related Bank Loans/Credits Loan/Credit Title 7 Purpose IYear of Approvall Status Preceding Operations LN UNI To provide (i) sites and services and upgrading in Bauchi town and Nigerian States Urban Gombe township; (ii) Technical Assistance at State and Federal Development Project Levels; and (iii) Urban Development feasibility studies in seven other States Closed 6/30/86 LN UNI To (i) Strengthen, at the Federal level, Government's capability for Imo Urban Development policy formulation and program monitoring and evaluation in the Project Urban Sector and extend preparation assistance to the States; (ii) extend to Imo State the demonstration begun in Bauchi State of a replicable approach to providing shelter and related services affordable by low-income population; and (iii) build on and strengthen institutional linkages and capacity in Imo State to carry out future low-income Urban development projects' while improving the local financial resource base Closed 6/30/93 LN UNI (i) Strengthen the administrative, financial, and technical capacity Lagos Solid Waste and of Lagos State. (ii) Help Lagos Waste Management Authority and Storm Drainage Project State Ministry of Works and Transport to improve waste and drainage services. (iii) Assist LSG to improve property tax collection for operation and maintenance of these services Closed 9/30/93 Following Operations LN UNI To promote the efficient functioning of Ibadan and Oyo States' Oyo State Urban Project other major towns through city-wide infrastructure rehabilitation, and through strengthening the institutions responsible for Urban Management and Local resource mobilization Closing date 6/30198 CR Lagos Drainage and Sanitation Project To improve the ability of the Lagos Metropolis to serve as an economic c.enter and to improve living conditions by improving stormwater drainage and introduce measures for community upgrading and wastewater disposal 1993 Closing date 6/30/98

35 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual Identification December 16, 1985 Preparation February 1986 February-April, 1986 Appraisal May 1986 May-June, 1986 Negotiations January 1987 May 11-15,1987 Board Presentation May 1987 March 29, 1988 Signing August 4, 1989 Effectiveness May 1988 May 29, 1990 Midterm review February 1994 Loan Closing December 31, 1994 June 30, 1997 Table 4: Credit Disbursements: Cumulative Estimated and Actual (US$ million) Comparative Indicators FY 88 FY 89 FY 90 FY 91 FY 92 FY 93 FY 94 FY 95 FY 96 FY 97 Appraisal estimate Actual Actual % of estimate

36 Table 5: Key Indicators for Project Implementation At the time this project was approved by the Bank's Board, no project performance indicators were specified in either the SAR or MOP. Physical and financial progress was monitored throughout the project without reference to any benchmarks other than the sub-projects listed for the.first three states of Phase I in the SAR and the original financing and disbursement plans. Table 6: Key Indicators for Project Operation At the time this project was approved by the Bank's Board, no project performance or operation indicators were specified in either the SAR or MOP. Table 7: Studies Included in Project l Purpose as Defined Study at Appraisal/Redefined Status Impact of Study 1. Prioritization Studies Investment planning and C Prioritized urban programming for each State infrastructure investment programs prepared for 10 States 2. Project Performnance Audit Assessment of physical, financial, C Effective monitoring and institutional performance against tool for the project project's objectives 3. Re-Structuring Study of the Evaluation of operating procedures C Recommendations of Urban Development Bank of and assistance with the corporate the study yet to be Nigeria plan. implemented 1995

37 Table 8A: Project Cost (By-sub-Project) US$ S/No. State Loan Canceled Appraisal Estimate Actual Latest Estimate Allocation Loans Foreign Local Total Foreign Local Total Component Component Component Component I Anambra (Udoka) 3,000,000 2,709, ,742 3,106,675 2 Anambra (Okpoko) 2,000,000 1,142,124 1,132,415 2,274,53 3 Borno 3,000,000 1,000, ,020 1,659,482 2,440,503 4 Edo 5,000,000 2,800,000 1,426, ,130 2,301,275 5 Yobe 5,000,000 26,250,00 8,750,000 35,000,000 4,020,412 1,432,784 5,453,196 6 Kogi 3,000, ,000 1,667,382 1,109,197 2,776,579 9 Plateau 2,000,000 1,470, ,795 2,037, Taraba 5,000,000 1,000,000 2,950,028 2,313,813 5,263,841 I Enugu 2,400,000 2,131, ,000 2,351, Gongola 13,300,000 11,454,800 3,694,700 15,149,500 12,960,001 1,340,000 14,300,000 7 Ondo 12,300,00 650,000 10,423,500 4,559,700 14,983,200 8,187,227 4,039,285 12,226,512 8 Benue 10,900, ,000 10,388,00 3,762,200 14,150,200 5,359,051 6,332,357 11,691, FMWH 2,600,000 1,050,000 4,368,00( 4,368,000 1,090,000 1,090,000 IDF Training and 964,700 94,700 Evaluation Physical 3,410,600 1,339,900 4,750,500 Contingencies Price Contingencies 2,245,600 5,163,200 7,408,800 Total 69,500,00a 7,500,000 69,505,200 27,269,700 95,904,90 45,895,723 19,858,001 65,753,72

38 Table 8B: Project Financing Source Appraisal Estimate (US$M) Actual/Latest Estimate(US$M) Local Foreign Total Local Foreign Total Costs Costs Costs Costs IBRD State Governments Merchant Banks TOTAL Table 9: Economic Costs and Benefits Re-estimation of economic costs and benefits was not feasible for this project.

39 Table 10: Status of Legal Covenants SELECTION NO. COMMENTS ACTION TAKEN OR REQUIRED OF CREDIT/LOAN COVENANT TYPE STATUS AGREEMENT Section 2.02 (b) Open and maintain a Special Account (in dollars) 3 C The PFIs performed the operations Close supervision and monitoring of the PFIs was in a Commercial or Merchant Bank. adequately well. effected by the Bank. Section 2.05 (NMB Open and maintain a Project Account 3 C The PFIs performed the operations Close supervision and monitoring of the PFIs was Project Agreement) adequately well. effected by the Bank. Section 4.02 (a)(i) Special Account to be audited for each fiscal year. I C Accounting and auditing systems External auditors were appointed to carryout the were set up for the PlUs by audit reports of the PlUs. independent accounting firm s. Section 4.02 (a)(ii) Audit report to be presented to Bank no later than I CD Audit reports were not usually Close follow-up was needed by the Bank to ensure six months after end of the fiscal year. submitted early by most PlUs. the submission of audited reports. Section 4.02 (b)(ii) Maintain Statements of Expenditures (SOE) and I CD Record keeping at the PlUs were Close supervision of the PFIs could have improved keep records until one year after audit report has adequate but quality of the bookkeeping by the PlUs. been received. bookkeeping could be improved Section 4.03 (i) Establish and maintain a control account with I NC The CBN did not get involved in Involvement of the CBN could have assisted with Central Bank the project after loan negotiations loan documentation. : in W ashington DC. Section 4.03 (ii) Review annually the performance of PFIs and the 2 NC This aspect of monitoring and The review of the performance of the PFIs would overall financial status of the sub-loans. supervision of the PFIs by the have provided early warning signals about the CBN was carried out position of the PFIs Section 4.04 Cause the Central Bank to annually discuss with 2 NC This aspect of monitoring and The review of the performance of the PFIs would the Bank on the financial performance of the PFIs supervision of the PFIs by the have provided early warning signals about the with particular reference to their Capital adequacy CBN was carried out position of the PFIs and liquidity position. Section 2.01(c) (i) (State Establish and maintain a project management unit 5 C Cases of interference in the The ministry in which PIU will be located must be Agreement) to oversee the carrying out of the project operations of the PlUs were well defined in future projects. I ram part. Section 2.01(c) (ii)(state Promptly appoint a Project Manager to head the 5 C Frequent changes of Project Project Managers must be high ranking officers in Agreement) Project Management Unit Managers and supporting staff was the public service. _recorded during the project

40 Table 10: Status of Legal Covenants (cont'd) Agreement Covenant Type Present Status Original Fulfillment Description of Comments Financial, Management Long delay in processing of legal Loan Agreement Main Agreement CD August 4, 1989 and Loan Monitoring Agreements by FMFED resulted in prolonged project execution time For the Bank-Appraised Long delay in execution of legal Sub-Loan Agreement Subsidiary Agreement CD projeccts -May For the Phase 11 Projects 1,2,3,4,5, 9 agreements by FMFED and the Subproject States resulted in delay in Feb project execution. Bank-Appraisedi _.....X_. For _Processing of Agreements along projects-may 1990; For other legal documents in the states State Agreement Subsidiary Agreement CD IPhase 11 Projects, March 1,2, 3,4, 5, 9 resulted in delays in the execution of 1994 the agreement and delay in project effectiveness Guarantee Agreement by Varying dates for the Need for guarantee agreement - the PFIs for 10% of the PFIs and Sub-project between PFls and Sub-Project States i Deed of Guarantee Project Costs C States 34 3,4 not necessary as the repayment of thei loan is effected directly by deducting repayment from the statutory... _.. ~~~~~~allocations of the states_ between the _. Non of the PFis contributed the 10% PFis and Sub-Project States requirement to the project allocations ofthestatagreement Co-Financing Agreement for the financ ng of 10% ofc ditto 1,2, 3, 4, 5, 9 the prjctcs toa _ C= Complied with 1. Accounts/audit CD= Compliance after delay 2. Financial performance/generate revenue from beneficiaries NC= Not Complied with 3. Flow and utilization of Project funds 5. Management aspects of the Project or of its executing agency

41 Table 11: Compliance with Operational Manual Statements Not applicable Table 12: Bank Resources: Staff Inputs Stage of Planned Revised Actual Project Cycle Weeks US$ Weeks US$ Weeks US$. (000) (000) (000) Preparation to Appraisal NA NA NA NA Appraisal-Board NA NA NA NA Negotiations through Board Approval NA NA NA NA Supervision NA NA NA NA Completion TOTAL NA NA NA NA l

42 Table 13: Bank Resources: Missions Perfonrance Rating Number Specialized Implementation Development Stage of Month/ of Days in Staff Skills Status Objectives Types of Project Cycle Year Persons Field Represented Problems Through Appraisal Appraisal through Board Approval Supervision 1 8/88 1 N/A Land Economist NR NR Project not yet effective. Major legal drafting bottleneck exists at FMF Supervision 2 8/ Urban Planner 2 2 Project still not effective although a compromise solution on merchant banks' credit risk affecting mainly the subsidiary loan agreements has been worked out an put forward for FMFED approval. Loan agreement will require amendment. FMWH managed state prioritization studies and project appraisal training have not been started. Supervision 3 8/90 7 N/A Division Chief Engineer 2 2 Ondo State agreement still unsigned. New studies arrangements with Economist PMB (NAL) not finalized and Sr.Oper. Officer Project Agreement not yet signed. Urban Planner Engineer Land Economist Supervision 4 11/ Municipal Eng. Fin. Analyst 2 2 Ondo State Agreement: signing still pending. Amendments to Loan Agreement awaiting FMF signature. Instiutional strengthening, limited progress. Benue: supervision consultancy, no progress. Supervision 5 2/ Municipal Eng. 2 Rating & Valua. 2 NMB may no nger be prepared to ~~~~~~~~honor their agreemento fiind 100/6 of Benue and Congola Sub-Projects. FMFED have still not signed the amendment of August 2, Supervision 6 6/ Unfras Enginer 2 2 NMB's Financial participation Infim. Engineer to be uncertain. ~~~~~~~~continues Supervision 7 7/91 1 F. Analyst2 2 NMB's Financial participation may be resolved shortly. Line of Credit, participating Banks unwilling to take the credit risk. Supervision 8 10/ Urban Engineer Fin. Analyst 2 2 Ondo State agreement still unsigned. FMG response awaited (legal Fin. Analyst agreement draft amendments). Ondo have approved contracts or new studies but arrangements with PMB (NAL) not finalized and project agreement not yet signed. Proposal for prioritization studies awaited by Bank.

43 Table 13: Bank Resources: Missions (cont'd) Performance Rating Number Specialized Implementation Development Stage of Monthw of Days in Staff Skills Status Objectives Types of Project Cycle Year Persons Field Represented Problems Supervision Urban Engineer 2 3 Collection as a percentage of billing Urban Planner for 1991 has been disappointing. Munfi. Engineer Supervision 10 6/ Munic. Engineer 2 Rating & Evalua. 3 NMB have stated that they may no ~~~~~~~~longer be prepared to honor their agreement of fund I100/o of the Benue and Gongola Sub-Projects. FMFED have still not signed the amendment of August 2, The Ondo State agreement cannot be signed until this is done. Prioritization Studies: progress has been halted on prioritization studies because the ;niitial allocation has not been made to the FMWH Special Account from which they are to be funded. Supervision 11 12/ Task Manager Fin. Analyst 2 2 NMB's financial participation continues to b,e uncertain. Engineer Infras. Supervision 12 7/ Fin, Analyst 2 2 NMB's financial participation my be resolved shordy Supervision 13 7/ Task Manager Fin. Analyst 2 2 Counterpart fund provision by Benue and Kogi States and NMB Infras. Engineer have still not met the accrued Supervision backlog of N9 million, nor have they increased their monthly contribution to N660,000 as had been agreed with NWB in July. NMB have still not made a firm commitment to meet their share of the funding. Final works contract embraces both Benue & Kogi States, and thus cannot be signed until a decision is reached on the sharing of assets and liabilities. 35 Urb94 ank Plannger 2 2 Property taxes: collection as a Urbnf PlaEngneer Supervsion Engineer 4 3/ Infi-as. 2been percentage of billing for 1991 has disappointing; 26% in Supervision 15 8/94 = Infra. Engineer 5 5 Adamawa/Taraba and 8% in Benue/Kogi. Supervision 16 9/ Fin. Analyst Infras. Engineer 5 5 Govemor of Adamawa unilaterally fired the project manager of the joint project unit covering both states, immediately prior to the mission Supervision 17 11/ Urban Planner Municipal Eng. Fin. Analyst I

44 Table 13: Bank Resources: Missions (cont'd) Parbim Rating Number Specialized Implementabion Development Stage of Monthl of Days in Staff Skills Status Objecives Types of Project Cycle Year Persons Field Represented Problems Supervision 18 5/ Sr. Munic. Eng. Urban Planner U Infirs. Engineer Supervision 19 6/ Sr. Munic. Eng. Inhs. Engineer U u Progress has been disappointing since June Implementation and consequently disbursement has been slow: protracted procurement poor performance by the contractors, exacerbated b y delayed payments and the inability of states and their PFls to comply with the Banks' documentation requirements for disbursement especially with regard to the operation special accounts. Completion 5/ Urban Specialist M_iM. Engineer u_u

45 APPENDIX A BORROWER'S COMMENTS ON DRAFT ICR

46 f: :::

47 FEDERAL MINISTRY OF WORKS & HOUSING DEPT. OF LANDS, ENVIRONMENT, URBAN & REGIONAL DEVELOPMENT Plot 797 Adeto Aem re use II, Abuja. Ref. NoURD*222/TC/T2/37 Tel Date:. December 5, 1997 Mr. Alan Carroll, Senior Urban Development Specialist, Water and Urban Group 2, Africa Region, The World Bank, 1818 H Street, N.W., Washington D.C , U.S.A. IDF PROJECT (LOAN 2925) COMMENTS ON THE DRAFT COMPLETION REPORT Please find attached the comments of the Federal Ministry of Works and Housing on the draft Implementation Completion Report for the IDF Project. We observed that the draft report contains some distortion of the facts and %all for amendments to reflect our comments and observations. 2. Also find enclosed the Federal Ministry of Works and Housing Completion Report on the project.. O. c bayo Deputy irector (Urban & Regional Development Division (URD) for: Honourable Minister

48 IDF PROJECT (LOAN 2925): COMMENTS BY FMW&H ON THE DRAFT COMPLETION REPORT A. GENERAL 1.0 The draft completion report is generally biased and failed to present an accurate assessment of the IDF project implementation In Nigeria. The report failed to analyse the pjroject in a wholistic manner but rather c6mmented on issues out of context. Through out the document, FMW&H was seen as the implementing agency contrary to its role of supervision and monitoring. Also, the document did not recognise the project mid-term review and the performance audit submitted to the Bank In the course of project implementation. 1.1 The draft ICR assessment of performance and achievements followed the same line in which the SAR allocated roles without due regard to constitutional responsibilities existing in the country for urban infrastructure development. - Some of the shcrtcomlngs identified, particularly with respect to FMW&H, arose from limitations Imposed by the Constitution. For example, the Issues of Solid Waste Management and property taxation are exclusively the responsibilities of Local Governments. Federal Government Intervention could, at best, be subtle and persuasive rather than pro-active as expected in the draft ICR. B. SPECIFIC COMMENTS 2.0 Reference to page 6 under "Major Factors Affecting the Project". The draft ICR did not present a balanced assessment. There were some factors subject to World Bank control which should be noted. One of such factors was the failure of the Bank to review its lending strategy under the IDF project inspite of early and sufficient signals(which the Bank acknowledged and discussed) pointing to macro-economic and governance problems in Nigeria. have ignored such signals affected the project substantially. To 2.1 Reference to page 8 paragraph 39. The assessment of FMW&H with respect to matters of training for State Government officials.. /2

49 -2- and the PFis should be taken-with' full regard to the various changes In the Implementation and financial arrangements. Though, the project allocated funds for training to FMW&H, the failure to utilize the total sum arose from the following: (l) (ll) It was realised that all State sub-projects had financial allocation for training and should have drawn up training programmes to meet their specific requirements. Further utilization of FMWSH allocatlon for training of State Government staff would have amounted to duplication of efforts. Upon PFIs rejection of the original financing arrangements, there was no longer the rational for utilizing public funds for training private sector operators. These Issues were clearly understood at the mid-term review and led to the financial reallocation of US$2.7million from FMW&H a!loca- ;lon. The completion report Is so silent on the World B3nk app inted Training Consultant Who did not achieve any tangible result on the IDF Reference to page 10 paragraph 49. The assessment of Bank performance is Incomplete without mentioning the substantial delays In project Implementation arising from delayed processing of documents requiring clearance. In particular, documents kept months with the Municipal Engineer at the Resident Mlssion without action. The cases of Edo and Borno States were examples. It is also not fair to Ignore the role of the Bank In the appointment of Inexperienced Consultant In the States, the result of which led to very poor performance. Before the project was 'hijacked' by the Resident Mission, all the Contractors and Consultants appointed In Gongola and Benue States under FMW&H supervision and leadership performed creditably as appropriate processes and procedures gulded their selectlon. 2.3 Reference to page 10 paragraph 50. The FMW6H take serious objection to the statement that "the FMWSH played a generally passive reactive role" under the IDF I project. and In bad taste. The statement Is frivolous Within the limits of Bank's rules and regulations, and bearing In mind the "agreed need to limit bureacratic bottlenecks" In project Implementation process, the FMWSH played sufficlently.. 3

50 -3- active roles' In project monitoring and provided leadership. The engagement of a management Consultant to assist In project super- Vision was a demonstration of the commitment of FMW&H to the project. For the Bank to-have considered the work of the Consultant successful itr'ests to this fact. Natfoiial leadership and direction was provided through the following actions and achievements during the course of project implementation: (1) Review and promulgation of the Urban and Reglonal Planning Decree of 1988; (ii) (it!) Preparation of the National Urban Development Policy for Nigeria (Part of the funding for this was met from the IDF support to FMWSH); and Establishment of Urban Development Bank of Nigeria Plc. (UDBN). A restructuring study of the Bank was financed from the IDF support of FMW&H. 3.0 It is agreed that the IDF I was premised upon a rather ambitious "long-term lending strategy" and the achievement of a "wholesaling Mechanism" was a tall order considering the level of development of the public and financial sectors in Nigeria at the time of project appraisal. Also, the supervision of the project In 11 States and 49 sub-projects was an enormous challenge. As indicated in the borrowers completion report, future Bank sponsored projects and programmes should address specific urban issues and be sp'read within a reasonable geographical area for effective impact. Also, project design and appraisal should articulate "project performance Iidicators" for easy measurement of success or failure. 3.1 Finally, the draft completion report should be reviewed substantially to reflect a balanced assessment of the situation and address issues concerning the implementation of the project rationally.

51 APPENDIX B BORROWER'S EVALUATION OF THE PROJECT

52 I

53 INFRASTRUCTURE DEVELOPMENT FUND (IDF) PROJECT: PROJECT COMPLETION REPORT (PCR) PREPARED BY FEDERAL MINSTRY OF WORKS AND HOUSING URBAN AND REGIONAL DEVELOPMENT DIVISION OCTOBER, 1997

54 A. PROJECT DESCRIPTION 1.01 The Infrastructure Development Fund (IDF) Project was established in 1985 as a collaborative effort between the Federal Governrnent of Nigeria and the World Bank. This was in response to the need to develop local capacity and expertise in assisting State and Local Government authorities to identify, prionitize, appraise and finance urban infrastructure projects. The World Bank provided, through a loan facility to the Federal Govemment, funds to complement local resources to rehabilitate and maintain existing infrastructure, while at the same time efforts were made to improve and expand the local revenue base of the States and local governrments. Also, attempts were made at improving the local financial market to facilitate the participation of the private sector in the provision and maintenance of basic urban infrastructure and services. PROJECT BACKGROUND 2.01 In post independent Nigeria, urban infrastructure development and management were characterised by inadequate funding, poor designs arising from adaptation of inappropriate standards and legislations, disjointed administrative framework, lack of maintenance and general uncoordinated efforts. The problems were further compounded during the oil boom era of the 1970s with the abolition of local tax systems, reduced incentives for cost recovery and inadequate development of local revenue base. At the same period, government borrowed heavily at inappropriate terms and often for poorly selected projects. The resultant effects in the urban sector was a huge backlog of unmet need in infrastructure and services coupled with the deterioration of the existing stock. X 2.02 In order to redress the problems, the Federal Government sought the assistance of the World Bank in 1977 and established the Nigerian States Urban Development Programme (NSUDP). Under the programme, the Bank provided both financial and techrncal assistance in Bauchi, Imo and Lagos States. While the Bauchi and Imo projects focussed essentially on the provision of low cost housing, the Lagos project emphasised city-wide infrastructure development and maintenance. Based on the lessons learnt on the NSUDP projects, the Federal Government and the World Bank agreed to shift emphasis to the provision and maintenance of basic urban infrastructure and services in subsequent collaboration. By the infrastructure Development Fund (IDF) was established to address the issues of long term financing of urban infrastructure in Nigeria. PROJECT OBJECTIVES 3.01 The Infrastructure Development Fund (IDF) was set-up primarily to achieve the following objectives: - to establish a,finance mechanism that would assist States to manage, maintain and consolidate existing urban infrastructure and services and improve their financial management and resource mobilization; - to monitor and impr-ove their financial management and resource mobilization; I

55 - to monitor and improve the credit worthiness and revenue base of State Governments to make urban services self financing; and - to help States prepare infrastructure projects and develop their capacity for project execution. The Staff Appraisal Report on the IDF sumnmarised the Banks long term lending strategy for Nigeria as follows: - the project will support the establishment of a sustainable wholesale mechanism to fund priority urban investments; - the project will promote fiscal self-sufficiency at the State level, and a more efficient, equitable and sustainable delivery of urban services; - the project will support the State in making the necessary fiscal adjustments, primarily through a more rational allocation of investment funds, and through mobilisation of local financial resources; - through the project, a market for State and municipal bonds for financing of infrastructure progranimmes of State and Local authorities will be developed; * by bringing the private sector to operate together with the public sector, the private sector approach to business will be introduced into the public system thereby increasing efficiency of the sector; and * through the interaction with the PFIs, financial discipline will be introduced into the system..02 In line with the broad objectives of the Fund, the implementation of the project was to hinge on a mutual collaboration between the public and private sectors. In this regard, five leading Merchant Banks were initially selected to be used as financial Intermediaries between the Bank and beneficiary States Towards the realisation of the set objectives, a project guidelines was put together. It sets out detailed criteria for subproject selection and appraisal of urban infrastructure projects. Also, the guidelines define the eligible infrastructure that could be financed under the loan. Listed as eligible infrastructure are roads and drains rehabilitation and extension, urban water supply, solid waste management, markets, motor parks, abattoirs and so on. In addition to eligibility criteria, the guidelines also set out sub-sector objectives and technical design criteria. B ASSESSMELNT OF OBJECTIVES 4.01 The IDF project w-as implemented over a period of about seven years. It should be noted that the loan was signed between the parties on August 4, 1989 and it became effective in April, The loan finally closed on June 30, 1997 after a three year extenision period. 2

56 4.02 A major objective of the IDF project was to establish a wholesale financial mechanism to fund priority urban investment. The general climate in the financial sector of the economy in the late 1980s gave a dleceptive indication that such a concept as wholesaling of funds through the Merchant Banks were possible and indeed desirable. However, events of the early 1990s leading to the total collapse of the financial sector show that the IDF project was predicated on poor forecast of the financial sector. The objective was based on the assumption that the trend of development in the financial sector will be sustained over time. Also, the objectives of promoting fiscal self-sufficiency at the State level, through necessaiy fiscal adjustments and more rational allocation of investment funds were based on the assumptions of a dynamic relationship between the public and private sectors. PHYSICAL 4.03 The short term objective of the IDF project to assist the States to prepare and fund infrastructure projects would be considered to have taken into consideration the financial and institutional capacities of the States. The project provided for technical support along side the loan facility. However, political instability as manifested in the constant changes of State priorities in project selection was a major limiting factor in achieving the physical objective. MANPOWER AND INSTITUTIONAL 4.04 The critical factors in the achievement of the broad objectives set for the IDF project were manpower capacity and institutional arrangement for delivery of seivices. Although, the project provided for training to improve the quality of manponwer, little was put in place to set the institutions in line with the objectives. The complexity of the civil service was not put into appropriate perspective in the project design which seek to forge a more dynamic collaboration between the public and private sectors for better project implementation. The underlying assumptions with respect to resource availablity, manpower development and institutional capacity in the design of the objectives of the IDF project have been put to test during the seven years of project implementation. Unlike a purely physical development project, the IDF project was aimed at improving the operating environment for urban infrastructure and services deliverv as well as fundamental transformation of orientation and procedure of institutions. Such changes would require considerably longer time-frame than the life of a loan facility, the promotional consideration of the project notwithstanding. The first few years of project implementation were more of a learning period. A good example of the lessons learned was demonstrated in the extension of the Taraba State sub-project. The selection and appraisal of the sub-project components were carried out with very little delay and execution was done within the contract period. C. ASSESSMENT OF ELIGIBILITY CRITERIA AND DESIGN OBJECTIVES.-.01 The project guidelines provided a detailed criteria for the selection and 3