FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT IN THE AMOUNT OF SDR MILLION (US$246.6 MILLION EQUIVALENT) AND

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Social Protection Unit Human Development Department Africa Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT IN THE AMOUNT OF SDR MILLION (US$246.6 MILLION EQUIVALENT) AND PROPOSED ADDITIONAL CREDIT IN THE AMOUNT OF SDR MILLION (US$173.4 MILLION EQUIVALENT) TO THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR THE PROTECTION OF BASIC SERVICES PHASE II PROJECT January 26, 2011 Report No: ET 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 ETHIOPIA GOVERNMENT FISCAL YEAR July 8 July 7 EFY03 IDA FY11 CURRENCY EQUIVALENTS (Exchange Rate Effective December 15, 2010) Currency Unit = Ethiopian Birr (ETB) ETB 16.5 = US$1.00 US$0.655 = SDR 1.00 ABBREVIATIONS AND ACRONYMS AfDB BOFED CAS CJSC CIDA COPCU CSA CSO DAG DFID DP EFY ETB EMCP ESMF FM FTA GoE GTP HMIS HSDP IBEX IDA IFR ITN INTOSAI JBAR JCCC JRIS LIG African Development Bank Bureau of Finance and Economic Development Country Assistance Strategy Central Joint Steering Committee Canadian International Development Agency Channel One Programs Coordinating Unit Central Statistical Agency Civil Society Organization Development Assistance Group Department for International Development, UK Government Development Partner Ethiopian Fiscal Year Ethiopian Birr Expenditure Management and Control Program Environmental and Social Management Framework Financial Management Financial Transparency and Accountability Government of Ethiopia Growth and Transformation Plan Health Management Information System Health Sector Development Program Integrated Budgeting and Expenditure International Development Association Interim (Unaudited) Financial Report Insecticide-Treated Nets International Organization of Supreme Audit Associations Joint Budget and Aid Review Joint Core Coordinating Committee Joint Review and Implementation Support mission Local Investment Grant

3 M&E MDG MDTF MEFF MOFED MOH MTR NGO OFAG ORAG PAD PFSA PBS PDO PEFA PPPAA PSCAP QER RJSC SAFE SNNPR WASH MIS WJSC WOFED Monitoring and Evaluation Millennium Development Goal Multi-Donor Trust Fund Mid-term Expenditure and Financing Framework Ministry of Finance and Economic Development Ministry of Health Mid-Term Review Non-Government Organization Office of the Federal Auditor General Office of the Regional Auditor General Project Appraisal Document Pharmaceutical Fund and Supply Agency Protection of Basic Services Project Project Development Objective Public Expenditure and Financial Accountability Public Procurement and Property Administration Agency Public Sector Capacity Building Program Quarterly Expenditure Report Regional Joint Steering Committee Sustainability in Additionality/Accountability and Fairness/Fiduciary Standards/Effectiveness (PBS Block Grant Review Principles) Southern Nations, Nationalities and Peoples Region Water and Sanitation Management Information System Woreda Joint Steering Committee Woreda Office of Finance and Economic Development Vice President : Obiageli K. Ezekwesili Country Director : Kenichi Ohashi Sector Director : Ritva S. Reinikka Sector Manager : Lynne D. Sherburne-Benz Task Team Leader : Robert S. Chase

4 FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCING FOR THE PROTECTION OF BASIC SERVICES PHASE II PROJECT CONTENTS I. Introduction... 1 II. Background and Rationale for Additional Financing... 1 III. Proposed Changes IV. Appraisal Summary Annexes Annex 1: Revised Results Framework and Monitoring Indicators Annex 2: Operational Risk Assessment Framework (ORAF) Annex 3: Project Costs Annex 4: Revised Implementation Arrangements and Support MAP IBRD 33405R1..41

5 FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA PROTECTION OF BASIC SERVICES PHASE II ADDITIONAL FINANCING Country Director: Kenishi Ohashi Sector Manager/Director: Lynne D. Sherburne- Benz /Ritva S. Reinikka Team Leader: Robert S. Chase Project ID: P Expected Effectiveness Date: March 7, 2011 Lending Instrument: Sector Investment and Maintenance Loan Additional Financing Type: Cost Overrun Project ID: P Project Name: Protection of Basic Services Phase 2 Lending Instrument: Sector Investment and Maintenance Loan ADDITIONAL FINANCING DATA SHEET Basic Information Additional Financing (AF) Basic Information Original Project Sectors: General education 53%; General agriculture, fishing and forestry 21%; Health 15%; General water, sanitation and flood protection 6%; General transportation 5% Themes: Decentralization (P); Public expenditure, financial management and procurement (P); Other social protection and risk management (S); Participation and civic engagement (S) Environmental category: B partial assessment Expected Closing Date: January 7, 2013 Environmental category: B Expected Closing Date: January 7, 2013 AF Project Financing Data [ ] Loan [ X] Credit [X] Grant [ ] Guarantee [ ] Other: Proposed terms: IDA Standard with 40 year maturity, including 10 year grace period Retroactive Financing of 20% (US$84 million) AF Financing Plan (US$m) Source Total Project Cost: Cofinancing: Borrower: Total Bank Financing: IDA New Recommitted Financing Gap: (To be met by anticipated Development Partner contributions) Total Amount (US$m) Client Information Recipient: Government of the Federal Democratic Republic of Ethiopia Responsible Agency: Federal Ministry of Finance and Economic Development; Federal Ministry of Health Contact Person: Coordinator, Channel One Programs Coordinating Unit, Federal Ministry of Finance and Economic Development Telephone No.: ; Fax No.:

6 AF Estimated Disbursements (Bank FY/US$m) FY FY11 FY12 FY13 Annual Cumulative Project Development Objective and Description Original Project Development Objective: The Ethiopia Protection of Basic Services Program Phase II Project aims to contribute to expanding access and improving the quality of basic services in education, health, agriculture, water supply and sanitation, and rural roads delivered by sub-national governments, while continuing to deepen transparency and local accountability in service delivery. Project Description: Sub-program A for the Delivery of Basic Services supports the decentralized delivery of basic services by sub-national governments in five sectors (education, health, agriculture, water supply and sanitation, and rural roads) through (i) financing of federal block grants for recurrent expenditures; and (ii) the implementation, on a pilot basis, of a multi-sector Specific Purpose Grant for capital investments in the five sectors. Sub-program B for Health MDGs Support Facility finances Ethiopia s health sector strategy by providing flexible funding for priority activities through: (i) procurement and distribution of critical health commodities; and (ii) health systems strengthening to support the accelerated attainment of health-related MDGs. Sub-program C for Transparency and Accountability includes two parts. C1 on Accountability in Decentralized Finances and Services finances a group of three fiduciary strengthening activities; two are related to public financial management, while one is related to procurement capacity. Part C1 will also finance innovations and the roll-out of Financial Transparency and Accountability initiatives that the Government initiated under PBS 1. Part C2 on Social Accountability will (i) support the roll-out of successful social accountability approaches from PBS 1; and (ii) enhance and institutionalize capacity building for social accountability. Sub-program D for Monitoring and Evaluation supports the strengthening of existing national and sectoral M&E systems and M&E assessments to be implemented by lead Government agencies. Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP/BP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Project on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Does the project require any exceptions from Bank policies? Have these been approved by Bank management? [X] Yes [ ] No [ ] Yes [X] No [ ] Yes [X] No [X] Yes [ ] No [ ] Yes [X] No [ ] Yes [X] No [X] Yes [ ] No [ ] Yes [X] No [ ] Yes [X] No [ ] Yes [X] No [ ] Yes [X] No [ ] Yes [X] No

7 Financing Agreement Reference Article V/5.01 Original FA, Sched.2/Sec.IV/PartB/1(b), (c), (d) Original FA, Sched.2/Sec.IV/PartB/1(b) Original FA, Sched.2/Sec.IV/PartB/1(b), (c), (d) Original FA, Sched.2/Sec.V/1(a); AF FA Sched. 2/Sec.III/1(a) Original FA, Sched.2/Sec.V/1(b); AF FA Sched.2/Sec.III/1(b) Original FA, Sched.2/Sec.V/1(c) Original FA, Sched.2/Sec.V/1(d); AF FA Sched.2/Sec. III/1(c) Original FA, Sched.2/Sec.V/1(e); AF FA Sched.2/Sec.III/1(d) Conditions and Legal Covenants Description of Condition/Covenant The Recipient has revised the Operations Manual in the part pertaining to activities under Subprogram C(i), substantially in form and substance satisfactory to the Association. Submission of interim financial reports for A1, A2, B, C1 and D. Satisfactory outcome of JBAR and JRIS. Submission of annual sub-national budget for sub-programs A1, B, C and D. Recruit (maintain/renew) agreed staff to PBS Unit, EMCP, BoFEDs, General Directorate of Policy Planning and Finance and Program Based Audit Office in MoH, federal and regional PPPAAs, PFSA. Social accountability plan roll-out endorsed (maintained) by SA Steering Committee and corresponding activities underway. Mid-Term Review. PEFA to be completed and discussed at Federal and Regional levels. Independent procurement audit for all PBS procurement activities financed under the Project and provide report. Environmental sustainability study on LIG activities completed and report submitted. Follow-up study to monitor improvements in financial transparency and accountability based on Woreda Benchmarking Study. Independent procurement audit for all PBS procurement activities financed under the Project and provide report. Due Date Prior to Effectiveness. Quarterly. Semi-annually. Annually. Recruited by September 30, 2009 (done); thereafter ongoing. Endorsed by April 30, 2010 (done); thereafter ongoing. Done. Done. By October 31, 2010 (subsequently postponed to May 15, 2011). By October 31, 2010 (subsequently postponed to May 15, 2011). April 30, By October 31, 2010 (subsequently postponed to May 15, 2011); to be followed by next successive audit by April 30, 2012.

8 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide additional grant and credit financing in an amount totaling US$420 million to the Federal Democratic Republic of Ethiopia for the Protection of Basic Services Program Phase II Project (PBS 2) - Project No /Grant No. H477-ET/Credit No ET. The PBS Program supports the Government s progress to reach the Millennium Development Goals through strengthening decentralized basic service delivery and enhanced transparency and accountability in service delivery. IDA has supported the PBS program through Phase 1 (PBS 1 and PBS 1 Additional Financing) and the first two years of Phase 2 (PBS 2). Additional financing would provide IDA support through completion of the PBS program s second phase. 2. The proposed additional credit/grant would help cover the costs associated with financing gaps, both in the Basic Service Block Grants (Sub-program A1), providing an additional two years of IDA financing, and in the Health MDG Support Facility (Sub-program B). It will extend the PBS 2 operation by one year, from December 31, 2011 to January 7, Thus, there are no fundamental changes to PBS 2 design and implementation. PBS 2 Additional Financing would continue support for: (i) regional and local government delivery of basic services, particularly supporting transparency and accountability in education, health, agriculture and natural resources, rural roads and water supply and sanitation; and (ii) the procurement of insecticide-treated bednets (ITNs) to support the Government in its efforts to eradicate malaria. 3. The PBS program is supported through a partnership between the Government of Ethiopia, IDA and 10 other Development Partners (DPs) 1. Through Phase 1 and Phase 2 to date, DPs have contributed approximately US$2.0 billion. IDA coordinates DP s contributions to the PBS program, managing several Multi-Donor Trust Funds on behalf of DPs. With IDA s continued support to complete PBS Phase 2, DPs have expressed their desire to maintain this effective collaboration through their own additional contributions. II. Background and Rationale for Additional Financing Background 4. Context. The Government of Ethiopia has demonstrated a firm commitment to reach the MDGs and a strong capacity to strengthen basic service delivery. For more than a decade development partners, including IDA, have supported this commitment and worked with Government to enhance its capacity. In the uncertain environment following a contested general election in Ethiopia in 2005, DPs suspended direct budget support based on an assessment that it could be vulnerable to political capture or diversion from the core priority of basic service delivery. Nonetheless, they recognized the imperative to continue supporting the Government s significant progress towards achieving the MDGs through strengthened decentralized basic services. With close collaboration, the Government, IDA, and other DPs created the nationwide 1 The PBS Development Partners include the African Development Bank, Austrian Development Cooperation, Canadian International Development Agency, Department for International Development (United Kingdom), European Commission, Irish Aid, Italian Cooperation, Kreditanstalt für Wiederaufbau (Germany), Royal Netherlands Embassy and the Agencia Española de Cooperación Internacional (Spain). 1

9 PBS program, which brings together the Government and multiple donors to support basic service sectors through sub-national levels of government. 5. The PBS program aims to contribute to expanding access and improving quality of basic services in education, health, agriculture, water supply and sanitation, and rural roads delivered by sub-national governments, while continuing to deepen transparency and local accountability in service delivery (PBS 2 Program Development Objective). During its course to date, the Government has taken impressive action to reach these goals for improved nation-wide, decentralized service delivery. It has hired more than 100,000 primary school teachers, which has enabled net primary school enrollment rates to increase from 68.5 percent in 2005 to 87.9 percent in It has placed 35,000 primary health extension workers nationwide, providing them with essential immunization materials. Two trained workers are in every new health post in every community in the country. As a result, the child immunization rate increased from 70 percent in 2005 to 82 percent in It has taken concerted efforts to improve transparency of local government budgets and to provide opportunities for citizens to give feedback. Ninety percent of local governments posted budgets in public places, and more than 3,000 local government officials have been trained in tools to explain budgets and solicit citizen feedback. It has strengthened accountability and fiduciary systems, as quarterly audits took place for 95 percent of local governments nationwide (730 out of 770). 6. Despite this significant progress in MDG achievement and improved access to service delivery, continued effort is needed to sustain these gains and further improve basic services. Variations in both access and quality remain across regions and woredas, with some areas experiencing significantly lower coverage than what is shown in national statistics. The rapid expansion in service delivery over the past years also means that additional resources are needed to ensure that quality is maintained and further enhanced. Extension of PBS, which has proven an efficient instrument since 2006, will greatly support further improvements and sustainability of basic service delivery in Ethiopia. 7. As evidence of its commitment to the PBS program, the Government provides the largest financial contribution. For Phase 1, it provided US$2.14 billion to support these objectives through increasing the size of basic service block grants to subnational governments. For the second phase of the program, it plans to spend approximately US$1.8 billion in regional-level recurrent expenditure in the basic service sectors, bringing its total commitment to almost US$4 billion. IDA and the other Development Partners have contributed or committed 2 approximately US$2.7 billion for these block grants. 8. IDA contributions. IDA has supported the Government s commitment to these objectives through three lending operations. Through PBS 1, PBS 1 Additional financing, and PBS 2, total IDA commitments have been US$ million to date. PBS 2 was approved by the World Bank Board on May 14, 2009 and became effective May 22, Its current closing 2 Including the proposed PBS 2 Additional Financing. 2

10 date is December 31, IDA s contribution through PBS 2 is SDR million (US$540 million), which is split between SDR million (US$310 million) grant and SDR million (US$230 million) credit. PBS 2 is a follow-on operation to PBS 1 (H224-ET), which included an Additional Financing (H347-ET) component. PBS 1 financing provided SDR million (US$ million) for the PBS program to support decentralized basic service delivery in Ethiopia. 9. Development Partners contributions. Beyond the Government and IDA, 10 other Development Partners (DP), listed in Footnote 1, contribute to the PBS program. Of these partners seven contribute to Bank-administered Multi-Donor Trust Funds (AFDB, KFW and Austria provide parallel financing directly to the Government). A total of US$1.5 billion have been committed to the PBS program by DPs across all PBS sub-programs. Of these total commitments, US$1.1 billion have been or are in the process of being transferred to MDTFs managed by the World Bank. Considering the high transactions costs of administering these MDTFs, at a June 28, 2010 meeting the Implementation Support Operations Committee recommended the Task Team consider options to simplify trust fund processing. In response to this advice, the Task Team has moved away from co-financing MDTFs linked to the timing of World Bank operations and towards programmatic MDTFs as existing trust funds expire. 10. Project Design. PBS supports the Government s commitments to strengthen decentralized service delivery and enhance transparency and accountability mechanisms. PBS 2 includes two types of sub-programs: (i) a high-volume, fast-disbursing sub-program that finances recurrent expenditures for basic services at sub-national levels Basic Services Block Grants Sub-program A1, and (ii) a comprehensive series of capacity building sub-programs to strengthen transparency and accountability systems. 11. Basic Service Block Grants Sub-program A1 receives the largest proportion of financing for PBS 2, US$448 million of US$540 million. The Block Grants finance recurrent (salary, operation and maintenance) expenditures in the five basic service sectors at local levels. A major benefit of the PBS Program is its use of Government systems. IDA and DP funds are combined with Government s own resources and distributed to regional and local governments through Federal Block Grant transfers. Local level expenditures are then recorded using the country s financial management reporting system. As it transfers high volumes of resources through the Government s systems in line with the Paris and Accra agendas on effectiveness of development assistance, the project builds capacity of the public financial management execution system. As described below on Program Monitoring, the Basic Service Block Grants are based on common principles to assure that they reflect joint understandings of how to reach the PBS development objectives of enhanced basic service delivery. 12. To ensure that these resources deliver the intended results, the PBS 2 Program augments this block grant financing with capacity-building sub-programs. Together these programs take a comprehensive approach to strengthen systems necessary to improve basic service delivery while improving local transparency and accountability. Specifically, as outlined below, these capacity building sub-programs improve local investment planning and execution, expand access to crucial health commodities, and strengthen public financial management, social accountability, and monitoring and evaluation. 3

11 13. Pilot Local Investment Grant (LIG) Sub-Program A2 supports the introduction, on a pilot basis, of a multi-sector, Specific Purpose Grant from the Federal Government for capital investment at the woreda level in health, education, agriculture and natural resources, water and sanitation, and rural roads. As part of the Government s commitment to decentralization, it established the approach that local levels of government should have the prerogative to manage their own investment planning and execution. However, from PBS 1 project monitoring, it became clear that woreda governments had few capital resources available, and so were unable to exercise these local planning, procurement, safeguards and implementation systems. The objective of the Pilot LIG is to understand the constraints at the local level to increased capital budget and to support the development of policies and instruments to address these constraints. It emphasizes strengthening local-level coordination mechanisms across sectors, particularly to ensure that the outcome of this process reflects citizens needs and priorities. Additionally, the Pilot LIG supports the rolling-out and testing of new national standards for procurement and environmental screening of capital projects. 14. Health MDG Support Facility Sub-program B supports the Government in its efforts to attain the health-related MDGs in line with the goals and objectives of the Health Sector Development Programs. In particular, it provides flexible financing for priority activities for (i) procurement and distribution of critical health commodities, such as vaccines, essential drugs and insecticide treated bed-nets (ITNs); and (ii) health systems strengthening. 15. Transparency and Accountability Sub-program C is composed of two sub-programs, Accountability in Decentralized Finances and Services (Sub-program C1) and Social Accountability (Sub-program C2). 16. Accountability in Decentralized Finances and Services Sub-program C1 supports a set of activities designed to strengthen local-level fiduciary and oversight capacity as well as deepen the engagement of citizens around public budgeting procedures. To strengthen Public Financial Management, the Program supports the rolling out of the existing automated financial management software (IBEX) from region to woreda levels, including equipment and software for the ongoing upgrading of this software to improve functionality. It also finances activities to strengthen the internal and external auditing capacity, cash management, budget and account reforms and the PBS Continuous Audit process. The sub-program seeks to build woreda procurement capacity by publishing and disseminating revised public procurement manuals, directives and proclamations; as well as providing technical assistance and training for the Federal and Regional Public Procurement and Property Administration Agencies. 17. Implemented under Sub-program C1, Financial Transparency and Accountability (FTA) activities aim to increase the ability of citizens to meaningfully engage in public budgeting procedures. These activities have quickly taken root in Ethiopia. The posting of budgets at local levels has become institutionalized, promoting greater transparency in the provision of services and allowing citizens to partake in public budget discourse and provide feedback on service delivery. PBS 2 continues to support FTA activities through the roll-out of customized FTA tools at the regional, woreda and kebele levels, and capacity building for officials at all administrative levels. 4

12 18. Social Accountability (Part C2) activities under PBS aim to institutionalize capacity building and mechanisms for social accountability, improving service delivery by allowing citizens to evaluate service provision. This is done through channeling funds to local civil society organizations that enhance the ability of citizens to provide feedback on the quality and priorities of basic services. A scaled-up PBS 2 Social Accountability Sub-program C2 has been designed based on the findings of an independent evaluation of the PBS 1 pilot phase. A key conclusion of the evaluation is that the social accountability pilot initiative has shown that the use of appropriate social accountability mechanisms indeed can work in Ethiopia and have beneficial outcomes for the actors involved as well as for the quality of basic services. 19. Monitoring and Evaluation Sub-program D supports efforts to improve the quality of basic service data collection, so that there is more reliable and transparent information about progress to improve basic service results. To that end, the sub-program works to (i) strengthen existing national and sectoral M&E systems, and (ii) support the Central Statistics Agency (CSA) to improve surveys and data quality that will better link the inputs of PBS 2 to its results. The sub-program involves assessments of the quality and reliability of administrative and financial data. With this information, the sub-program can design and implement activities to strengthen data collection and reporting processes at all levels. This sub-program also provides targeted support to CSA to strengthen surveys and to expand its network connectivity to remote sites. 20. Program Monitoring. The Program is monitored through intensive implementation support. This includes, among other activities, semi-annual, Government and DP Joint Review and Implementation Support (JRIS) missions. To allow informed discussions of the Government and Development Partners contributions to the PBS program through its fiscal system, these missions include Joint Budget and Aid Review (JBAR) sessions, where all stakeholders review fiscal data from all sectors and levels of Government. Further, in addition to frequent field visits to monitor aspects of PBS capacity building results, the JRIS missions involve multiple stakeholder field visits to observe program activities on the ground. Disbursements for block grants are made following DP assessments from these JRIS missions. 21. To provide a metric for measuring progress towards shared objectives and agreements, the Program employs a matrix based on shared principles that guide program implementation, the SAFE principles - "Sustainability in Additionality", "Accountability and Fairness", "Fiduciary Standards" and "Effectiveness". Below is a summary presentation of each SAFE principle. Sustainability in Additionality ( S ). PBS 2 envisages a medium-term commitment to increasing overall financing for the federal block grants and basic services within a sustainable macroeconomic framework. Thus, the principle involves monitoring a series of criteria to ensure the Government s continued commitment to provide for nondeclining allocations for decentralized basic services through the budget and through actual expenditures, taking into account the macroeconomic environment. Accountability and Fairness ( A ). This principle has three components: (i) the extent of dissemination of budgets and service information using layperson s tools; (ii) adherence 5

13 to objective inter-governmental fiscal formulas for allocating block grants to sub-national levels; and (iii) implementation of the Dated Covenants and other agreed actions and action plans under the transparency and accountability aspects of Sub-program C. Fiduciary standards ( F ). This principle includes assessing: (i) the implementation of the Dated Covenants and other agreed actions to strengthen public financial management performance, and others related to fiduciary strengthening under Sub-program C; (ii) timeliness and quality of fiscal reporting (JBAR data), as well as financial reporting (IFRs), and audits; (iii) implementation of Continuous Audits as well as their integration at woreda/regional councils and Federal parliamentary levels; (iv) progress in efforts to enhance procurement systems at sub-national levels; and (v) strengthening as needed of procurement capacity of PBS 2 Government implementing agencies regarding PBS 2 activities. Effectiveness ( E ). This principle focuses on linking basic service results with the financing, policy and implementation inputs which the PBS program finances. It seeks to strengthen M&E for basic service sectors, to monitor how decentralized services are financed, and how sectoral policies can use that financing to improve results. 22. In addition to these six-monthly in-depth JRIS reviews, PBS involves regular financial reporting through interim unaudited financial reports (IFRs), quarterly expenditure reports (QERs) and yearly program audits. Given that the Basic Service Block Grants support decentralized service delivery across the country, these financial reports provide opportunities to monitor expenditures down to the woreda. At the same time, given the national scope, there is need for significant coordinated effort across levels of Government to provide these financial reports, resulting in delays in their being produced. The collaboration between DPs and Government to improve financial reporting is part of the PBS program s effort to build capacity. 23. Risks Considered during PBS 2 Preparation. During PBS 2 preparation throughout EFY01, several concerns emerged that had the potential to affect the design of continued PBS programming. In particular, DPs consulted extensively on approaches to the then-fragile macroeconomic environment and the passage of the Charities and Civil Society Proclamation, which had the potential to limit the scope of CSO activities in the country. In response to concerns raised by World Bank management and other DPs, an enhanced level of dialogue was built into PBS 2 to ensure donors concerns in these areas were adequately addressed. Eighteen months into Phase 2 of PBS implementation, there have been substantial developments, most of them favorable. 24. Macroeconomic Environment. Prior to the inception of PBS 2, Government faced severe macroeconomic challenges, including high inflation and low level of foreign reserves. These threatened to derail what had been a substantial period of economic growth between 2005 and 2010, where GDP growth per year has averaged near 10 percent. As part of the enhanced dialogue on macroeconomic policy during PBS preparation, the Development Assistance Group agreed to revive the Macro Sub-Group, which is part of the Public Finance Management Committee, though outside the formal PBS architecture. This group renewed its monitoring and assessments of the macro situation on a quarterly basis and reports on these assessments during the PBS JRIS. 6

14 25. Developments in the macroeconomic situation have been positive. As part of this renewed monitoring, PBS 2 set out benchmarks to assess Government s progress in achieving medium-term macroeconomic goals. The three benchmarks chosen, with the option to revise them in the future, were (i) end-of-period consumer price inflation, (ii) level of gross official reserves, and (iii) an increase in the share of private sector bank credit. In November 2010 inflation stood at 7.5 percent, down from its historical peak of 64 percent in July The Government devalued the currency 16.7 percent in September 2010, which, though possibly putting increased pressure on inflation, has been applauded as a wise long-term step to promote exports and generate foreign exchange. The level of official reserves has risen to nearly US$2 billion, up from US$750 million in October The share of domestic credit to the private sector continues to increase, most recently from 34.0 percent in July 2009 to 37.3 percent in July In addition, the targets of the Exogenous Shocks Facility of the International Monetary Fund, which approved US$240 million for Ethiopia in August 2009, have been consistently met or exceeded. 26. Government s vigor in tackling its macroeconomic challenges have translated into positive policy reforms, such as eliminating domestic borrowing of the general government, reducing domestic borrowing of public enterprises, tightening monetary policy by containing credit expansion, eliminating fuel subsidies, increasing exchange rate flexibility and mitigating food price increases by importing large quantity of cereals. Moving forward the Government and the Macro Sub-Group will continue to monitor the macroeconomic situation. But the fragility and heightened concerns that existed when PBS 2 was approved have abated. The Government remains vigilant to maintain macroeconomic stability and has committed to twice yearly Article 4 reviews with the IMF. 27. CSO Law. In January 2009, Parliament passed the Charities and Societies Proclamation, which provided a new legal framework for all CSO activities. The stated purpose of the law was to aid and facilitate the role of charities and societies in the overall development of the Ethiopian people. The law was widely criticized, however, among the DP and NGO communities because it restricts civil society organizations (CSOs) with foreign funding from activity in political governance and rights-based advocacy. 28. To allay concerns about how the CSO law might hinder PBS social accountability activities, the Government furnished to DPs a letter in February 2009 assuring that the law would not impede implementation of PBS social accountability activities in the delivery of basic services. The Government and DPs also agreed that implementation of the CSO law would be reviewed regularly as part of the broader Development Assistance Group s High Level Forum. The Government has continued to honor this agreement and social accountability activities under PBS 2 have proceded without hindrance from the CSO law. In addition, through the PBS Financial Transparency and Accountability Sub-program, the Government has taken significant steps to increase local citizen awareness and involvement in budgeting and feedback to service providers. 29. Program Complexity. The PBS program takes a comprehensive approach to supporting and strengthening decentralized service delivery. As such, its capacity-building sub-programs support a number of government agencies at different levels. This approach allows the 7

15 Government, IDA and DPs to build on partnership principles for Basic Service Block Grants to strengthen local development planning and implementation, decentralized financial and accountability systems, public financial management, social accountability, and monitoring and evaluation. However, as discussed during design of PBS 2, this comprehensive capacity building approach makes for a complex design. 30. To manage this complexity, the PBS program involves extensive implementation support. The Task Team Leader, a Lead Social Protection Economist, is based in Addis, as is the co-task Team Leader, a Senior Social Protection Economist. For each of the sub-programs, a senior level, field-based staff takes responsibility as a focal point or Sub-program Task Team Leader. Further, there is a donor-financed PBS Secretariat that coordinates activities between all DPs and Government agencies involved in the Program. This extensive implementation support is financed by a combination of World Bank budget resources and donor-financed Enhanced Supervision Trust Funds. The Implementation Support Operations Committee meeting concluded that, to achieve desired results, multi-sector programmatic lending like PBS requires this level of implementation support. 31. Risks Moving Forward. In May 2010, Ethiopia held parliamentary elections. Despite unconfirmed reports of political intimidation in the run-up to the elections, and as opposed to the previous elections in 2005, the polls were conducted and results announced without violence. The ruling party won 499 out of 547 seats, while regional and opposition parties received 46 and 2 seats, respectively. Though the Government on its part declared the process was democratic and the political space wide open, the results have raised concerns among some PBS Development Partners on the narrow space for citizens formal political engagement. Since the Basic Service Block Grants provide a high volume of resources through Government systems, there is a risk of the perception that PBS does not sufficiently promote independent accountability, monitoring and expanding space for citizen voice. For this reason the Stakeholder risk rating for the Additional Financing Project is designated High. 32. As summarized in a DAG-sponsored report of accountability systems for major development assistance programs, PBS 2 includes robust safeguard mechanisms that detect distortions in the allocation of resources to basic services. Further, as described above, the program includes extensive efforts to promote local level transparency and citizens accountability mechanisms. Nonetheless, these extensive monitoring and safeguard mechanisms would not adequately capture the possibility of access to employment or goods and services being shaped by political affiliation. The PBS Program supports improved M&E activities to promote independent survey-based verification of results that help lead to increased accountability of service providers and improved basic service delivery. During PBS 2 Additional Financing appraisal, DPs and Government agreed to ensure the full implementation of all agreed studies, surveys, and other safeguards by the agreed dates. 33. Based on the DAG report, Additional Financing will redouble support for strengthened local level transparency and accountability mechanisms already built into the PBS 2 Program. The Financial Transparency and Accountability activities in Sub-program C1 enhance the ability of citizens to hold decision makers accountable by providing them with the means to question resource allocation, such as through transparent budget and expenditure posting and 8

16 opportunities to provide feedback to service providers. The Social Accountability Sub-program C2 supports this effort, raising citizens awareness of the quality of basic services provision and providing them the tools and mechanisms, such as Citizen s Report Cards, to demand better services. Finally, as agreed during PBS 2 Additional Financing appraisal, the Government and Development partners will work together to expand and strengthen grievance redress mechanisms. Together, the PBS Program s support for improved Government transparency, increased citizen awareness, more reliable data generation and strengthened grievance mechanisms make progress to narrow the scope of possibilities for biased resource distribution. 34. Project Performance. Measured in terms of progress in meeting its results indicators, the PBS Program is progressing well, evidenced by significant positive trends in basic service provision. For example, in education the Government reports that the Net Enrollment Rate for children in primary school increased from 79 percent to 87.9 percent between FY07 and FY10, which represents an increase of almost 1.5 million additional children attending school. PBS finances teacher s salaries, enabling an increase in teachers and more children in school. In health, a large and growing number of Health Extension Workers, who raise awareness of disease and malnutrition prevention as well as provide basic curative care, has been deployed throughout the country. The ratio of primary health workers to population has reached 1:2,500 from 1:4,369 three years before. Similarly in agriculture, the number of development agents providing technical advice to small-scale farmers has risen from about 50,000 in FY08 to 63,000 in FY10, an increase of 26 percent. For water, 65.8 percent of the rural population had access to potable water in FY10, which represents a substantial improvement over the baseline in FY07, where 46 percent had access. Finally, there is improved transparency and accountability as all regions and 90 percent of local governments posted budgets in public places, and quarterly audits took place for 95 percent of local governments nationwide (730 out of 770). 35. In terms of progress towards Development Objectives and Implementation Progress, the PBS program is rated Satisfactory. As a reflection of strong partnership, when the World Bank and Development Partners have underlined concerns about implementation progress, the Government has in general reacted quickly to address these issues. Following the JRIS in November 2009, Government responded promptly to DP concerns regarding staffing of the PBS Unit in MOFED and the clarification of roles and responsibilities between the various implementing departments. This was reflected during the JRIS in April 2010 where DPs commended Government s efforts in addressing these issues. The April 2010 JRIS highlighted delays in financial reporting and lack of coordination to support the Public Financial Management activities within the Transparency and Accountability Sub-program C1. At the November 2010 MTR/ JRIS/ Appraisal, progress on Monitoring and Evaluation was satisfactory. While Financial Management and procurement were moderately satisfactory, the mission verified progress with Government to address these issues and solidified agreements through a Financial Management Improvement Plan for Additional Financing and through specific steps to ensure procurement audits and procurement capacity building activities under Sub-program C1 progress smoothly (See Section IV Appraisal Summary). 36. Progress by sub-program. The JRIS/MTR/Appraisal mission undertook a comprehensive review of the PBS program performance. Following the SAFE assessment framework, it reviewed progress across sub-programs, summarized below. 9

17 37. Basic Service Block Grants Sub-program A1. The commitments related to the Basic Service Block Grants have been fully or substantially met, as determined during the three joint review missions held since effectiveness. Sustainability with Additionality. As a sign of Government s commitment to decentralization, PBS 2 seeks to monitor increases in the overall, medium-term financing for Federal Block Grants. The PBS 2 SAFE framework measures Government commitment to decentralize resource flows through the share of total discretionary expenditures dedicated to the Federal Block Grant. As a follow up to the April 2010 JRIS, the Government and DPs agreed on a new approach to verifying the Additionality principle. For EFY02, the federal government fully disbursed to all regions the budgeted amount for the Federal Block Grant, ETB 19.6 billion. This was ETB 3.2 billion (or a 20 percent increase) over the previous year. Moreover, the planned Federal Block Grant for EFY03 (ETB 23.6 billion) was proclaimed in the Negarit Gazette, reflecting the same level of Additionality as in EFY02. As encouraging trends towards sustainability, domestic revenue mobilization increased by 38 percent in EFY02 over EFY01 as did the proportion of federal block grants financed by domestic resources. Fairness. Under PBS 2, rigorous analysis of public spending data has continued to confirm that Federal Block Grant disbursements from federal to regional and from regional to woreda levels are adhering to objective intergovernmental fiscal formulas. The fairness test, which under PBS 1 was focused only on the four large regions, has been enlarged under PBS 2 to include all regions. The development partners found that allocations from federal to region and from region to woredas consistently followed objective formulae, and disbursements very closely matched these planned amounts. 38. Pilot LIG Sub-program A2. The Pilot LIG sub-program is progressing well, with enthusiastic support from regions. Further, through extensive training, it supports strengthening of local investment planning, procurement, safeguards and implementation systems and provides information to the Government s local investment planning guidelines. While significant information about LIG performance among woredas has emerged from extensive supervision, an evaluation of LIG activities is underway to guide the possibility of future program expansion. 39. Health MDG Support Facility Sub-program B. After an initially slow start to activities under the Health MDG Support Facility because of inadequate procurement arrangements and capacity, the pace of activity has accelerated. Contracts for the procurement for essential drugs and ITNs totaling US$17.9 million have been processed. Procurement of medical equipment kits for 7,000 health posts and 2299 health centers financed from PBS 1 and valued at US$21 million has been completed, as has procurement of essential health equipment. 40. Financial Transparency and Accountability Sub-program C1. Local level transparency and accountability measures have gained momentum across regions. The posting of budgets at woreda and regional levels has become institutionalized, catalyzing transparency and accountability at local administration levels. MoFED, as well as several BoFEDs, now post their fiscal information on the internet. The development and regional customization of financial transparency and accountability tools, i.e., laypersons budgets and service delivery templates for posting in schools and health posts, to make public budget and expenditure information much 10

18 more accessible for the average Ethiopian citizen, has been rolled out across regions. FTA and Budget Literacy Training has been delivered to 2,847 trainers in all regions, and awareness modules have been delivered to 222 officials in SNNPR and to 400 officials in Addis Ababa City Administration. Moreover, budget literacy training has been delivered to more than 43,000 citizens (50 citizens in each woreda throughout the country). 41. Social Accountability Sub-program C2. An independent evaluation examining the first phase of the social accountability activities was completed in July The Social Accountability Steering Committee subsequently endorsed an action plan for social accountability expansion and enhancement of activities. The sub-program will be rolled out to some 170 participating woredas over the coming months in collaboration with CSOs. The aim of the sub-program is to strengthen the use of social accountability tools, approaches and mechanisms by citizens and citizen groups, CSOs, local government officials and service providers, as a means to make basic service delivery more effective, efficient, responsive and accountable. 42. Monitoring and Evaluation Sub-program D. While initially subject to delays in implementation, activities under the Monitoring and Evaluation Sub-program D have accelerated since the JRIS in April Three of five sectoral system assessments have been started, with the aim to provide better understanding of the challenges of sectoral data reporting systems and serving as inputs to the design of a Data Quality Assessment Framework. The Central Statistical Agency has made substantial progress in the procurement of hardware needed to facilitate networking 15 of its branch offices. Rationale for Additional Financing 43. During the PBS Phase 2 approval process, it was decided that the Project would provide two years of block grant financing and that a decision on additional financing for the third year s funds would be made contingent on satisfactory implementation progress. This built-in financing gap would allow World Bank management the opportunity to review any implementation challenges hindering the Project s objectives and allow for the re-evaluation the Project s design before committing resources for the third year of Phase 2 Basic Services Block Grant financing. 44. Since effectiveness in May 2009, some activities under the capacity building subprograms have advanced more slowly than anticipated. Thus, the team is proposing to extend the closing date of the entire operation by one year, from December 31, 2011 to January 7, It would use IDA resources to finance the block grants for two more years. This strategy has the advantage that the design of any follow-on operation, such as a PBS 3, will be strengthened by allowing the other sub-programs to make further progress to improve capacity for decentralized basic service delivery. 45. Alternatives to Additional Financing. As impressive increases in basic service results suggest, the PBS Program has proven to be a successful collaboration between DPs and the Government of Ethiopia. This success is due to the shared commitment to basic service delivery at sub-national levels. The PBS program also involves learning by doing. As both DPs and Government have gained experience in PBS as an instrument, they have identified and addressed 11

19 many implementation challenges. Government s commitment to the PBS program has been further evidenced by its request to dedicate the remaining IDA 15 allocation to PBS 2 Additional Financing. Given these circumstances, and the existing financing gap built into PBS 2, Additional Financing is the natural instrument to support Phase 2 of the PBS program. 46. The team considered preparing an Additional Financing with the same closing date as the original PBS 2 Project, i.e., December 31, This would have filled the financing gap for the third year of the Basic Service Block Grants Sub-program A1 and allowed preparation for a potential Phase 3 of the PBS Program. On reflection, however, the team decided to extend the closing date of the operation by one year and provide an additional two years of Basic Services Block Grant financing. This approach has the advantage that it provides an additional year for the capacity-building sub-programs, some of which have been delayed in their implementation, to further progress with their development activities. By giving more time to these sub-programs, results achieved and lessons learned will be able to better inform the design of the follow-on operation. 47. Alignment with Country Priorities. The Government recently released its latest fiveyear development plan, the Growth and Transformation Plan, covering the period up to The plan reaffirms Government s commitment towards human development, including expanding access to and ensuring the quality of basic services, such as education and health. Though the financing and implementation arrangements have not yet been detailed, the GTP commits the Government to reaching the MDGs by 2015 as originally envisaged. The Government considers PBS a crucial contribution to reaching its ambitious goals. 48. The Country Assistance Strategy aims to support Ethiopia in achieving four main strategic objectives: (i) fostering economic growth, (ii) improving access to and quality of basic service delivery, (iii) reducing Ethiopia s vulnerability, and (iv) fostering improved governance. PBS is a key instrument for promoting pro-poor basic service delivery by sub-national governments in Ethiopia and promoting local-level transparency and accountability. PBS Phase 2 Additional Financing is strongly aligned with all of the objectives of the CAS, especially with the second and the fourth. 49. Compliance with Dated Covenants/Conditions and Capacity Issues. Overall, the Project has complied with its legal covenants. As an anticipated implementation risk, there have been delays in the timely submission of quality Financial Management Reports (FMRs), including Interim Financial Reports (IFRs) and Quarterly Expenditure Reports (QERs). To manage this risk, the World Bank is providing targeted capacity building: accordingly, reporting has started to improve. Likewise, there has been a pattern of delays in the submission of yearly audit reports, though currently there are no outstanding audit reports. Effective review of safeguards compliance, which had been lacking under PBS 1, has improved: a safeguards expert has been hired to maintain these gains. As described in the Appraisal summary, there have been delays in meeting Dated Covenants related to Independent Procurement Audits and an Environmental Sustainability study related to LIG component. However, during appraisal the Government and the World Bank agreed on a revised schedule to complete these reviews, an obligation which has now been duly incorporated into the Financing Agreement for the Additional Financing. 12