Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING CREDIT TO THE GOVERNMENT OF KENYA FOR AN

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING CREDIT IN THE AMOUNT OF SDR MILLION (US$60 MILLION EQUIVALENT) TO THE GOVERNMENT OF KENYA FOR AN Report No KE ARID LANDS RESOURCE MANAGEMENT PROJECT PHASE TWO - ADDITIONAL FINANCING FOR THE DROUGHT EMERGENCY ESSD Operations for Eastern Africa Country Department 2 Africa Region JULY 10,2006 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 30,2006) Currency Unit = US$l - Kshs. 1 - Kenya Shillings Kshs. 71 US$0.014 FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS AAP ASAL CAS CDC(s) CDD CDF CPIA DCF DCO DFID DIR DMO DPP DSG(s) ECA EMF EU FMR(s) GOVERNMENT HIV/AIDS IDA IEG JNT IP-ERS IRCBP KACC M&E MPs NEPAD NGO OP PAD PCU PEFA RBM SLO Africa Action Plan Arid and Semi-arid Lands Country Assistance Strategy Community Development Committees Community Driven Development Constituency Development Fund Country Policy and Institutional Assessment Drought Contingency Fund District Coordination Unit Department for International Development (UK) Detailed Implementation Review Drought Management Officer Director of Public Prosecution District Steering Groups Economic Crimes Act Environmental Management Framework European Union Financial Monitoring Reports Government of Kenya Human Immunodeficiency Syndrome/Acquired Immunodeficiency Syndrome International Development Association Independent Evaluation Group Department of Institutional Integrity Investment Program-Economic Recovery Strategy Institutional Reform and Capacity Building Project Kenya Anti-Corruption Commission Monitoring and Evaluation Members of Parliament New Partnership for Africa s Development Non-governmental Organization Office of the President Project Appraisal Document Project Coordination Unit Public Expenditure and Financial Accountability Results-Based Management State Law Office

3 SWAP UNICEF USAID WFP Sector-wide Approach United Nations Children s Fund United States Agency for International Development World Food Programme Vice President: Counry Director: Sector Director: Task Team Leader: Gobind T. Nankani Colin Bruce Karen Brooks Christine Cornelius

4 REPUBLIC OF KENYA ARID LANDS RESOURCE MANAGEMENT PROJECT PHASE TWO ADDITIONAL FINANCING FOR THE DROUGHT EMERGENCY CONTENTS PAGE A. INTRODUCTION... 2 B. SPECIFIC RATIONALE FOR AND ELEMENTS OF ADDITIONAL FINANCING. 2 C. PROPOSED CHANGES... 9 D. CONSISTENCY WITH CAS E. APPRAISAL OF RESTRUCTURED OR SCALED-UP PROJECT ACTIVITIES. 16 F. EXPECTED OUTCOMES G. BENEFITS AND RISKS H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING ANNEX A: KENYA S FIGHT AGAINST CORRUPTION ANNEX B: ESTIMATED PROJECT COSTS ANNEX C: TIMETABLE OF KEY PROJECT PROCESSING EVENTS ANNEX D: REVISED KEY INDICATORS ANNEX E: DEVELOPMENT PARTNER ACTIVITIES RELEVANT TO THIS OPERATION ANNEX F: STATEMENT OF LOANS AND CREDITS ANNEX G: COUNTRY AT A GLANCE... 41

5 ARID LANDS RESOURCE MANAGEMENT PROJECT PHASE TWO - ADDITIONAL FINANCING FOR THE DROUGHT EMERGENCY PROJECT PAPER DATA SHEET Country: Kenya Project Name: Arid Lands Resource Sector Manager: Karen Brooks Country Director: Colin Bruce Environmental Category: B Borrower: Government of Kenya Responsible agency: Office of the President, Special Programs Current closing date: 06/30/09 oyes XNo Revised project development objectives/outcomes Reduced livelihood vulnerability, enhanced food security, and improved access to basic services in 28 drought prone arid and semi-arid districts in Kenya. Does the scaled-up or restructured project trigger any new safeguard policies? No For Additional Financing [ ] Loan [XI Credit [ ] Grant For Loans/Credits/Grants: Total Bank financing: US$ 60 million equivalent Proposed terms: Standard Credit Source Local Borrower 6.25 IDA Communities 0.75 Foreign Total

6 A. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide additional financing in the amount of SDR million (US$ 60 million equivalent) to the Kenya Arid Lands Resource Management Project Phase Two (Cr KE). 2. Purpose. The proposed additional credit would help finance the costs associated with: (a) scaling up both geographically and substantively the successful drought management and long term livelihood activities of the Arid Lands project in 28 districts; (b) reimbursing eligible and audited non-food expenditures associated with the severe drought which has affected the arid and semi-arid districts of Kenya over the last year; and (c) scaling up the drought contingency fund which is operating under the current credit and has been depleted due to the extended nature of the drought. B. Specific Rationale for and Elements of Additional Financing in the amount of US$ 60 million Short Rains Failure. The short rains of 2005 (October-December) were a complete failure. This followed five consecutive seasons (2.5 years) of poor rains in many parts of Kenya. Nearly 3.5 million rural pastoral and farming people, including half a million school children in 25 districts, were affected and have received assistance to sustain their lives and their livelihoods. The Government of Kenya s ongoing drought emergency program, which the IDA credit complements, was extended and expanded in February 2006 to address this urgent need. 4. Drought Response. The Government and the donor community have responded to the drought in an effective way. On balance, using the effective early warning and contingency planning system developed under the ongoing credit, which operates in 22 drought prone districts, the overall response to the emergency was speedy and well targeted compared to previous years. Districts could access the funds available from the credit through the Drought Contingency Fund (DCF) to address their most urgent needs. These include response to disease outbreak in human and animal populations, ensuring consistent water supply, supporting animal offtake, and taking care of the needs of schoolchildren. Due to the intense and prolonged nature of the drought, the credit s drought contingency funds have been exhausted. 5. Government Funding. The Government has substantially funded from budgetary resources the drought response. Over half of the food aid requirements provided between March and June 2006 has been provided by the Government, as well as major expenditures for water supply, purchase of seed for the current season, funding for schools in drought affected areas, and for emergency offtake and feeding of livestock. In addition, building on experiences gained from World Bank (Bank) assistance for a drought-induced power crisis in 1999/2000, the Government financed and effectively managed water reservoirs used for power generation and procured emergency generators in This ensured adequate power supplies despite the drought and a growing market demand for power, and in contrast to the neighboring countries which are currently 2

7 experiencing power supply shortages. For the entire financial year that just ended (2005/2006), the Government budgeted US$194 million, through reallocation and additional allocation, to cover the anticipated fiscal requirements of the drought. By February 2006, the Government had already spent US$124 million of this allocation. 6. Focus on Prevention and Livelihood Restoration. The Government s National Policy for the Sustainable Development of the Arid and Semi-arid Lands (ASAL), which includes a fully costed ten-year development plan, focuses on community involvement, and emphasizes prevention and increased livelihood opportunities. In the short term (5 years), it envisages that, through interventions proposed, the vulnerability of poor people to climatic shocks, particularly droughts and floods, would be reduced and capacities strengthened to respond to climate change. It also envisages that ASAL inhabitants would benefit from systems of good local governance that are already in place. In the medium term ( years), it envisages attracting sustained investments by Government, the private sector and development partners in various priority areas such as physical infrastructure, livestock production and marketing, water resources development, education and human capital development, health, tourism, trade and industry. In the long-term (25-30 years), the Government envisions a vibrant ASAL economy that has strong linkages with non-asal economic systems and contributes significantly to national economic development. 7. Multiple Challenges. In order for this vision to be realized, there is need to: (a) restructure the ASAL economy over time to conform with commercial realities so that key inputs are accessed through the market as opposed to kinship and social networks as is the case today; (b) reduce reliance on livestock through human capital development and diversification of sources of income; (c) upgrade natural resource management and utilization by reviewing existing land use policies and land tenure systems; (d) improve pastoral productivity by conservation of the environment, domestic animal genetic resources and other biodiversity; (e) widen markets and provide social services to mobile pastoralists; (0 provide financial services to nomadic pastoralists; and (g) reduce and manage risks such as droughts and floods that often reduce assets and increase food insecurity. 8. Several Interventions. In order to address these issues, investment would be made under the medium term strategy to improve the road infrastructure and communication network to minimize transaction costs in production, trade and business. Efforts will be made to add value to ASAL products at source. This will be done through the establishment of private sector abattoirs, rural dairies and small leather processing factories. Crop farming and livestock production will be strengthened through dissemination of improved technologies in water harvesting, irrigation, range management, livestock disease control, livestock and crop-based marketing as well as through the revitalization of extension services. Provision of social services such as education and health will be improved. Development of skills through vocational training, gender equity and the fight against HIV/AIDS will be given priority. Conflicts will be minimized through support and promotion of peace initiatives. At present, the Arid Lands project is supporting implementation of the more immediate, short term objectives of the Government s ASAL strategy. 3

8 9. Government Leadership and Stakeholder Collaboration. The framework for ASAL development is characterized by solid Government leadership and good collaboration among other stakeholders, including civil society and development partners. For example, the drought management structure which the Government has put in place with project assistance provides a framework at national and district level for early warning and relatively quick response to drought stress. All key donor partners involved in drought management (WFP, USAID, DFID, and the EU) as well as important NGO partners (OXFAM, Action Aid, Red Cross) plan and commit their drought response through the Kenya Food Security Meeting structures and the district steering groups. In addition, DFID is providing support to the Government to design a Hunger Safety Net Program which, through coordination with the Office of the President (OP), will assist the ASAL regions to move away from famine relief to a more predictable and reliable safety nets program. The EU is also preparing a Drought Management Initiative Program to support drought management in general and the DCF (see Annex E - Development Partner Activities). These activities are being prepared in a collaborative manner, which will support and strengthen the existing Government institutional mechanisms under which the Arid Lands program operates. In keeping with this approach, all of these key stakeholders were consulted during the preparation of this additional financing and their inputs were incorporated. 10. Relevant and Timely Additional Support. The proposed additional support is consistent with the overall development strategy for ASAL. Bank support at this juncture would be especially timely. The long rains of April and May 2006 were generally good, with some mixed performance in the northeastern pastoral areas and the southeastern lowlands. The additional funding provided through this project would have a positive impact on the recovery of areas which have received good rains, and will contribute to activities designed to mitigate the effects of the drought in eight districts still under emergency conditions. Scaling up the work of the program to mitigate future droughts and invest in the long term livelihoods of these vulnerable communities will also increase the likelihood of achieving the objectives of the overall ASAL program. 11. Governance and Corruption Concerns in the Bank s Portfolio in Kenya. Forensic work commissioned by the Government was undertaken and completed in 2005 by an international consulting firm on three Bank-financed projects. The exercise found direct evidence of fraud in the Kenya HIV/AIDS Project, and shortcomings in risk management and control (though little direct evidence of fraud) in the Kenya Decentralized HIVIAIDS and Reproductive Health Project and in the Public Sector Management Technical Assistance Project. The report also notes poor Government management against fraud risk, weak oversight, and insufficient capacity (particularly in accounting staff). Project supervision focused on documentation rather than physical evidence of implementation, and confusion over World Bank and Government requirements, all allowed for opportunities for corruption. There was also insufficient managerial accountability. Meanwhile, the Integrity Department of the World Bank is at an advanced stage of work on Detailed Implementation Reviews of four Bank-financed projects, including additional work on the HIVIAIDS and Reproductive Health projects 4

9 that were covered by the international consulting firm, Free Primary Education and the Northern Corridor Transport Improvement Projects. 12. Governance and Results in Bank-financed ASAL Activities So Far. Previous and ongoing Bank-supported ASAL activities have not been included in any of these forensic reviews partly because of their good track record of governance and measurable results (see also para. 16), and existing arrangements for community monitoring. The Independent Evaluation Group (IEG) in its project performance assessment report (Report Number 34052, October 2005) rated the overall outcome of the first phase of the project as satisfactory as the project has established a drought early warning and response system recognized by all stakeholders as successful in the eleven districts most adversely affected by drought; helped organize response programs to the drought through aid agencies and NGOs that saved livestock to the value of at least US$lO million per annum; introduced a range of measures that assisted pastoralists to better manage their livestock and range and water resources, and to increase herd offtake to the value of about $20 million per year; and supported community based interventions that improved infrastructure (improving access to health and education services), helped the poorest to recover from the effects of drought and generated incomes of about $2 million per year. The institutional development impact was rated as high because, beyond developing the District Steering Groups (DSGs) as focal points in organizing the response to drought, the project empowered both Government staff at the district level and the local communities, and increased their capacity to tackle emergencies and development problems. The drought management system in Kenya has been cited as best practice and is being emulated in other countries, including Ethiopia. 13. Raising the Bar on Anti-Corruption. Still, this additional financing package takes on board relevant key recommendations, including explicitly reflecting in project design, implementation and supervision, sensitivity to fraud and fraud risks. Agreement has been reached with Government for the establishment of an institutional risk management function comprising the following institutions: (i) an independent audit committee at the project steering committee level. The mandate of this committee will include the development and maintenance of an institutional risk management policy framework, oversight of internal and external audit functions and monitoring implementation of internal control recommendations; (ii) a finance committee responsible for overseeing the effective use and safe custody of project resources; (iii) an internal audit function responsible for oversight of the activities of the project s accounting and internal control bctions at both national and district levels. There are explicit arrangements for public disclosure and access to information that facilitates managerial accountability. Monitoring at the community, district and national levels will be scaled up. Proposed procedures for reimbursement of incremental drought related expenditures will include pre-screening the list of expenditures considered for reimbursement and physical verification by internal auditors to confirm their eligibility; reinforcing community monitoring, with possible beneficial spillover effects for devolved funds such as the Government s Constituency Development Fund (CDF); and strengthening disclosure and complaint mechanisms. A side letter from the Government dated June 26,2006, agreeing to transparency/disclosure arrangements and their monitoring, was provided to the Bank. Annex A discusses country wide anti-corruption 5

10 actions being taking by the Government, and the Bank s contribution to the fight against corruption. 14. The Original Credit. The second phase of the Arid Lands Project (SDR 43.6 million, $60 million equivalent) was approved on June 19,2003 and became effective on September 8 of the same year. To date, 44 percent of the second phase credit has been disbursed, including 100 percent of the Drought Contingency Fund, due to the extended dry period. The original objective of the project will be slightly modified as described in para Original Project Design. The project s current design is as follows (figures include total IDA, Government and community contribution): Natural Resource and Drought Management (US$38.9 million, including US$ 4.4 million for the Drought Contingency Fund). The activities of this component mitigate the risk posed by drought and other factors by strengthening and institutionalizing natural resources and drought management systems. Activities include district and community based natural resource management, conflict management, drought early warning system drought preparedness and contingency planning, and the Drought Contingency Fund. Community Driven Development (CDD) (US$24.2 million). This component finances the implementation of community-prioritized investment projects, community capacity building, and capacity building for backstopping services in arid districts. Support to Local Development (US$ 14.8 million). This component aims to improve the delivery of essential services in arid districts and promotes the interests of the arid lands at the national level. 16. Status of Project Implementation. Both the development objective and implementation progress have been rated satisfactory since the credit became effective on September 8,2003. The Arid Lands program continues to be a successful instrument both to support the drought management structures of Government and to invest in the long term development of the project area. The project is delivering its intended benefits to support communities and is leveraging substantial additional funding from other sources. Response to drought, in terms of speed (three months sooner than the 2000 drought) and targeting (unified community based food aid targeting is able to reach women, therefore the family directly) has improved. The vulnerability of arid lands populations has reduced due to an effectively functioning drought management system, and due to improved access to social services such as water, education and health care, To date, the project has built or repaired over 600 water supplies, constructed and assisted 400 schools, 60 health facilities and 55 small irrigation schemes, assisted 18,000 beneficiaries to restock, purchased 37,000 animals through emergency livestock offtake, and supported livestock marketing and livestock health investments, income generating activities and social safety nets. On average the distance between communities and water, schools and health facilities has been halved. Despite these gains, the populations of these districts remain vulnerable to weather shocks, and require additional investments 6

11 as indicated in the ASAL strategy, to strengthen their livelihoods and ensure that the loss of assets is minimized during the drought cycle. 17. Compliance with Covenants. The project is substantially in compliance with its covenants, with changes which will institutionalize the drought management structures having reached Cabinet approval stage. The IDA task team is encouraging the Government to accelerate the institutionalization of drought management structures, the Kenya Food Security structure at national level and the District Steering Group at district level. It is also encouraging the formal establishment of a structure for the Drought Contingency Fund which would allow for multi-donor participation. It is proposed to require these actions to be completed by the end of calendar year Rationale for the Additional Financing. The Government has requested additional financing of US$60 million to address the needs of the recent drought emergency, by scaling up both geographically and substantively the successful drought management and long term livelihood activities of the Arid Lands project. During the last ten years, the program has gained extensive experience and built solid capacity in delivering district and community based interventions. With the resources available, the project has been able to reach over half the population of the arid districts. The basis for the additional financing presented by the Government and supported by the IDA task team is as follows: 0 Thefirst rationale i s scaling up. Scaling up support to these marginalized communities through this additional credit will allow for the majority of the communities in the arid districts to benefit, and about 25 percent of the communities in the semi-arid districts to be reached. Within the communities already benefiting from the project, the credit will respond to the increasing demands and needs of these communities, as the program has increased their capacity to absorb development funds. This will increase the probability of achieving the project objectives of reducing food insecurity and livelihood vulnerability. 0 The second rationale is to give greater attention to prevention, by focusing on factors which would positively mitigate the adverse impact of drought. The recent IEG report on World Bank assistance to natural disaster globally indicates that the Bank is not doing enough to support prevention. This finding is also consistent with the National Policy for the Sustainable Development of the Arid and Semi-Arid Lands of Kenya. Accordingly, the approach involves scaling up investments that address the root causes of the emergency such as improved range and water resource management and the need for livelihood diversification. The structure proposed - support to long term livelihoods interventions, mitigation and contingency planning, and emergency response is defensible as a 'hew kind" of emergency reaction. 0 The third rationale is supporting the Government's ongoing efforts to shift budgetary resources toward pro-poor development spending. The Government is making a genuine effort to re-orient expenditures along the 7

12 priorities identified in their Economic Recovery Strategy. For example, in the budget proposals presented to Parliament on June 15,2006, the Minister of Finance continued to emphasize pro-poor expenditures, with special emphasis on women, children and youth. Overall, the Government is succeeding in increasing the share of spending allocated to education, health and physical infrastructure, and has taken tough steps to introduce relative reductions in allocations to wages and salaries (particularly outside of health and education). However, in the absence of substantial donor support, it has not been able to make radical shifts, since about 70 percent of the budget is accounted for by wages and salaries, pensions, and interest rate payments'. Against this dynamic backdrop, the additional financing would help to reduce the fiscal impact of the drought and in a modest way complements the sincere efforts of individual ministries to shift expenditures toward high impact, pro-poor items. To do so, it is recommended that the Bank reimburse the Government for eligible drought related expenditures, incurred by the water, health, education, agriculture and livestock ministries who reallocated budgets to support affected communities. This would alleviate the pressure to cut back expenditures for non-wage operations and maintenance this year, and for the Treasury to compensate for this incremental spending, by further increasing domestic borrowing requirements. 0 The fourth rationale is reinforcing community oversight and the strengthening of local decision making structures, which are providing best practice models as the country-wide dialogue on decentralization progresses. One especially topical aspect of this process is a debate over increasing the amount and improving decision making and monitoring of the CDF. In 2005/06, the CDF was equivalent to 2.5 percent of ordinary revenue, which are indirectly controlled by MPs. The CDF is seen by many as an innovative instrument for overcoming bureaucracy to ensure resources reach the grassroots level, but has also raised concerns that it could create new opportunities for patronage and wasteful spending. As a result, the CDFs are coming under more intense scrutiny, particularly in light of MPs demands to increase the size of these funds in the budget for FY06/07. In the budget speech of June 15,2006 the Minister of Finance recommended an increase to just around three percent of ordinary revenue. In practice, there are successful CDF cases where MPs have promoted transparent decision making and helped communities finance projects which respond to community priorities, and others where decision making is opaque or where ' This limited flexibility calls for an austere approach to budgeting, and led to substantial public criticism of Members of Parliament (MPs), who were able to evade Treasury oversight and award themselves a substantial increase in allowances earlier this year. Although the fiscal implications of this incident are minor, they have created a healthy pressure for a better system to determine the compensation o f parliamentarians and other senior public officials. Indeed, in his recent budget, the Minister introduced several austerity measures including a new transportation policy to significantly reduce Government vehicles and proposed that MPs pay taxes on their house and entertainment allowances. This proposed taxation has to be approved by Parliament. 8

13 funds were not used. In Arid Lands project districts, there are good examples where decisions on the use of CDF have been brought under the DSG umbrella for partnership with Arid Lands (para. 24). These have been identified for scaling up under the additional financing. 19. Implementation Capacity. The proposed scale up should not strain implementation capacity at national and district levels. The Arid Lands project has been able to handle increasing disbursement levels over the past two years without negative quality or fiduciary implications. Measures to further improve program capacity have been incorporated under this additional financing proposal, especially since the project is being extended to 28 districts. Detailed institutional, financial and procurement implementation mechanisms are defined in the project implementation plan, which will be revised to include this additional financing. This is also part of the overall effort to further strengthen oversight, manage fiduciary and development risks, and facilitate an increased focus on results (see paras 27-28). C. Proposed Changes 20. The original objective of the project was to enhance food security and reduce livelihood vulnerability in drought prone and marginalized communities in 22 arid and semiarid districts. A minor modification to the objectives is proposed, to take into account actual activities, especially the increased provision of basic services, and the positive impact of the program thus far, as well as the geographical scale up proposed and increased focus on livelihood opportunities under this additional financing. The newly worded objective would be to reduce livelihood vulnerability, enhance food security, and improve access to basic services in 28 drought prone arid and semi-arid districts in Kenya. The closing date of the project will be extended by one year from June 30,2009 to June 30,2010. There have been no amendments to the legal agreement to date. The proposed scale up does not involve any exceptions to Bank policies. Incremental drought-related Government expenditures which will be considered for reimbursement fall within the project description. 21. Components. The original project components would be unchanged. The total additional project cost is estimated at US$67 million equivalent, of which US$60 million would be financed by IDA. The breakdown of estimated costs, financing plan, disbursement schedule and procurement arrangements for the additional financing are shown in Annex B. Annex C indicates the timetable of key project processing events. Incremental activities to be financed through additional hnds are as follows: Long Term Livelihood Interventions (US$25 million). There is a need to scale up activities aimed at improving livelihoods in the drought prone districts. These would include additional funding for: (a) drought preparedness and natural resource management activities in all 28 districts, including new and improved water supplies, natural resource management activities (range and fodder improvement, ecotourism, honey, aloe, gum and resin collection, hay production, livestock product value addition), other 9

14 livelihood related infrastructure investments at district level such as irrigation, and other income diversification strategies such as investing in women groups (US$ 10.0 million), (b) expansion of drought management and the early warning system to additional drought prone districts in Coast Province (Taita Taveta, Lamu, Kilifi, Malindi and Kwale) which were excluded from phase two due to resource constraints, and to another drought-prone district in Central Province, Meru North (US$ 7 million); (c) scaling up investments made through the community driven development and support to local development components in the eleven arid districts where demand and capacity to implement exceed existing credit availability (US$ 5.2 million); and (d) the cost of extending the project by one year, to allow time for incremental investments to take place has also been factored into the three project components (US$2.8 million). Replenishing the Drought Contingency Fund (US$ 15 million). This component also supports risk prevention and livelihood improvement, but is released on a contingent basis at critical points in the drought cycle. It finances drought mitigation, response and recovery activities based on district drought contingency plans developed and endorsed by all stakeholders at the district level, and triggered by the early warning system. This category has been exhausted due to the persistent drought situation in many districts since 2003 when the Arid Lands I1 project started. In 2005 the Bank and Ministry of Finance allowed the project to reallocate Kshs. 89 million from other activities for the current drought. As a result, emergency funding for drought expenditures continued. This funding has allowed the project to fill gaps in the nutrition-related response to the high levels of child malnutrition in many districts (where NGO/UNICEF support is lacking), livestock interventions (to keep remaining animals alive and begin restocking), maintain emergency water supply, and fill other immediate and urgent needs and 'gaps in the current levels of emergency support, which are continuously identified and met by the district-based multi-sectoral teams. During the budget speech of June 15,2006, the Minister of Finance further reinforced support for the drought contingency funding mechanism by announcing an additional Government contribution of Kshs. 500 million for next fiscal year. The intention is to institutionalize a mechanism to which other donors and Government can contribute, which will fund district drought contingency plans, triggered by a clear signals given by the existing and quite robust drought early warning system functioning in districts most prone to drought. The additional financing will fimd expenditures such as purchase of livestock during early stages of the drought, investments in strategic drought preparedness water supplies for humans and animals, repair of critical access roads, and strategic human and animal health interventions. Reimbursement of Incremental (pro-poor) Drought-Related Expenditures incurred by Government (US$20 million) This financing is necessary to ameliorate the negative impact of an additional US$ 85 million the Government must borrow from the domestic market to cover its drought- 10

15 related expenditures. The additional financing would cover reimbursement for up to US$ 20 million of drought-related non-food expenditures incurred after January 1, The Treasury has carried out a preliminary assessment, through their internal auditors, of these expenditures made by the ministries of Water, Livestock, Agriculture, Health, and Education. The non-food activities proposed to be financed under this additional financing proposal fall squarely within the existing project objectives and description. Activities identified to date include water tankering, support to rapid response teams to respond to water supply breakdowns, emergency livestock offtake, animal disease control, purchase and distribution of seed for food crops, incremental costs due to waiver of school fees for secondary schools in drought affected areas, human disease management, and therapeutic and supplemental feeding for the sick and malnourished. The team has pre-screened the list of expenditures, and the internal auditors have carried out a physical verification to confirm their eligibility. Project Implementation, Fin an cia1 Management and Procurement Arrangements 22. The institutional and implementation arrangements would be largely the same under the additional financing as for the ongoing project, as they are working effectively. Overall project coordination will remain with Special Programs in OP, reporting to the Permanent Secretary. At the district level, the project will continue to be coordinated through the District Coordination Unit (DCU), headed by a Drought Management Officer (DMO), who also acts as the district project coordinator and secretary of the DSG. The DSG is a sub-committee of the District Development Committee, which is composed of local leaders, district technical staff and partner agencies. Due to: (a) the multi-sectoral and innovative nature of the project; (b) the fact that drought and natural resource management are complex issues which did not fit neatly into any existing Government structure; and (c) the lack of effective decentralization in Kenya to manage the project at district level, the project has operated through a project coordination unit. Through the influence of the program, the Disaster Management Policy of the Government now includes these structures. Formalization of the drought and disaster management functions at national and district level through the approval of this and the ASAL policy by Cabinet should be completed by the end of A major outcome of the project has been to build the capacity of district teams through the DSG to plan and manage untied resources. Another outcome has been increased demand for transparent resource allocation at the community level. 23. Community/Beneficiary Participation. The involvement of local communities and the accountability of project management to them as a whole has been a major success factor for the existing Arid Lands project. The project has enhanced the capacity of the DSGs in decision making processes in areas such as natural resources management, as well as improved drought preparedness, contingency planning and monitoring and evaluation. The DSG has strengthened overall development planning at the district level. One of the principles of the project is to provide various windows of support through which districts and communities can decide their priority activities, including the drought contingency fund and funding for drought preparedness, various 11

16 CDD activities, and enhanced local service delivery. For each of these funding lines, guidelines and rules developed under the Arid Lands project have empowered local level leaders to improve the planning and implementation of development activities at the district level. Communities also bear increased implementation responsibility, especially in the operation of the CDD component which follows community based disbursement and procurement guidelines. Community institutions taking on decision-making and fund-management responsibilities have been strengthened to enhance their management capacity. The role of women in the community development committees is notable. Consistent with successful community based accountability mechanisms, the project is assisting in the establishment of a community radio station in one district (Wajir) which will broadcast inter alia the monthly DSG meetings over this station. 24. Complementing the CDF. The Arid Lands project has also been able to complement the use of CDF at the district level. As the CDF funds are targeted almost entirely at social infrastructure, the DSG planning mechanism has been critical to ensure that CDF funds do not duplicate and when possible are used collectively with project funds to maximize their utility. For example, in Mandera, multipurpose flood control/irrigation structures are being constructed by pooling Arid Lands and CDF funds. Secondary school improvements in many districts are also being jointly financed. 25. Financial Management. The financial management capacity in the institutions involved in the project is satisfactory, having been strengthened over the years under both phases of the project, both at the center and in the current 22 districts. For the six new project districts, a strategy for rapid development of local capacity in financial management will be adopted before operations in these new areas can be commenced. From a financial management perspective, the project is managed by a Project Finance Officer with a competent finance and accounting section. They provide oversight and monitoring as well as mentoring for district accounting staff. At the district level, the project will continue to receive support from the District Treasury and guidance from the District Accountant. Existing financial management safeguards are expected to be further enhanced by the proposed introduction of institutional risk management functions mentioned below. 26. Updated Financial Management Assessment. In view of the proposed additional credit of US$ 60 million, a detailed financial management review was completed in June This included an in-depth review of the project's Statements of Expenditures (SOEs) covering the entire second phase, and all Financial Monitoring Reports (FMR) and audit reports, through which all IDA and Government project receipts and expenditures to date were confirmed and financial management systems critically appraised. The review comprised a detailed examination of accounting, internal control and reporting systems at selected project implementation sites. While no significant weaknesses were identified, mutual agreement has been reached for immediate implementation of systems enhancement recommendations2. A financial ' Key findings o f the review include the need for: (a) an enhanced institutional risk management function, including the establishment o f fiduciary oversight committees and an effective independent internal audit function; and (b) improvements to existing financial management reporting 12

17 management improvement action plan has been discussed and agreed, and will be implemented before the mid term review of the project, scheduled for November Risk Management and Internal Control Arrangements. Improvements to the current institutional arrangements o f the project have been agreed with Government to establish an effective institutional risk management function, and include the following: Fiduciary Oversight Committees - two financial management sub-committees of the Project Steering Committee, with clear mandates, composition and functions : An Audit Committee which has in its mandate, responsibility for: (i) development and operationalisation of a Risk Management Policy Framework; (ii) monitoring and ensuring timely effectiveness of audit and operational review recommendations of various fiduciary oversight responsibilities including, internal and external auditors, Government I proj ect monitoring agencies and periodic review and supervision missions; (iii) overseeing the effectiveness of accounting and internal control standards, policies and practices; (iv) ensuring compliance with legal covenants and terms of funding agreements; (v) overseeing the effectiveness of the internal audit function; (vi) monitoring the performance of key internal audit staff against approved performance contracts; and (vii) packaging and disclosing relevant findings, on a quarterly basis, in publicly accessible ways that facilitate timely and effective monitoring and accountability at the community, district and national levels. A Finance Committee that will have as its mandate responsibility for: (i) comprehensive review of quarterly Financial Monitoring Reports (FMR); (ii) approval of periodic operational budgets and monitoring financial performance; (iii) reviewing and approving annual financial statements; (iv) monitoring the performance of key financial management staff against approved performance contracts; and (v) packaging and disclosing relevant findings, on a quarterly basis, in publicly accessible ways that facilitate timely and effective monitoring and accountability at the community, district and national levels. The committees will be staffed with appropriately experienced persons and would meet regularly, at least once each quarter. Internal Audit function - As per the new Government regulations, an independent and effective internal audit arrangement in OP will be established, responsible for oversight of the activities o f the project s accounting and internal control fbnctions at both national and district levels. An independent institutional risk management review will also be conducted on an ongoing basis, monitoring compliance with laid down policies and arrangements, including revised guidelines and a training workshop for all head office and district accounting staff. 13

18 procedures, and reviewing and recommending enhancement of accounting and internal controls. For enhanced effectiveness, it is proposed that this function be carried out by the Government Internal Auditor General, an independent unit under the Ministry of Finance, and adopting the risk-based approach that is currently being rolled out with the support of the IDA funded Institutional Reform and Capacity Building Project (IRCBP). External support will mainly be in: (i) the oversight of periodic risk assessment and audit planning processes; and (ii) operational quality assurance. The Internal Audit function will report directly to the Audit Committee, presenting findings and recommendations in implementation progress reports on, at least, a quarterly basis. The audit findings will be disclosed in publicly accessible ways that facilitate timely and effective monitoring and accountability at the community, district and national levels. 28. Social Accountability. Given the dispersion of the project s activities and the adoption of simplified community based fiduciary arrangements to be employed at the micro-proj ect level, proactive and innovative internal control and oversight functions will be in place to address associated risks. The already functioning participatory monitoring and evaluation mechanisms provide for community feedback to the project at community and district level on an annual basis. The following practical improvements to public oversight of the project are proposed: a) Public disclosure of information covering (i) periodic resource allocation and fund accountability; (ii) periodic listings of funding allocations to respective beneficiaries including their location, amounts and purpose for which funds are disbursed; (iii) local project operational results and project implementation progress; (iv) disclosure of fund accountability defaulting entities, and (v) sharing of experiences of best practice among beneficiary entities. Arrangements will be made for prominent disclosure and timely update of such information in the media and public bulletin boards at both the District and community levels. These efforts would be part of a broader comprehensive communication strategy developed by the project to support partnerships with key stakeholders, including other Government agencies, Members of Parliament, civil society organizations, the private sector and the media. The key objective for the strategy is to enhance transparency and accountability through greater public access to information and outreach activities, including public education. These partnerships will also help to strengthen the project s monitoring and evaluation efforts towards better implementation and results. 14

19

20 an internal audit of the expenditures. Disbursement for such expenditures is conditional upon the completion of an external audit, for which terms of reference have been prepared. The audit would commence in time to allow for the disbursement for these items to be disbursed soon after the additional financing becomes effective. D. Consistency with CAS 31, The current Country Assistance Strategy (CAS) for Kenya (dated May 14,2004) is based on the Government Investment Program for the Economic Recovery Strategy (IP-ERS). Pillar two of the IP-ERS emphasizes equity and poverty reduction, with a focus on targeted programs aimed at reducing poverty of particularly disadvantaged communities. A particularly noteworthy feature of the IP-ERS is the prominence it gives to addressing the needs of pastoralists, a previously neglected and particularly vulnerable and poverty-stricken group. As mentioned earlier, the National Policy for the Sustainable Development of the Arid and Semi-Arid Lands of Kenya (ASAL Policy) combines investment in infrastructure with human resource development and security enhancement, social safety nets, education for pastoralist children, and improved food security. The Arid Lands project is the main vehicle in the CAS for providing support to this Government s objective. 32. Africa Action Plan (AAP). The additional credit also supports several objectives of the AAP. It will continue to support decentralized institutional capacity building and further expand its successful approach into six additional districts. The additional credit will also scale-up and expand small scale water supply for humans and animals, and productive infrastructure (irrigation), further closing the rural infrastructure gap in Kenya. The Arid Lands program promotes the harmonization of approaches with key development partners for effective coordination of drought management, and is working to develop mechanisms which will allow for joint financing. E. Appraisal of Restructured or Scaled-up Project Activities 33. Although the project is being scaled up, the program remains as originally designed and appraised. The economic, financial, technical, fiduciary and social aspects of the activities to be undertaken with the additional financing remain the same as the original project, but with additional safeguards to ensure that the project funds are used effectively for the purposes intended. 34. Environmental Analysis. The environmental classification of the ongoing project is Category B. The additional financing would fund activities similar in scale and scope to those implemented under the original project. The Environmental Management Framework (EMF), which was considered best practice at appraisal, i s being used effectively by headquarters and districts to assess and mitigate negative environmental impacts of project investments. Annual environmental audits are carried out by third parties to review and fine tune the EMF process mechanism. In addition, the participatory rural appraisal mechanisms used to implement the CDD component were improved during the design of the second phase to enhance the participation of women 16

21 and other marginalized community groups. Additional training will be carried out in the six new project districts to ensure the EMF process and principles are well understood. 35. Monitoring and Evaluation. Activities to be financed under the additional credit will follow the M&E model currently in place under the Arid Lands project. This is based upon participatory approaches, which have been integrated with natural resources, drought management, and local and community development planning processes. An important objective has been to develop capacity for M&E and institutionalize it at the various levels. This includes training of project personnel and other stakeholders in the districts, especially DSG members and community leaders, through a participatory learning process over the project period. An M&E unit has assisted project management to: (a) establish a system of routine records and periodic monitoring reports at community, district, and project levels; and (b) undertake studies and surveys to support baseline establishment and subsequent evaluations, which would be undertaken with the assistance of independent consultants. Special efforts are being made to co-ordinate and dovetail these efforts with other agencies in Kenya, such as the World Food Programme and the Central Bureau of Statistics. Each district undertakes annual reviews of a diagnostic and trouble-shooting nature in response to information emerging from monitoring activities, which are participatory in nature with the full involvement of stakeholder communities. This is being technically supported by the M&E unit, with the help of external consultants. Given the increased scope of the program, responsibilities and procedures for M&E, including the frequency, content and audience, the M&E framework will be re-evaluated and reinforced under the additional financing. F. Expected Outcomes 36. Key perfonnance indicators were finetuned during the last supervision mission, following the completion of baseline survey data collection in February These indicators will be the subject of further review during the mid term review exercise scheduled for November The amendment to the development credit agreement now includes the new, revised outcome indicators, instead of output indicators which were included in the original DCA. Intermediate and output indicators are being revised to incorporate the scaling up of the project, which include the expansion of districts benefiting from rapid response to drought conditions, an increase in the number of communities directly benefiting from livelihood enhancing microprojects, and an increase in the number of beneficiaries with closer proximity to basic services. The project outcome indicators are attached as Annex D. G. Benefits and Risks 37. Benefits remain as described in the Project Appraisal Document, but expanded geographically to six additional districts and in numbers to additional communities in the existing project area. The project is expected to generate a variety of social, economic and institutional benefits which will strengthen sustainable livelihoods of the target population, and include: 0 reducing time lapse between reported drought stress and appropriate response; 17

22 e 0 improved access to technical and social services; and strengthening the voice of people from project districts in local and national development. 38. Gender. The project has had a substantial positive impact on women and girls in the arid and semiarid districts where it operates. Increased access to water, education and health care has benefited girls and women disproportionably more, as they are traditionally disadvantaged in access to education, and bear the burden of providing water for the family. The participatory methodology for the development of community priorities for the CDD component mandates women participation, as does the formation of community development committees (CDCs). With time, it is found that over half the CDCs have women treasurers, as women are found to be trustworthy managers of community resources. Social safety net community projects target widows and the most vulnerable members of the community. 39. Domestic Debt. The additional financing will help reduce domestic debt and increase pro-poor expenditures through the reimbursement of incremental drought related costs borne by the Government over the last six months, and through the strengthening of the drought contingency fund. The latter should help to reduce these costs in the future. 40. Risks. The critical risks mentioned in the Project Appraisal Document (PAD) remain valid. Measures to reduce fiduciary risks which have been prevalent in some other Bank-financed operations in Kenya are highlighted in the risk management and internal control arrangements described in paras. 27 and 28 above. Given country conditions, the fiduciary risk rating remains high. The following specific mitigation measures will be taken: e Audit of Government Financed Expenditures to be Reimbursed For droughtrelated emergency expenditures expected to be reimbursed under the proposed additional credit, physical verification has been carried out, and a Bank team (comprising financial management and procurement specialists) will work alongside the Government audit team to establish that the expenditures meet the Bank s fiduciary requirements for eligibility before disbursements take place. 0 Results of the Kenya Detailed Implementation Review (DIR). Results of the Kenya DIR are being finalized by the Bank s Department of Institutional Integrity (INT). The Arid Lands project has had a continuously good track record of governance. For this reason, the project has not been included in any of the forensic audits conducted in 2005, or in INT s DIR work. However, lessons from the forensic audit of other projects are being incorporated in the design of strengthened fiduciary controls. The general recommendations on transparency and accountability, especially at community and district levels, have been incorporated into agreements for enhanced risk management and internal control arrangements as well as community transparency and accountability arrangements described in paras. 27 and 28 above. A side letter from Government, agreeing to these transparency/disclosure initiative arrangements and their monitoring, was sent to the Bank on June 26,

23 0 Governance Assessment Mission. The Government invited the Bank to conduct a governance assessment mission. The mission visited Kenya from June 28 to July 7,2006 and received the full cooperation of the authorities. Working with key stakeholders, including civil society representatives, and building upon the governance and anti-corruption work already underway in Kenya, the mission s TORS included sharing international experiences and helping identify gaps, and developing a framework for monitoring measurable results. In parallel, the Arid Lands project team agreed with the governance mission members that the planned governance survey (see Annex A, para 23), would over-sample arid and semiarid districts to understand better how project initiatives have improved the overall governance environment. In addition, the design of the annual beneficiary assessment carried out by the Arid Lands project will be modified to assess the impact of improved transparency and accountability measures as described in para 28 above. H. Financial Terms and Conditions for the Additional Financing 41. The additional loan would be on standard IDA terms, with a maturity of 40 years, including a grace period of ten years. There are no additional conditions of effectiveness. 19

24 Annex A Kenya s Fight Against Corruption: Selected Highlights and Already Planned Near Term Actions I. Introduction 1. Kenya has acquired a reputation of endemic corruption, as reflected in frequent local and international press reports, the public statements of development partners, and more importantly in Kenyan public opinion. The Annex discusses highlights of Kenya s efforts since 2003 to address the problem, including steps taken and setbacks experienced, and further actions planned by the Government. 11. Selected Highlights 2. When it came to power at the beginning of 2003, the new government made a number of bold moves in fulfillment of its campaign pledge to put a halt to corruption, 3. Legislative Actions. In 2003, Parliament passed the Public Officer Ethics Act, requiring civil servants to file annual declarations of income, assets and liabilities, and the Anti-Corruption and Economic Crimes Act, which set up the Kenya Anti-Corruption Commission (KACC). The Government also enacted key legislation aimed at improving governance and public service delivery which include the Government Financial Management Act (2004) and the Public Audit Office Act (2004). In fulfillment of the Anti-corruption Action Plan for April 2005-June 2006, a landmark Procurement Bill received Presidential assent in November 2005, establishing an autonomous Public Procurement Oversight Authority responsible for the regulation of procurement in the public sector, including procurement of security related contracts-transactions which were shrouded in secrecy in the past and associated with high level graft. In addition, the Privatization Act received Presidential assent in October 2005 setting the stage for the privatization of public assets and operations including state corporations, as part of the privatization program under a new privatization commission. 4. Capacity Building and Administrative Actions. Under the Anti-Corruption Action Plan, there was also a four-fold increase in the professional staff of the KACC, recruitment of 23 magistrates and other legal staff, and the launch of public education campaigns. The Attorney General s Office had 126 new state attorneys in January 2006, significantly increasing its capacity. To speed up trials, the Chief Justice changed the rules of the court in January 2006 to set rigorous time limits for disposing of Constitutional references which tend to add years to the disposal of cases. Responding to criticism that it relied too heavily on legislative measures, the Government began to take administrative steps more regularly. For example, in December 2005, the Government annulled the recruitment of 3,000 police officers and suspended senior officers involved in the recruitment exercise, pending further investigation. The Kenya Revenue 20