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

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: Nigeria Second State Governance and Capacity Building Project AFRICA Sub-national government administration (95%); Central government administration (5%) P FEDERAL REPUBLIC OF NIGERIA Federal Ministry of Finance IER Department, Finance Building Central Business Area Garki, Abuja Nigeria Tel: (234-09) ; Cell Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 9, 2009 Date of Appraisal September 15, 2009 Authorization Date of Board Approval November 24, Country and Sector Background 1.1. Federal political framework with significant autonomy to states: Nigeria is a federal system comprising of the federal government at the centre, a federal capital territory administration, thirty six state governments and seven hundred and seventy four local government councils (LGCs). The Constitution assigns significant powers, resources, responsibilities and autonomy to the sub-national levels of government, particularly the state governments. Under the revenue sharing formula currently operating in the country, about 54.68%, 24.72% and 20.60% of federation account revenues are allocated to the federal, state and local tiers of government respectively. Sub-national levels of government thus control close to half of the public purse and the quality of their public expenditure has significant effect, inter alia, on fiscal management, service delivery and poverty reduction in general Social and macroeconomic context: Located in the western Africa, Nigeria is the most populous African country with a population of 148 million people according 2008 estimates. With a Gross Domestic Product (GDP) of US$208 billion (2008), Nigeria is the second largest economy in Africa and 41 st in the world. Per capita GDP is $650 (2007) and about 54.4% 1 of the population live in poverty (less than 1 dollar a day). Nigeria has a low human development index being ranked 158 out of 177 on the United Nations Development Programme (UNDP) Human Development Index in the 2007/2008 Human Development Report. With the return to 1 National Bureau of Statistics (2005) National Living Standards Survey 2004.

2 democratic civilian rule in 1999 and the return to political stability, significant progress has been made in macro-economic and public service reforms, as well as gradual institutionalization of good governance, especially at the federal level. The economy has experienced steady growth, especially in the non-oil sector with average growth rate of about 9 per cent per year in , compared to 2.9% in It is worth noting here that the overall growth rate has decelerated since 2008 due to the global financial crisis and combined with the decline in oil production and drop in oil and other commodity prices. However, GDP is projected to grow by 5.8% in 2009 and 6.1% in 2010 (Vision 2020 Framework), partly due to the recent amnesty declared in the Niger Delta and the resultant increase in crude oil production and as well some recovery of oil prices, but on the proviso that on-going infrastructure programme in the power and social sectors will achieve their objectives The current administration has launched the Seven Point Agenda (7PA) and Vision 2020 National Development Plan. These strategic policy documents provide the framework for reforms, principally targeted at improving governance and building a competitive economy, especially in the non-oil sector. Earlier in 2005 the Federal Government s National Economic Empowerment and Development Strategy (NEEDS) provided the framework for the first joint IDA and DfID (United Kingdom Department for International Development s) Country Partnership Strategy/Country Assistance Strategy (CPS/CAS ). However, CPS II ( ) is driven by the key pillars in the 7PA. One key objective of the 7PA is the promotion of accountability and transparency in public service. The successful implementation the Seven Point Agenda, the Vision 2020 National Development Plan and progress towards the Millennium Development Goals (MDGs) depend on the effective and efficient use of Nigeria s own resources and development assistance funds. Therefore technical assistance by development partners towards improving the capacity and quality of public expenditure management and other governance systems will be critical and need to continue The Challenge of Governance and Public Financial Management: Nigeria returned to democratically elected government in 1999 after a long period of military rule, economic mismanagement and policy instability. The transition to democracy provided the enabling environment to address governance challenges which have undermined development effectiveness for several decades. However, it was not until 2003 that the Federal Government began to take bold initiatives in macroeconomic and governance reforms. A major step in fiscal management reform was the introduction of the oil price fiscal rule in 2004 under which the government introduced a system of basing the budget on a conservative reference price for oil and saving the surplus in a special account (the Excess Crude Account). This step successfully de-linked expenditures from oil receipts and avoided massive increases in public expenditures hitherto associated with oil price boom. The government has also put in place the institutional and legal framework and other measures to promote transparency and accountability, though demand side governance is weak. First, in 2007 Procurement and Fiscal Responsibility legislations were enacted by the Federal Government. Even though the implementation of the Procurement law has been slow, the concept and practice of due process and competition are being applied in the award of public contracts. The Fiscal Responsibility Law is also gradually instilling fiscal discipline and accountability in management and use of public resources. Other significant initiatives include anti-corruption reforms, the most prominent of which is the Economic and Financial Crimes Commission which has been effective to some extent in

3 convicting some high level officials for corruption, reducing internet fraud and recovering stolen assets estimated at $5bn Despite the progress made, significant governance and corruption challenges remain, especially at sub-national levels of government. The most recent challenge is the steep drop in crude oil prices and hence oil revenue, which for Nigeria, demonstrates overdependence on the oil sector and vulnerability to fluctuations in the oil market. Although prices have somewhat recovered recently, it leaves both federal and state governments with significant shortfalls in revenue. To offset the drop in revenue, there is pressure from states and some quarters in the National Legislature to increase disbursement from the Excess Crude Account or even scrap it, with risks to macroeconomic and fiscal stability The implementation of public sector governance reforms has also been relatively slow compared to progress made in More significantly, reforms at the federal level (e.g. procurement, fiscal responsibility and budget reforms) are not automatically applicable to subnational levels of government; states have to institute their own reforms. Except for a few states (e.g. Lagos, Kano, Kaduna and Cross River State) sub-national levels of government, generally lag behind in reforms. Yet, regardless of Nigeria s federal system, the country has only one economy. The weaknesses in economic, fiscal, public financial management and procurement systems at one tier of government naturally impact on whatever efforts or accomplishments the other tier has made. It is also worth noting that even though Nigeria has a vibrant civil society, their capacity to engage government positively on policy and governance reforms and improve demand side governance on issues such as budget, procurement and monitoring and evaluation remains weak To better understand the issues and challenges in governance, especially at the subnational level, this Project Appraisal Document (PAD) is informed by a number of analytical works, including state level Public Expenditure Reviews (PERs) and Public Expenditure Financial Assessment (PEFA), and Public Expenditure Management and in-depth Fiduciary Assessment undertaken in selected states. These studies 3 and a baseline study undertaken for this project highlight number of challenges and serious vulnerabilities, which are briefly summarized here. Six main themes of the PEFA Public Financial Management (PFM) Performance Measurement Framework were used: (i) credibility of the budget, (ii) comprehensiveness and transparency, (iii) policy-based budgeting, (iv) predictability and control in budget execution, (v) accounting, recording, and reporting, and (vi) external scrutiny and audit Credibility of the Budget: A number of issues raise questions about the integrity and credibility of the budget. All the states had significant gaps in expenditure and revenue out-turns compared to original approved budget (PEFA scores of D, apart from Anambra and Ekiti which 2 As at late 2008, the EFCC has secured over 200 convictions and recovered about $5billion stolen assets. 3 See C. Nwoko et al (2008) Anambra State of Nigeria: PFM Performance Measurement, June EU-SRIP and World Bank; (2) Nwoko, C. And Oden, A.(2009) Bayelsa State of Nigeria: Fiscal Performance Analyses ; Taiwo, O. et al (2008) Ekiti State Public Expenditure Review, April 2008; Abubakar, H. & Yaru, M.A. (2009) Niger State Public Expenditure Management and Financial Accountability Review, March 2009; Taiwo, O. et al (2009) Kogi State Public Expenditure Management and Financial Accountability Review, June 2009; Nwoko, C. (2009) Plateau State of Nigeria: Public Expenditure Management and Financial Accountability Review (draft), March See also State Governance and Capacity Building Project II Baseline Assessment Report, 2009.

4 had some Cs and Bs respectively). Significant variances also existed in expenditure composition in the states with an average PEFA score of D for all states. For example average budget deviation and composition variance was 24-66% in Plateau state during In Bayelsa state budget deviations averaged 18.4% and composition variances averaged 29.4% over a three year period up to For all states the deviation tends to be worst for general administration with implications of less money for priority sectors. It also worth noting that for the deviation of actual expenditure from budgeted expenditure in almost all states is mainly from the Capital expenditure; the capital expenditure could not be met due to lack of funds in most cases Comprehensiveness and Transparency: This is generally weak across states with significant levels of extra budgetary operations. Most states examined scored D on budget classification. Also in all states budget codes either did not conform to good national and international standards such as GFS/COFOG (e.g. Plateau, Niger, ) or incorrect classification of accounts were common (e.g. Anambra). Some states, however, included relatively comprehensive information in the budget (e.g. Anambra and Kogi with a score of B). Overall, existing budget classifications do not easily lend themselves to fiscal, financial and management reporting of the performance of the approved annual budget. In some cases (e.g. Yobe state) the budget classification is highly restrictive and very difficult to disaggregate data Policy-Based Budgeting: The budget in most states is not guided by a clear development strategy in the period examined. Even though most states had developed the State Economic Empowerment and Development Strategy (SEEDS) in 2005, there is weak alignment between resource allocation and SEEDS priorities. In the case of Kogi State where the state government operates a three year rolling plan, the priorities are broadly consistent with those of state SEEDS (KOSEEDS). However, in almost all the states sector plans/strategies are either partially costed (e.g. Anambra) or not costed. PEFA scores were generally poor for states (Ds; with Kogi scoring C and C+) in the period covered. There is also no system in place to support systematic provision of information for evidence-based policy making and monitoring of results of public expenditure in key sectors Predictability and Control in Budget Execution: Evidence suggests inadequate predictability and controls in the period examined. These include weak tax registration and internally generated revenue, award of contracts on selective tendering basis, lack of cash flow forecast and monitoring and commitment ceilings for MDAs. Most states generate on average less than 10% of their total revenue from IGR, except Anambra which generates close to 20% compared to about 3% in the case of Bayelsa, an oil producing state. This reflects over dependence on revenue from the federal level which is also highly dependent on oil revenues. There are also significant levels of unreported extra - budgetary expenditure in some states as reflected in reports of State Auditors General and suggest weak fiscal discipline5. The average PEFA scores for most states was C except Niger state that scored D. It is also worth noting that there is a significant level of centralization of approval authority for spending. In particular approval of capital projects is done by the state chief executive, the Governor. According to the 4 State Governance and Capacity Building Project II Baseline Assessment Report, To illustrate, in the case of Anambra state, while actual total expenditure for 2006, 2007 and 2008 remained within the budget for these years, the State Auditor-General reported 82 cases worth N6.6 million in 2007 out of a budget of actual expenditure of N58 billion. In the case of Yobe state, the situation was bad between 1999 and 2004 but appears to have improved from 2007, with the state legislature approving virement.

5 Baseline Study for this project, although states have draft fiscal responsibility bills in place, they are yet to pass them into law and adopt revised framework for commitment control and payment authorization Accounting, Recording and Reporting system is generally weak across states, though Kogi seems to have a relatively acceptable standard (scores of 3Bs and one C+). Account reconciliations are not timely and regular and in-year budget reporting is either not done or irregular during the period examined. A major area of weakness is the poor quality and timeliness of annual financial statements, with significant backlogs of accounts arrears (e.g. Plateau state only has accounts up to 2004). The poor reporting is partly blamed on the manual nature of generating and processing financial information. Where automation exists, they tend to be restricted to only the office of the State Accountant - General or fragmented stand alone systems External Scrutiny and Audit: Whilst there is evidence that states have relatively good external audit system, there are significant flaws in the scrutiny and follow-up of recommendations of audit reports by the state legislatures. The Public Accounts Committee (PAC) of state legislatures are expected to scrutinize audited reports and pass their recommendations to legislature/house of Assembly. However, in almost all states, there is no evidence that reports have been issued on the Auditor General s report and there is no law or procedure to compel the legislature to scrutinize the report within a specific time frame. The states examined were about 9-11 months in arrears in presentation of external audit report, though Plateau state had almost three years in arrears at the time of the assessment. Average PEFA scores were D+ except for Kogi and Niger states with scores of Bs The above summary analysis point to significant capacity weaknesses in the public financial management systems in the states of Nigeria where close to 50% of public expenditure takes place. They reinforce the need for support states to strengthen their capacity for improved quality, effective and efficient public expenditure management in order to improve service delivery and development outcomes Public Service is de-skilled and lacks professionalism: In addition to weaknesses in the states PFM systems identified above, there are also weaknesses in human resource management systems. Indeed most of the weaknesses of the PFM system are directly related to human resource capacity issues. Experience from the State Governance and Capacity Building Project I (SGCBP I) and interaction with state officials during project identification and preparation suggest states have not recovered from the prolonged neglect of their bureaucracies during decades of military rule prior to Presently, many states do not have any manpower development plans and the civil services lack the capacity to effectively implement government programmes. This situation has resulted in significant skill and capacity deficiencies in the public services of states. For over several years, government had not invested adequately in building and upgrading skills of its staff and ability to attract and retain well qualified staff remains very low in most states. Provisions were rarely made in budgets for training and as a consequence little training was conducted to develop the skills and competencies required by states to modernize their public services. Where training institutions are available, they had become run down just as course contents had become less relevant to the modern needs of the public service. External training programs yielded limited impact since only a few officials benefitted. The

6 result is a public service with limited professional skills and competence and with the majority of staff lacking the requisite professional training for the positions they hold A major weakness in the human resource management is that most states do not have any system in place that enable linkage between the personnel records and the payroll and most records are kept manually. Reconciliation between the payroll and the personnel records is thus very difficult, with high risk of abuse and ghost workers The proposed SGCBP II will support states in addressing the weaknesses in the PFM systems as well personnel and payroll systems and strengthen capacity of relevant agencies. In the face of serious institutional capacity constraints, states seeking to implement coherent public financial and civil service administrative reforms need to develop a comprehensive and yet realistic public sector reform strategy. This entails addressing: (a) ineffective planning, budgeting and the lack of transparency and accountability in public expenditure management, including inadequate procurement practices, (b) the weak human resource management system, especially personnel and payroll management which are susceptible to abuses and (c) the need for continuous effort to develop staff skills to enable good performance in the civil service as well as (d) the capacity and systems for monitoring and evaluating results of public investments and use of resources Already some state governments that came to office in 2007 have commenced a number of reforms initiatives in revenue administration, planning and budgeting, accounts classification and chart of accounts, and cash management. The state level PERs/PEMFARs also laid out action plans, which the states have agreed to implement with the support of the project. With the sharp drop in the level of oil earnings since the last quarter of 2008, it has become imperative for the states to strengthen their internally generated revenue bases as well as align their development strategies with improved resource allocation and quality of public expenditure management to deliver results to citizens. 2. Objectives 2.1 The project development objective is to improve transparency, accountability and quality in public finance and human resource management systems, with a view strengthen governance in the participating states. 2.2 Key indicators: Progress towards achieving the objectives of the project will be measured through the following key performance indicators: (i) State Government entities representing at least 75% of total expenditure are audited annually, covering revenue and expenditure and audit report submitted to the state legislature within 6 months from the end of the financial year in participating (Tier 1) and selected (Tier 2) states. 6 6 Participating state means each of Anambra State, Kogi State and Ondo State for the Recipient, also referred to in this PAD as Tier 1 states.. Selected State means any of Abia State, Adamawa State, Bayelsa State, Edo State, Ekiti State, Kebbi State, Niger State, Plateau State and Yobe State, also referred to in this PAD as Tier 2 states. Original

7 (ii) Decreas e in deviation of actual expenditure from budgeted expenditure in each participating state. (iii) Growth in the percentage of actual collection of projected internally generated revenue in each participating state. (iv) Growth in the percentage of public contracts above threshold awarded through competitive open process in each participating state and selected state. (v) Reduce d discrepancy between personnel database and payroll database in each participating state. (vi) Growth in the number of MDAs that submit annual reports with updated data on agreed results indicators in each participating state. (vii) Increased use of BATMIS and HRMIS in line Ministries in original project states. 3. Rationale for Bank Involvement 3.1. The rationale for Bank involvement under SGCBP II arises from several counts. Firstly, it responds to requests received from several State Governments 7 through the Federal Ministry of Finance, for the Bank s support to reform and strengthen the capacity of their public services, particularly PFM and payroll systems. In the past twelve months some of these governments have demonstrated their commitment by agreeing to actions plans following PER/PEMFAR analytical work and some are making efforts to implement some of the recommendations. The Banks involvement will give the reform-minded state governments the necessary technical assistance to continue and sustain reforms. Secondly, and related to the above, while state governments have expended sizeable resources and efforts to improve their governance systems in the past year, the Bank s involvement will bring in wide-ranging international experience and needed technical assistance to the reform efforts of participating state governments. The Bank has accumulated substantial knowledge and experience on public sector reforms including public financial and human resource management. State Governments will benefit from this pool of knowledge and expertise to address some of the critical challenges in PFM, and Human Resources Management (HRM) and Monitoring and Evaluation (M&E) Thirdly, the Bank s support will continue the thrust of improving state capacity for public financial and human resource management initiated under the first State Governance and Capacity Building Project (SGCBP) which is currently operating in 3 of the 36 states. Support to states to strengthen their PFM and procurement systems and practices fits in well with the Country Partnership Strategy and plans to introduce state level Development Policy Operations Project State means states carrying out activities under the project described under the Development Credit Agreement (CR No UNI) dated July 15, As at September 2009, the following 13 states have made requests for Bank support through the Federal Ministry of Finance: Abia, Adamawa, Anambra, Bayelsa, Edo, Ekiti, Imo, Kebbi, Kogi, Niger, Ondo, Plateau and Yobe.

8 (DPOs). DPOs tend to work better when, inter alia, the overall fiduciary framework is strong enough to ensure funds will be used for intended purposes with less risk. Strengthening the states public expenditure and other governance systems will eventually give confidence to development partners to use country/state own systems with reduced fiduciary risk. Fourthly, the state (and the local government) is the tier of government closest to a greater majority of the citizenry and principally responsible for the delivery of basic services to the population. Therefore, the attainment of Nigeria s poverty reduction objectives and more generally the MDGs largely depends on the quality of public expenditure by state and local governments and their capacity to improve basic service delivery. 4. Project Description 4.1 The project will initially support three participating states under three participating (Tier 1 states) Anambra, Kogi and Ondo - and ten selected (Tier 2). The three participating states are states that met the full selection criteria at the time of appraisal and will implement technical components A-C, whilst component D will be implemented by the ten selected (Tier 2) states, based on their ability to meet the criteria. The criteria for selection agreed between the Federal Ministry of Finance and the Bank are: (i) a formal request for support from the Federal Ministry of Finance; (ii) evidence of willingness and readiness to undertake a state PFM performance assessment (PER and PEFA or PEMFAR) and adopt an agreed action plan for addressing weaknesses; data must be available and accessible for the exercise; (iii) Commitment to Public Procurement and Fiscal Responsibility reforms; at least draft bills should be available in the state; (iv) Fiduciary performance of the state (procurement and financial management) on past/existing Bank projects 8 ; (v) balance in geo-political representation of states which is a requirement of the Nigerian Government. 4.2 The project is designed around six components: the first three of which are the full package of support to be implemented in the three participating Tier 1 states. The fourth component will be used to provide technical assistance support on basic PFM, including fiscal responsibility and procurement to states that did not meet the full criteria for selection at the time of appraisal (referred to hereafter as selected or Tier 2 states ) The fifth component will be used to provide support to original project states (Bauchi, Cross River and Kaduna). This is to enable them to scale up activities under BATMIS, reform of budget preparation and execution, procurement reform, HR Management and Training Enhancement components of the project and undertake further capacity building and development of M&E system in selected MDAs. 4.3 Component A: Development and Modernization of Public Financial Management Systems ($39.1 million) aims to develop and modernize the PFM systems of participating states, with the objective of improving its efficacy and quality in managing public finance. To enhance the quality of public expenditure in the states, the component will support fiscal planning and standardization of PFM procedures, processes, and reporting among participating state governments for consistency with the federal government. Activities will include:(a) enactment and implementation of an organic public finance management legislation (including fiscal responsibility legislation); (b) strengthening capacity for budget preparation and public 8 The fiduciary performance of states on the Health Systems Development Project II (HSDP II) was used.

9 investment planning, presentation, implementation and monitoring, (c) improvement in accounting and financial reporting; (d) strengthening internal and external audit and oversight role of the State Houses of Assembly; (e) improving tax administration (f) modernization and implementation of State Integrated Financial Management Information Systems (SIFMIS); (g) enactment of a sound and modern legal and regulatory framework to underpin effective procurement (h) provision of technical assistance for setting up of a functional state public procurement agency (i) preparation and use of State s standard bidding documents (j) Strengthening of State Public Procurement Agency and MDAs capacity to improve quality and efficiency of procurement practices and enhanced value for money (k) demand driven technical assistance to oversight and watchdog institutions and civil society groups to develop and strengthen their capacity to monitor public procurement reforms; and (i) pilot capacity building for selected local governments as an entry point for engagement with local governments. The component will mainstream independent monitoring into budget, procurement, audit and other PFM activities. These activities are in line with the follow-up action plans that are part of the PEFA/ PERs and PEMFARs undertaken by the potential candidate states. The PFM component will be coordinated with other development partners support in the selected states where applicable (e.g. with EU-SRIP in Anambra state and Yobe states). 4.4 Component B: Human Resource Management and Capacity Development ($9.3 million equivalent. Diagnostic work undertaken by the Bank and other development partners highlight the depth of human resources capacity and systemic weaknesses that undermine the credibility of PFM, payroll and personnel management systems. They also highlight the fact the wage bill constitute one of the biggest items of government expenditure and subject to weak controls and abuses with negative impact on the quality of public expenditure. The objective of this component will be to provide targeted capacity building to PFM-related ministries, departments and agencies, as well as strengthen training provision and personnel and payroll systems to minimize abuse and redirect potential savings to improve services. Activities include the conduct of a thorough assessment of existing skills and training needs of Ministries, Department and Agencies (MDAs); targeted short to medium term trainings, provision of logistic support and development, development of service standards for selected MDAs and modernization of personnel records in the state public service. 4.5 Component C: Monitoring and Evaluation System Development ($7.5 million). In most states, M&E is either non-existent or even where they exist the emphasis is on project monitoring. One of the key challenges is how to monitor and measure the outcome of public expenditures, especially in big spending ministries, departments and agencies. This component will help to address these challenges by strengthening the capacity of state governments to effectively allocate resources, development of M&E strategies to track outcomes of government programs and improve the quality of service delivery, using evidence generated from regular evaluation of programs. The focus will be on improving the legal and institutional framework for results-based M&E and building the institutional capacity for effective monitoring and management of development outcomes. It will support activities related to (a) diagnosis of existing M&E systems; (b) design and implementation of a new M&E system; (c) formulation of policies and drafting of enabling regulations; (d) training and skills development for staff of State Planning Commissions and MDAs; (e) establishment of an M&E secretariat to coordinate M&E

10 activities across the state alongside capacity building; and (f) pilot evaluations and service delivery satisfaction surveys for key government programs. 4.6 Component D: Improvement in Public Financial Management in Selected (Tier 2) States ($24 million). Funding from this component will be used on first come first served basis to provide support to selected states in to enable them to achieve Tier1 status. Support will be limited to strengthening basic PFM and procurement systems, including fiscal responsibility and procurement legislation and regulations. 4.7 Component E: Scaling up Selected Activities from the Original Project ($22million): This component will provide support to Bauchi, Cross River and Kaduna states to scale up activities under BATMIS, budget preparation and execution, procurement, HRM and Training Enhancement and further capacity building necessary to consolidate and sustain the outcomes of reforms supported by the project as well as strengthening of M&E systems. 4.8 Component F: Project Coordination at National and State Level ($8.5 million): This component will support project coordination at National level, including centrally provided technical, quality assurance and other support services to states on PFM, procurement, FM and project audit. It will also support the State Project Coordinating Units. 5. Financing Source: ($m.) BORROWER/RECIPIENT 0 International Development Association (IDA) 120 Total Implementation Arrangement The SGCBP II will be implemented in the beneficiary states but coordinated at both Federal and state levels: 6.1 Arrangements for Coordination and Support at the Federal Level: The overall Project coordination and technical support to participating states in the implementation of their respective subprojects will be the responsibility of a National Project Coordination Unit (NPCU) located in the International Economic Relation Department of the Federal Ministry of Finance (FMF/IERD). The NPCU will be supported by a technical group of consultants on PFM, FM, HRM and Procurement who will provide, inter alia, quality assurance and technical support to the states. The Budget Office of the Federation will be co-opted into the NPCU to facilitate knowledge sharing between federal and states on budget reforms and support to states. The project includes a provision of US$2.661 million equivalent for the functioning of the NPCU and the support it will provide to states. The NPCU will (i) coordinate and provide technical support to the states; (ii) participate in implementation monitoring missions and mid-term reviews; and (iii) coordinate, consolidate, and disseminate the information from various participating states, as well as facilitate knowledge and experience sharing among the participating states and (iv) quality oversight and assurance of M&E reports submitted by the states and their collation at the national level. The NPCU will

11 include public finance management experts and ICT specialists, who together with the consultants will provide technical support to the states based on need. Staff dedicated from the Finance and Accounts Department of the FMF will be responsible for managing the financial affairs of the NPCU project management component including ensuring compliance with the financial and procurement management requirements of the Bank and the government. For effective project management, the FMF will assign relevant qualified accountants, internal auditors, and procurement officers to the NPCU. The staff used for the SGCBP I project will be deployed for the project while additional staff will be appointed as necessary. They will maintain adequate FM and procurement arrangements to support the deployment of project resources in an economic, efficient and effective manner to achieve the stated development objectives. The Project Internal Auditors at the FMF will perform modern internal audit functions for the NPCU activities. 6.2 Arrangements for the Project Implementation at State level: Each state will have the primary responsibility for the implementation of the project component activities. Activities will be carried out by beneficiary MDAs according to their respective areas of responsibility. To guide, support and oversee the Activity Executing Agencies (AEAs) in each participating state, there will be: a high level State Project Steering Committee (SPSC) to provide oversight for the project and other governance reforms in the state made up of relevant political heads/ Commissioners or Special Advisers of the respective AEAs and chaired by the Governor or his designated representative. The SPSC will include, inter alia, Head of Civil Service of the State, the Commissioners of Finance, Budget and Planning, Chairman State Board of Internal Revenue, State Accountant - General and State Auditor-General. The SPSC will include two representatives each of the Legislature and Civil Society. The SPSC will approve respective State annual work plans and procurement plans but will not be involved in the implementation of day to day procurement activities of the project. The SSC will meet quarterly or as required. a State Technical Committee (STC) made of technical/professional heads of AEAs that will meet monthly and will have the responsibility of providing technical guidance, coordination of implementation of the project components, quality assurance and monitoring progress on project implementation. States are advised to create sub-technical committees on (a) Public Financial Management Reforms to be chaired by the Permanent Secretary, State Ministry of Finance; and (b) Human Resource Management and Capacity Development to be chaired by the Permanent Secretary, Public Management Office or Establishment in the Office of the Head of Civil Service. State Project Coordination Unit (SPCU): The SPCU will be responsible for the day-today project management and monitoring in the state. It will be headed by a full time Project Coordinator/Manager with the rank of a Director or above and will be supported by a team of officials, with expertise in project management, procurement, accounting, internal audit, M&E, ICT and office management. Project Accountants and Internal Auditors will be staff of the Office of the Accountant General and would work under the existing PFMU arrangements in the State.

12 6.3 Financial Management Arrangements: The Project Financial Management Units (PFMUs) and the Finance and Accounts Department (FAD) of the Federal Ministry of Finance (FMF) which are already in place, staffed with professionally qualified accountants and internal auditors, and currently responsible for FM of other Bank assisted projects will be responsible for managing the financial affairs of the project at the state and federal levels respectively. FM arrangements in these units are rated moderately satisfactory. One additional Project Accountant will be required at the FAD of NPCU given the extensive FM services that is required with accounting for and reporting on the consolidated project FM activities. Also, a consultant will be engaged to install a computerized FMS for the NPCU as well as upgrade the systems in the PFMU to incorporate the project activities. Formats of unaudited consolidated interim financial reports, annual consolidated financial statements and terms of reference for the auditor will be agreed with the project. Designated project accounts will be opened by implementing entities and existing financial procedures manual for SGCBP I and the PFMUs will be updated to incorporate the specific project issues as well as the chart of accounts. Additional capacity building will also be required for all staff in the PFMUs and FAD. A Memorandum of Understanding with attached service standards will be agreed and signed between the SPCUs and the PFMUs. 7 Sustainability 7.1. The project design provides reasonable assurances regarding the sustainability of the activities supported and outcomes expected as shown in the commitment of the respective state governments which is demonstrated as follows: (i) the reforms supported in each of the components feature prominently in the SEEDS and other development strategies of the different states; (ii) the demand for the reforms supported by the project emanated from the states and much of the preparatory work has been carried out by agencies of the state governments; (iii) states have agreed to the action plans resulting from the PER/PEFAs and PEMFARs and some states have already initiated implementation of some activities within their competence; and (iv) the proposed new public management system and policies are relevant to the needs of the states in the medium to long term, particularly as they face increasing development challenges made more critical in the context of recent global financial crisis and its associated declining revenue inflows from federal allocations In spite of the above, one sustainability issue that remains is whether the States will maintain a strong political commitment for reforms throughout the life of the project and beyond given that the electoral cycle of the present state administrations will end in May A mitigating factor is that the governors in all but one of these states are currently doing the first of the constitutional two-term limit provision, though there is no guarantee of re-election. Furthermore, the objective is to start a reform momentum in each of the participating states that will be irreversible by working closely with senior technocrats in each of the states who will provide continuity to the reforms supported by the project. The experience of SGCBP I suggests that any new incoming state administration is likely to continue with the project. 8 Lessons Learned from Past Operations in the Country/Sector

13 8.1. The Project is a follow up to the State Governance and Capacity Project I, which was approved on June 28, 2005, became effective on October 1, 2005 and is scheduled to close in March Owing to implementation difficulties, the project was restructured in November 2007 and experience gained from that exercise has duly guided the design of the new project to improve project implementation Government Ownership: One of the lessons from SGCBP I was that states were not actively engaged in the preparation process. This may have weakened ownership and interests over time. Drawing on this lesson, both the restructuring on SGCBP I and the preparation of SGCBP II adopted a more participatory approach, involving both the Federal Ministry of Finance and State Government officials. Across the states, during project identification and preparation, ongoing and participatory dialogue and discussions have been held with key stakeholders, including State Governors, Commissioners and senior officials in the Ministries of Finance, Budget and Planning and other PFM related MDAs, as well as the State Civil Service Commissions and the Offices of the Head of the State Civil Service. To ensure ownership the project has been designed in response to formal requests received from State Governments through the Federal Ministry of Finance to support State s action plans adopted to implement weaknesses identified from diagnostic work that was conducted with full participation of key State officials. The project components, activities and expected outcomes are designed with due consideration to the implementation capabilities in the States. The project team held a number of meetings and workshops with officials from the states to discuss the project components and activities, as well as validate the project approach Strengthening demand side governance: Based on experience gained in the implementation of SGCBP I, the role of the State House of Assembly (SHoA) in the implementation of some key components such as budget reform and external audit in each participating state is essential. In addition, absence of Civil Society Organisations (CSOs) under SGCBP I weakened demand side governance. SGCBP II will strengthen demand side governance by mainstreaming independent monitoring and public involvement in some activities, including budget, procurement, M&E and demand for audit On the supply side, the Project acknowledges the erosion of the training capacity within the state civil services over the years. Building on recent efforts, the Project (i) stresses the need for a well thought through training policy as a condition for effective skills development; (ii) includes training of trainers in areas where training capacity is limited such as procurement; (iii) focuses on training locally which is more cost effective than training abroad; and (iv) seeks to support the rehabilitation of training institutions and development of curricula in key PFM areas in the participating states for sustainability Involvement of Local Government: A review of the Nigeria country portfolio by IEG noted that local government was a missing link between state level projects and Community Driven Development (CDD) projects. Whilst the full inclusion of local government is not feasible given the size of local governments,9, SGCBP II will include support to pilot local governments in capacity building activities under PFM, including procurement. This will 9 There are 774 local governments in Nigeria; the number of local government areas in each the SGCBP II candidate states range from

14 complement support provided under new CDD projects (e.g. CSDP and Fadama III) and provide some evidence and lessons for future full scale support to local governments Use full time Project Coordinators: Prior to the restructuring of SGCBP I in November 2007, the position of Project Coordinator/Manager was part-time; the coordinators still kept their civil service positions and schedule. This partly contributed to the slow take off and implementation because project coordinators were often overloaded and had too much demand on their time. Based on this experience, the restructuring of SGCBP I made the position of project coordinator full time and this has helped to move the project forward in implementation. SGCBP II will draw on this experience and keep the position of the project coordinator as a full time job Identification of clear component champions: SGCBP I experienced challenges with ownership of certain activities such as development of classification budget system and implementation of integrated financial information systems. To ensure accountability for the expected outcomes and to provide leadership and coordination for implementation of SGCBP II, key activities have been assigned to officials with the technical competence to drive the various components as follows: (i) The Permanent Secretary, Ministry of Finance for the overall coordination of the PFM components since this ministry has overall responsibility for PFM; (ii) The Permanent Secretary of the Personnel Management Office (PMO) or Establishment will have overall responsibility for the Human Resource Management and Capacity Development component; and (iii) A Senior Director in the State Planning Commission will champion the M&E component. The implementation structure will be elaborated in each State specific Project Implementation Manual (PIM). 9 Safeguard Policies (including public consultation) 9.1 One safeguard policy is triggered by this project. This is Environmental Assessment (OP/BP 4.01). Accordingly ESMF which is the appropriate safeguard instrument has been prepared, reviewed, approved and disclosed in country on February 11, 2009 and and at Info Shop on February 17, If any activities included in any Annual Work Plan would require, pursuant to the ESMF, the preparation of an environmental assessment or environmental management plan, the Recipient shall ensure that such environmental assessment and/or management plan (as the case may be) shall be prepared in accordance with the provisions of the ESMF, and that no such activities shall commence unless and until such environmental assessment and/or management plan (as the case may be) shall have been approved by the Association and any measures required there under prior to the commencement of such activities shall have been implemented. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ X] [ ] Natural Habitats (OP/BP 4.04) [ ] [ ] Pest Management (OP 4.09) [ ] [ ] Physical Cultural Resources (OP/BP 4.11) [ ] [ ] Involuntary Resettlement (OP/BP 4.12) [ ] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [ ] Forests (OP/BP 4.36) [ ] [ ]

15 Safety of Dams (OP/BP 4.37) [ ] [ ] Projects in Disputed Areas (OP/BP 7.60) * [ ] [ ] Projects on International Waterways (OP/BP 7.50) [ ] [ ] 10 List of Factual Technical Documents A. Relating to Project Implementation: Project Implementation Manual Detailed Project Costs Procurement Manual Baseline Study B. Bank Staff Assessment (including ESW): World Bank Nigerian Country Procurement Assessment Review World Bank Nigeria Country Financial Accountability Assessment World Bank Nigeria State and Local Governance in Nigeria World Bank Lagos State Financial Accountability Assessment World Bank Lagos State Procurement Assessment Report World Bank/DFID Country Partnership Strategy ( ) World Bank Lagos State Finances Review and Agenda for Action World Bank Nigeria Competitiveness and Growth Country Economic Memorandum (CEM) World Bank Nigeria Fiscal Agenda for Change Public Expenditure Management and Financial Accountability Review (PEMFAR) World Bank/EU Anambra State Public Expenditure and Financial Assessment World Bank Ekiti State Public Expenditure Review World Bank Country Partnership Strategy II ( ) World Bank/AfDB Kogi State Public Expenditure Management and Financial Accountability Review World Bank Niger State Public Expenditure Management and Financial Accountability Review World Bank Bayelsa State Public Expenditure Management and Financial Accountability Review World Bank Plateau State Public Expenditure Review/PEFA World Bank Ondo State Public Expenditure Management and Financial Accountability Review and Integrated Fiduciary Assessment (forthcoming) World Bank Environmental and Social Management Framework (ESMF) C. Other related documents: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas