Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR0000782 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-71460) ON A LOAN IN THE AMOUNT OF US$ 15.0 MILLION TO THE REPUBLIC OF SOUTH AFRICA FOR A MUNICIPAL FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT Water and Urban 1 Country Department 1 Africa Region December 31, 2008 1
CURRENCY EQUIVALENTS (Exchange Rate Effective June 30 2008) Currency Unit = South African Rand ZAR 1.00 = US$0. 127 US$ 1.00 = ZAR 7.85 April 1 March 31 ABBREVIATIONS AND ACRONYMS AsgiSA Accelerated and Shared Growth Initiative for South Africa CAS Country Assistance Strategy CMIP Consolidated Municipal Infrastructure Program CPS Country Partnership Strategy CQ Consultant's Qualification DBSA Development Bank of Southern Africa DORA Division of Revenue Act DPLG Department of Provincial and Local Government ESW Economic and Sector Work FMG Finance Management Grant FMR Financial Monitoring Reports GAMAP Generally Accepted Municipal Accounting Practices GDP Gross Domestic Product GEAR Growth, Equality And Redistribution GoSA Government of South Africa GPN General Procurement Notice GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH GRAP Generally Recognized Accounting Practices IBRD International Bank for Reconstruction and Development IC Individual Consultant IDP Integrated Development Planning LG Local Government M&E Monitoring and Evaluation MFMA Municipal Finance Management Act MFMB Municipal Finance Management Bill MFMTAP Municipal Financial Management Technical Assistance Project MOU Memorandum Of Understanding MSIG Municipal Systems Improvement Grant MSP Municipal Services Partnerships MSSP Municipal Sector Support Project MTEF Medium Term Expenditure Framework MTR Mid Term Review NIIF National Infrastructure Investment Framework NT National Treasury 2
PAD PDO QCBS RDP TA Project Appraisal Document Project Development Objective Quality and Cost Based Selection Reconstruction and Development Program Technical Assistance Vice President: Obiageli Katryn Ezekwesili Country Director: Ruth Kagia Sector Manager: Jaime Biderman Project Team Leader: Dave DeGroot ICR Team Leader: Ntombini Marrengane/ Barjor Mehta 3
SOUTH AFRICA Municipal Financial Management Technical Assistance Project CONTENTS 1. Project Context, Development Objectives and Design... 5 2. Key Factors Affecting Implementation and Outcomes... 13 3. Assessment of Outcomes... 16 4. Assessment of Risk to Development Outcome... 24 5. Assessment of Bank and Borrower Performance... 25 6. Lessons Learned... 26 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners... 27 Annex 2. Outputs by Component... 29 Annex 4. Bank Lending and Implementation Support/Supervision Processes... 33 Annex 5. Beneficiary Survey Results... 35 Annex 5. Beneficiary Survey Results... 35 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR... 37 MAP no. zaf31738 4
A. Basic Information Country: South Africa Project Name: Municipal Financial Management Technical Assistance Project Project ID: P076901 L/C/TF Number(s): IBRD-71460 ICR Date: 12/23/2008 ICR Type: Core ICR Lending Instrument: TAL Borrower: REPUBLIC OF SOUTH AFRICA Original Total Commitment: USD 15.0M Disbursed Amount: USD 11.1M Environmental Category: C Implementing Agencies: National Treasury, South Africa Development Bank of Southern Africa Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: Effectiveness: 06/18/2003 06/18/2003 Appraisal: 12/13/2001 Restructuring(s): Approval: 09/12/2002 Mid-term Review: 06/23/2005 Closing: 06/30/2006 06/30/2008 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory i
C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any time (Yes/No): No DO rating before Closing/Inactive status: Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 67 33 Sub-national government administration 33 67 Theme Code (Primary/Secondary) Municipal finance Primary Primary Other public sector governance Secondary Secondary E. Bank Staff Positions At ICR At Approval Vice President: Obiageli Katryn Ezekwesili Callisto E. Madavo Country Director: Gerard A. Byam Fayez S. Omar Sector Manager: Jaime M. Biderman Alain R. Locussol Project Team Leader: David G. De Groot David G. De Groot ICR Team Leader: Ntombini Marrengane ICR Primary Author: Ntombini Marrengane Barjor E. Mehta F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) In the context of the Government's overall public finance reform and local government transformation program, the project will support selected municipalities in implementing the new budgeting and financial management system and assist the National government to complete selected analytic work on policy reforms. Achievement of the project objective is necessary to create a platform for efficient and equitable delivery of services at local government level. ii
Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Implementation of the new budgeting and municipal financial management Indicator 1 : systems in at least 15 municipalities. Value 0 quantitative or 15 41 Qualitative) Date achieved 06/18/2003 06/30/2005 06/30/2008 Comments (incl. % achievement) Indicator 2 : Achieved- The number of municipalities implementing the new budgeting and financial management systems by the end of the Project exceeded the original targets by two hundred percent. Design and Implementation of Municipal Financial Management monitoring system. Value quantitative or Qualitative) 0 1 1 Date achieved 06/18/2003 06/30/2005 06/30/2008 Comments (incl. % achievement) Indicator 3 : Value quantitative or Qualitative) Achieved- The monitoring system was designed and implemented using NT and Bank budget resources and without project loan funds. Completion of selected analytical reports and strategic implementation plans. 0 5 6 Date achieved 06/18/2003 06/30/2005 06/30/2008 Comments Achieved- Analytical work prioritized by NT has been successfully completed (incl. % and the target surpassed. achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Implementation of the new budgeting and municipal financial management systems in at least 15 municipalities 0 15 41 iii
Date achieved 06/18/2003 06/30/2005 06/30/2008 Comments Achieved#The target value was 15 municipalities by the end of the project 41 (incl. % municipalities had registered implementation of the new system. achievement) G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 10/23/2002 Satisfactory Satisfactory 0.00 2 05/20/2003 Satisfactory Highly Satisfactory 0.00 3 11/18/2003 Satisfactory Satisfactory 0.15 4 05/18/2004 Satisfactory Satisfactory 0.15 5 11/09/2004 Satisfactory Satisfactory 1.63 6 04/18/2005 Satisfactory Satisfactory 1.63 7 08/25/2005 Satisfactory Satisfactory 5.90 8 03/17/2006 Satisfactory Satisfactory 7.96 9 12/08/2006 Satisfactory Satisfactory 7.96 10 06/28/2007 Satisfactory Satisfactory 7.96 11 11/29/2007 Satisfactory Satisfactory 7.96 12 05/20/2008 Satisfactory Satisfactory 10.91 H. Restructuring (if any) Not Applicable I. Disbursement Profile iv
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1. Project Context, Development Objectives and Design 1.1 National Context at Appraisal Since the early 1990s South Africa has undergone a major process of restructuring and transformation in government at all levels. With the watershed election of the first democratic and non-racial government in 1994, the priorities of the state were sharply focused on three critical areas: i) maintaining macroeconomic stability; ii) implementing a range of pro-poor and developmental programs aimed at redressing the historical and systemic inequalities of the apartheid system; and iii) creating an accountable and well capacitated administration. This transformative period was marked by the introduction of a series of legislation which set the stage for wide ranging reforms aimed at expressing the new dispensation and entrenching democratic values and representative government processes. The macroeconomic context in the 1990s was characterized by a series of critical policy statements illustrating the Government of South Africa s (GoSA) focus on pro-poor development, reduction of deficits and rapid revenue growth. The Reconstruction and Development Program (RDP) followed by the Growth, Equality and Redistribution (GEAR) policy, and the draft National Infrastructure Investment Framework (NIIF) argued that social and economic delivery would contribute to the redistribution of opportunities and income, to increasing productivity and the achievement of higher growth rates. All three policy documents saw infrastructure and public sector investment as key levers for economic growth and sustainable development. Recognizing this, GoSA published the White Paper on Local Government in March 1998. The intention of that document was to provide a general framework for the formulation of more detailed policies and legislation on a range of matters, including the fiscal and financial structure of the local sphere. GoSA also published a policy framework for municipal borrowing which was a detailed follow-up to the White Paper. It expanded on the framework for municipal finance and focused, in particular, on the design of the regulatory framework for local government borrowing. In addition it dealt in detail with the related matter of central government's response to the financial and fiscal difficulties that the municipal sector was confronted with. Municipal context In this same period, municipalities were rapidly emerging as the fulcrum of South Africa's newly created system of multi-tiered government. First, the 1996 Constitution recognized local government as an independent sphere with its own unique set of roles and importance. Second, it was determined that effective and efficient local government was critical to the implementation of the GoSA's service delivery priorities. For example, 5
over 80% of the nation's Gross Domestic Product (GDP) is urban based. * The governance and management of these areas was and still is critical to achieving GoSA's broader economic objectives. Similarly, there was greater recognition that non-urban local governments had an essential role in facilitating GoSA's push for integrated rural development. Third, the delivery of basic municipal services to all communities - urban and rural was dependent on the effective performance of local government. Finally, at the political level, the 1999 national election campaign revealed the importance that communities placed on their interface with local councils and administration - an interface that signaled the strength of South Africa's new democracy. In sum, the final shape, capacity and performance of local governments in South Africa had direct implications for the political, social and economic fabric of the society. As outlined in the White Paper, local government in South Africa has undergone a major process of restructuring and transformation in a number of different areas. A major objective of the reforms was to provide municipalities with sufficient resources and capacity to carry out their extensive responsibilities in respect of the development and management of the services for which they are accountable. There were six key dimensions to this transformation: At the administrative level, the process involved the amalgamation of the racially fragmented local authorities and the creation of democratic and unified municipal governments. The demarcation process redefined the boundaries and numbers of the local governments. This led to the creation of 283 municipalities, inclusive of 47 districts, 230 local councils and 6 metropolitan cities covering the entire country. This transformation also provided for changes in the roles and functions of municipalities in relation to the provision of basic services, such as water, sanitation, electricity and refuse removal. Following the administrative mergers and demarcation, elections of the new government units were held in December 2000 followed by a successful second term of election for local government in 2006. At the institutional level, local governments were provided with the scope to decide on the best mechanism to deliver services to their communities. This was supported by legislation to allow municipalities to restructure their operations for more effective service delivery. In particular, the legislative environment of the Municipal Systems Act provided a tool for participatory governance and development of Integrated Development Planning (IDPs) to assist municipalities in conceptualizing and executing their developmental mandates. Supporting this overall institutional change was the evolving fiscal framework for the local sphere. This included the preservation and strengthening of the local tax bases (rates and levies) and the rationalization of municipal authority to change tax rates and implement user-charges. In addition, GoSA replaced the ad-hoc intergovernmental grants of the apartheid era with a more efficient, equitable, and predictable system of recurrent ("equitable share") and consolidated municipal * State of the Cities Report, South African Cities Network, 2004 6
infrastructure program (CMIP) transfers. Changes to the municipal accounting system such as the introduction of the Generally Recognized Accounting Practices (GRAP) were also gradually being introduced and were soon made mandatory as part of the Municipal Finance Management Act (MFMA) in 2003. Finally, the local budgeting process was developed to ensure that local governments were placed in the overall Medium-Term Expenditure Framework (MTEF) and budgetary framework as an independent third sphere of government, consisting of national, provincial and local government. Such changes facilitated greater transparency in the fiscal management of all three spheres of governments. Specific changes to the financial framework included the introduction of the following legislation: - Annual Division of Revenue Act (DORA) in 1998, which announced the multi year allocations for the three spheres of government - Public Finance Management Act (PFMA) in 1999 legislating the financial affairs of national and provincial government, and - Municipal Finance Management Act (MFMA) in 2003 which legislated the financial affairs of local government. The focus of the MFMA is on budget reforms, improved reporting, transparency and efficiency and effective use of public resources at the local level. The reforms also focused on the policy framework for municipal borrowing and set out the policy and regulatory environment that guided and structured access by local governments to debt finance. Taken together, the administrative, institutional, fiscal, and financial frameworks form the policy basis for the establishment of an independent and accountable sphere of local government as envisioned in the Constitution and the White Paper. These four dimensions are closely connected. For example, without clarity on the institutional aspects of the demarcation and amalgamation process, local governments would find it difficult to access private finance. The demarcation and amalgamation process determined the potential fiscal base of the new municipalities and had a major impact on their creditworthiness. Similarly, the fiscal framework determined the overall revenues of the local government and hence the level of fiscal resources that were potentially available to gear up private finance. At the time of appraisal of the Municipal Financial Management Technical Assistance Project (MFMTAP) the South African municipal sector was at a unique point in the country s history. Local government transformation was shifting into a phase in which the focus was moving towards building the capacity of municipalities to expand sustainable delivery capacity to underpin real growth. However, given the range of management capacities at the time, the new local governments required a flexible capacity building program anchored by policy reforms and new standards of service delivery. In order to achieve development goals, South Africa needed to develop systems and capacity to: i) implement policy reforms; ii) entrench the new intergovernmental fiscal transfer system and iii) monitor performance. The financial reforms introduced by South African National Treasury (NT) that were legislated in the MFMA were aimed at improving municipal financial management practices. These reforms were comprehensive and mostly based on international best 7
practice. However, certain reforms represented innovations for South African local government. As a result, more focused policy development and access to international expertise were required for their successful implementation. In addition, NT had to develop national information databases to enable it to focus on its expanded roles in terms of the legislation, particularly around monitoring and evaluation of municipal finances. It is this assistance that informed the development of the MFMTAP which was aimed at strengthening the new local government system that was being established. Project Rationale The project evolved from ongoing dialogue between the Bank and the GoSA on the primary challenges to implementation of a development program based on growth and equity for all South Africans. Preparatory work was carried out in order to shape a program aimed at supporting the structural and functional transformation of local government. Having agreed that local government was the most effective conduit to deliver basic services, the dialogue then turned to the identification of barriers and opportunities for improved service delivery. This included focus on what measures would be required to strengthen the capacity of local authorities to sustain services within a sound fiscal framework. As part of these initial discussions, the Bank engaged with several national departments including the Department of Provincial and Local Government (DPLG) and the NT to seek solutions. In partnership with these agencies, a preliminary assessment entitled: Assessing Municipal Capacity in South Africa: Problems and Proposals was completed in mid-2000. The report found that while local governments had undergone corporate restructuring and administrative amalgamation, capacity constraints continued to exist and risked making the creation of accountable and participatory local government unsustainable. The GoSA then worked with the Bank to develop a project, the Municipal Sector Support Project (MSSP) to address these specific needs. During the course of the preparation of MSSP, several departments were consulted including DPLG. However ultimately the Bank and NT worked closely to define the parameters of the technical assistance project and sharpen the project objectives to give dedicated focus to municipal finance reform. At the time of MFMTAP preparation there were existing donor programs of support from bilateral agencies such as the Department for International Development, UK (DFID) and the Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (GTZ) to support the transformation of local government. However, the GoSA sought to go beyond bilateral assistance and develop a comprehensive program to harness international experience and networks such those available through the Bank. The GoSA required that a technical assistance project be focused, programmatic and carefully sequenced in order to produce real impact. In addition, there was a desire by the Bank to demonstrate that lending could be an effective instrument for cooperation with a high capacity middle income country (MIC) and an entry point for operationalization of the knowledge agenda. Specifically, despite the existence of broad administrative capacity and expertise in post-apartheid South 8
Africa there was a need for assistance in developing a democratic and integrated local government system. Democratic local government only came into existence in December 2000, thus at the time of project design, it was in its infancy. The GoSA recognized the need for significant resources to build the capacity of new institutions that would be at the coalface of service delivery. Furthermore, the project presented an opportunity for the Bank to assist in partnering for the development of the new system, to address development challenges and to confirm the benefits of continued engagement with the Bank. 1.2 Original Project Development Objective (PDO) and Key Indicators (as approved) In the context of the GoSA's overall public finance reform and local government transformation program, the project supported selected municipalities in implementing the new budgeting and financial management system and assisted the GoSA to complete selected analytic work on policy reforms. Achievement of the project objective was necessary to create a platform for efficient and equitable delivery of services at the local government level. The key performance indicators from the Project Appraisal Document (PAD) focused on the implementation and monitoring of key policy reforms aimed at strengthening the performance and equitable delivery of services by local governments. 9
Component 1. Implementation of Reforms Key Indicators Implementation of the new budgeting and municipal financial management systems in at least 15 municipalities Technology transfers to local government financial management teams Improve monitoring system in place 2. Design and Implementation of a Municipal Sector Monitoring and Early Warning System 3. Additional Policy Reforms Improve information available on local government financial management performance Improved ability to assess financial risk at municipal level Strategic plans to implement results of analytical work 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The Project Development Objective and indicators were not revised during the implementation of the project. 1.4 Main Beneficiaries The nation s largest municipalities were the primary target group for this project. The beneficiaries from the technical assistance provided under the project as articulated in the PAD were the poor and previously underserved communities excluded from service delivery under the discriminatory practices of apartheid. The regional distribution of municipalities initially included under the scope of MFMTAP was as follows: Province Number of municipalities Eastern Cape 7 Kwa Zulu Natal 7 Gauteng 6 Free State 3 Mpumalanga 5 Limpopo 3 Western Cape 5 North West 3 Northern Cape 2 Total 41 10
The list is inclusive of all six metropolitan municipalities which at the time of project preparation constituted 65% of the entire local government budget. 1.5 Original Components (as approved) The project was designed to support the GoSA s implementation of policy reforms and to enable the adoption of the financial management and budget reforms across sector departments to improve the efficiency of service delivery to the poor. The approved project components as articulated in the loan agreement are: (1) Implementation of Reforms (US$10.00 million). The objective of this component was to support selected municipalities in implementing their new budgeting and financial management system. This was to be achieved through the implementation of: i) existing reforms in the local governments; and ii) reforms for municipal financial operations and service delivery, including: a) reforms anticipated under the MFMA, which contains provisions based on international best practices in budgeting, accounting and financial reporting systems and lays down the basis for the implementation of municipal finance reform program in three phases; and b) additional reforms such adoption of new regulations, facilitation of the development of a municipal finance market and improvements to the intergovernmental fiscal transfer programs, all through the provision of technical advisory services. (2) Design and Implementation of a Municipal Sector Monitoring and Early Warning System (US$1.85 million). This component was to support the NT to develop an appropriate model for monitoring municipal finances and creating linkages in the two identified areas, namely: i) the monitoring of municipal budgets and financial statements in accordance with the budget reform program; and ii) the monitoring of intergovernmental transfers in association with the Treasury s Vulindlela Information System, and in compliance with the DORA, through the provision of advisor services. (3) Additional Policy Reforms (US$3.00 million). This component was to complete selected analytical work on policy reforms at the local government level. This objective was to be achieved through the implementation of reforms enabling municipalities to access both fiscal and financial resources. This included assistance in drafting legislation for the regulation of municipal systems and structures to clearly stipulate the NT s position on: i) responsibilities of sub-national entities in accessing finance for the provision of basic services; ii) existing policy framework on municipal borrowing; iii) subsidizing poor households; and iv) allocation of powers and functions all through the provision of technical advisory services. 2004 South African States of the Cities p.26 11
Further areas of policy reform included: a) Support for the development of municipal capital markets to create incentives and remedies which would encourage the municipalities to participate and seek access to finance through private markets, including implementing the policy framework within which borrowing by municipalities should take place. b) Refocusing intergovernmental grants in order to enable municipalities to improve their creditworthiness by: i) accurately defining municipalities which lack adequate resources to meet their expenditure on minimum operations; ii) identifying fiscal resources currently being expended at local or community level and analyzing the efficiency for utilization of such resources; iii) analyzing opportunities for simplifying and amalgamating central resources expended at local levels for greater efficiency; iv) analyzing the potential benefits from and avenues for extending restructuring grants to additional municipalities; and v) examining new intergovernmental fiscal instruments that may be used in promoting the national development goals. c) Reviewing and reforming policies on regulation of basic service provision to ensure efficient delivery and fair pricing of services provided by the sub-national entities, including municipalities. d) Clearly defining the limits of regulation of critical basic services and ensuring consistent and transparent regulatory arrangements which would provide consumers with regular avenues for public participation. e) Supporting the development of management tools by municipalities to link the integrated development plans and multi-year budgets, including review of appropriate policy and practice, as well as develop appropriate local guidelines and support to implement multi-year budgets linked to integrated development plans within a broader strategy to build capacity in the local government sphere. Project management was handled by the Development Bank of Southern Africa (DBSA) based on a memorandum of understanding (MOU) signed by NT. 1.6 Revised Components Revision of the project components was not required. 1.7 Other significant changes There were three noteworthy changes in the implementation of the project. The first significant change in implementation was related to the project schedule. The original project closing date was anticipated June 30, 2006, however as this was the first loan of its nature obtained by the GoSA, effectiveness was delayed as a result of parliamentary processes required for approval of MFMTAP. Due to the delays at the commencement of the loan and the success of the program, an extension was agreed with NT to ensure that the project covered the entire period originally envisaged at preparation. 12
The second significant shift in Bank operations was that the client was assertive in requesting that the Bank demonstrate its value as a knowledge institution as well as a funding institution. This request was explicitly communicated in correspondence from the Minister of Finance in agreeing to the loan. In an effort to meet client expectations, the project team leveraged an additional US$4.9 million in knowledge resources in the form of trust funds and Bank budget to compliment the loan (see Annex 9). The knowledge resources consisted of dedicated advisory services to support urban local authorities to address key development challenges including capacity for long term participatory planning and research for improved policy decisions at local level. This additional set of resources resulted, in part, in the third change in project implementation. The third significant change was in the implementation and funding allocations of the project. Although the components were not formally revised, the NT undertook significant work on Component Two to design and implement a municipal sector monitoring and early warning system using non project funds. Thus this project component was completed without Bank loan financing. As the disbursement modality was reimbursement, it was therefore agreed with the GoSA during the Mid-Term Review (MTR) in 2005 that the funds earmarked for this component be refocused to Component One. A reallocation of loan proceeds was approved in a letter dated 19 December 2005 cleared by the Regional Vice President to that effect. All activities as envisaged under Component Two were successfully delivered. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The project design built on key lessons learned in the region and internationally, which include: For decentralization to succeed, the intergovernmental "rules of the game" must be clear and predictable. Sub-national governments can become successful facilitators of local economic development- and thereby significant contributors to national growth only when assignment of expenditure responsibilities, authority to raise revenues and systems of accountability to citizens are transparent and accessible. Capacity building efforts in sub-national governments are more successful when a "learning by doing" approach is adopted. This approach requires that local government councils have access to both technical assistance/training and to investment capital in order to learn how to plan, implement and manage services that respond to local priorities. To ensure that local governments make optimal use of capacity building vehicles, it is important to design an incentive program that rewards tangible improvements in service delivery and other areas of local government performance. Since sub-national governments have a variable range of responsibilities and capacities in all countries, a sectoral capacity building initiative must be flexible and 13
responsive. Basic skills may need to be supplied to weaker municipal councils, while stronger councils may demand more sophisticated and specialized inputs. Despite the fact that democratic local government in South Africa was still in its formative years during project design and appraisal, it was determined that the risks to the project were negligible for the following reasons: i) demonstrated commitment by the GoSA s to stabilize its economy; ii) the consistent implementation of economic growth policies by the GoSA and iii) ongoing support received from donor countries since 1996 to implement the reforms reflective of good intergovernmental principles and pro-poor policies. Moreover, as a middle income country, South Africa s primary need in entering into a lending relationship with Bank was knowledge banking and technical assistance rather than traditional finance. Therefore the design of the loan was based on reimbursable technical assistance model. Based on this approach, the GoSA was able to access international experts with a practical understanding of municipal finance reforms and the challenges of implementation. 2.2 Implementation There were a number of unique features to this project which effected implementation. The first was that the implementation arrangements were based on a memorandum of understanding (MOU) between the DBSA and the NT due to existing capacity within DBSA to manage and execute Bank projects. This option was preferred by NT and the Bank rather than the creation of new agencies to undertake the management of the loan. The second was that as the Bank Task Team Leader (TTL) was based in the South Africa Country Office and there was capacity within the NT and its agent DBSA to manage loan operation. Therefore, in addition to World Bank supervision missions there was also supervision by DBSA on a continuous basis with active interaction with the World Bank country office. Third, at the mid-term review (MTR) in 2005 it was observed that GoSA did not request the funds originally allocated under Component Two for the design and implementation of a municipal sector monitoring and early warning system. The MTR also confirmed, retrospectively, that work on the grant framework and monitoring system was undertaken during 2003 and 2004. This review resulted in recommendations for effective monitoring, coordination, feed-back, process and systems modification. The review also provided areas for prioritization, examined the phased approach and suggested performance monitoring measures beyond the initial phases to assist in promoting decentralized reporting and accountability. Subsequent to the review, limited work was undertaken on Component Two using MFMTAP funding. However, the NT undertook further work in the interim using its own resources as well leveraged resources from the Bank which were not directly from the loan. The design of the monitoring system was carried out with 14
economic and sector work (ESW) and grant resources mobilized by the TTL. The implementation was financed by NT and as a result the allocation to support Component Two was refocused to Component One thus enabling the Project to expand its reach beyond the original 15 target municipalities to reach a total of 41 local authorities with technical assistance. It must be emphasized that MFMTAP was designed as a reimbursable TA project; the main benefit for the GoSA was access to international technical assistance, rather than financial assistance. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Several mechanisms for monitoring and evaluation of project results and impacts were utilized over the life of the project by the GoSA and the Bank. GoSA carried out its own monitoring and evaluation activities through out the life of the project and which included: Baseline assessment by NT at the inception of the project; Selection of pilot sites for early implementation of the MFMA reforms in preparation for national coverage of the technical assistance project for reform; Workshops; Questionnaires; Interviews; Monthly reports on the performance of international advisors and of each municipality on its progress towards implementation of the MFMA; End of project evaluation. In terms of Bank requirements for monitoring and evaluation, the four main tools utilized include: i) semi annual reports from the GoSA; ii) annual audits; iii) a mid term review; and iv) implementation status and results reports (ISR). The semi annual reports from the GoSA were prepared and submitted by the project management team at DBSA. The reports contained narratives and detailed expenditure reports which included procurement tables and summaries of procurement actions undertaken during the previous six months. These reports supplemented regular communication with the field-based TTL and consistent engagement by the TTL to ensure that all requirements were fulfilled. Annual audits were also submitted to the Bank financial management specialists as required by the loan agreement. 2.4 Safeguard and Fiduciary Compliance Procurement Issues. The procurement for the project was contracted out by the NT to an Implementing Agency, the DBSA. The DBSA was established by an Act of Parliament (Act No. 13 of 1997). Its mandate includes: i) investment in infrastructure and facilitation of the provision of infrastructure development finance; and ii) mobilizing expertise for infrastructure to improve the quality of life of the people of Southern Africa. At appraisal it was determined that based on previous experience with Bank financing and the cadre of available experts with a track record of managing Bank financed 15
contracts, the DBSA would on behalf of NT be responsible for day to day management of the project as determined by a MOU between the NT and DBSA. Procurement was carried out competitively and in accordance with consultant s qualifications (CQ), quality and cost based selection (QCBS) and individual consultant (IC) methods as outlined in the Guidelines for Selection and Employment of Consultants with World Bank Borrowers throughout the life of the project. However at the end of the project there was one instance of late submission by the DBSA to the Bank of its requests for no-objections for contract variations. The variations were due to unanticipated changes in project personnel. The consequence of delays in submission of the requests for no-objections was that related claims were ineligible for reimbursement. As a result not all withdrawal applications could be honored and part of the loan was not disbursed. Safeguards: As the project was focused on technical assistance for financial management, budgeting and policy reforms, safeguard policies were not applicable. 2.5 Post-completion Operation/Next Phase The NT has committed to sustaining the reforms enacted under MFMTAP and continuing to support their implementation nationally. The following critical steps have been undertaken to ensure sustainability of the project gains: The adoption and mainstreaming of the Finance Management Grant designed under the project into the national budget as part of the MTEF; The expansion of MFMA training including the accreditation of learning materials by the South African Qualifications Authority. The training includes tailored learning for: i) Accounting Officers; ii ) Chief Financial Officers; iii) Senior Managers; iv) Finance Officials; and v) Supply Chain Management; Establishment of an internship program piloted in municipalities participating in MFMTAP to build capacity amongst new graduates and enlarge the pool of qualified and experienced municipal practitioners. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) The project objectives were and remain relevant to South Africa s national development goals as articulated in the 1999 Country Assistance Strategy (CAS). At the time of project design, MFMTAP built on the desire by the GoSA to implement its vision of inclusive growth by accessing the knowledge resources of the Bank in addition to its financial resources. The project design was crafted in dialogue with GoSA counterparts and reflected an emphasis on fiscal discipline and debt management as a means to create sustainable local governments. Specifically, the project enabled the GoSA to move beyond the short-term interventions of bilateral doors and develop a systematic and 16
structured methodology for building capacity and transferring skills in the following areas: Financial management reforms; Implementation of new budgeting and reporting systems; Debt management and monitoring. The relevance of the project was affirmed in 2006 when the GoSA launched the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) program which identified six key binding constraints to growth and poverty reduction. Capacity remains high on the list of constraints which includes a shortage of skilled labor and deficiencies in state organization, capacity and leadership. In the period 2006-2007, a new Country Partnership Strategy (CPS) was developed and approved which continues to build on the engagement between the Bank and the GoSA on a knowledge agenda. The new CPS has two pillars: i) urban and rural development; and ii) regional integration. Capacity building also remains a cross cutting theme in the CPS as was the case in the 1999 CAS. Towards a 15 Year Review, a policy document published by the Presidency in 2008 affirms the importance of local government as a mechanism for enhancing public participation in the democratic life of the country as well as poverty reduction. The Review also emphasizes the need for public sector capacity building broadly, and municipalities in particular, to remain a priority in order to increase the availability of skills in technical, senior management and leadership positions thereby enabling sustainable service delivery. 3.2 Achievement of Project Development Objectives (Details on outputs in Annex 2) Achievement of PDO is rated satisfactory. The achievements by component are summarized below. 3.2.1 Component 1: The Technical Assistance to implement the financial management reforms.(us10 million; US$ 10.5 million actual) Satisfactory. The overall objective of Component One was to support the implementation of financial management reform in at least 15 pilot municipalities through the provision of municipal financial management advisors placed directly in those municipalities; and to use their experience to guide the subsequent roll-out of the reforms to all municipalities nationally. The Minister determined that certain sections of the MFMA would become effective based on the existing capacity to implement the new legislation. For example, high capacity municipalities were required to implement the new accounting standards with effect from 1 July 2005. Medium capacity municipalities were required to implement the Towards a Fifteen Year Review, 2008, Presidency, The Republic of South Africa p.15 17
accounting standards with effect from 1 July 2006, whilst low capacity municipalities were required to implement these standards with effect from 1 July 2007. It should be noted that this classification related only to compliance with the MFMA and is not a general classification of the capacity of municipalities within South Africa. In devising a methodology for the selection and placement of technical advisors municipalities responsible for the largest share of the annual turnover in the local government sphere were deemed priority areas for the MFMTAP support given their significance to the national economy. Advisors were placed within municipalities that accounted for approximately R73 billion of the total annual budgets and approximately 27.5 million of the country s total population of approximately 45 million people. The implementation of the new budgeting and financial management systems was prioritized in the initial phase of the project. The specific program of activity under this component included: Assisting pilot municipalities with improving budget and consultation processes; Preparing multi-year budgets, in-year reporting and refinement of reporting standards; Creating models and case studies for budget preparation for replication nationwide; Building awareness on the steps to attaining and retaining creditworthiness; Modernizing supply chain management policies and practices; Assisting with accounting reforms and the introduction of GRAP; Ensuring compliance with uniform norms and standards for reporting financial data; Publishing budgetary information to improve the transparency and the accountability of public funds. The other area of work included rendering advice on municipal borrowing. During this time, the City of Johannesburg was the first South African municipality to issue municipal bonds in accordance with the new municipal borrowing framework. Based on the success of the technical assistance component, NT received further requests for support from other municipalities in both urban and rural localities thereby increasing the number of municipalities benefiting from the program to 41 municipalities. These municipalities represent approximately 75 percent of the budgets of the local government sphere. Municipalities which benefited from the technical assistance demonstrated significant improvement in the quality of budget framework papers, development plans and monitoring of flow of public funds at local level. The consistency of reporting to NT also improved as early as 2006 in pilot sites. The project target of 15 municipalities was achieved early in the project cycle and its lessons replicated during the remaining life of the project in an additional 26 municipalities. During the life of the project, in an effort to accelerate reforms and expand beyond the technical assistance to the original pilot municipalities, the NT developed two instruments to support high, medium and low capacity local governments to implement Information on population statistics has been obtained from the Division of Revenue Act, Act no 1 of 2005 18
MFMA reforms. The two instruments were: i) the Municipal Systems Improvement Grant (MSIG), and ii) the Finance Management Grant (FMG). In the period including 2004/05-2010/11, the NT has committed a budget of ZAR1.2 billion and ZAR 1.4 billion to each grant respectively. The financial commitment demonstrated by the NT is characteristic of the GoSA s complete ownership of the effort. Period Finance Management Grant (R million) Municipal Systems Improvement Grant (R million) 2003/04 212 150 2004/05 198 182 2005/06 199 200 2006/07 199 200 2007/08 145 200 Total 953 932 Source: 2008 Budget Review, National Treasury, p134 and 2004 Budget Review, National Treasury, p164 3.2.2 Component 2: Design and Implementation of Municipal Financial Management monitoring system---satisfactory. The component achieved its objective. (US$1.85million, US$0 actual) This component was a requirement arising from the conditional and unconditional grant programs the processes and procedures in monitoring grants and the alignment with provisions as promulgated in the MFMA. At the time of project design, the reforms to the municipal financial management monitoring system were already underway led by NT. However, it was recognized that the system required refinement, specifically in the areas of conceptual framework and design. Much of the work was concluded without funding from the MFMTAP. The work contributed to the development of the Africa Region Working Paper Series No 98, issued in May 2006, entitled Measuring Intergovernmental Fiscal Performance in South Africa and was co-authored by NT and Bank staff. This also provided the Bank with an opportunity to share globally the knowledge gained through progress made in South Africa. The monitoring system was designed and implemented using NT resources and Bank budget resources mobilized by the project team without using project funding. The monitoring system was just one example of the leveraging of knowledge resources performed by the project team to strengthen the quality of the Project outputs. ** ** See section 1.7 and Annex 9. 19
3.2.3 Component 3: Selected Research and Analytical reports Satisfactory. This component achieved its objective.(us$3 million; US$1.05 million actual) The objective of Component Three was to contribute towards the unfinished financial management policy reform agenda for the local government sector in South Africa. This component was achieved through the use of international expertise to design appropriate policies for operating within the South African municipal environment. Research and analytical work carried out under this component included: Further development and refinement of the unconditional and conditional grant systems; Improvement to the equitable share model for redistribution of national resources to municipalities, addressing policy priorities of universal access to basic services, in the water, sanitation, refuse removal, and electricity sectors; Reponses to the expansion of municipal infrastructure to under-served areas of the country; Challenges to implementation of the Property Rates Act; Alternative sources of revenue to replace the discontinued Regional Services Levies. Analytical papers were produced and public comments received to the various proposals, which are now being considered by GoSA for implementation in the near future. Generally, the overall contribution to the various projects has resulted in policy refinement to the allocation system and recommendations are captured in the supporting documentation to the National Budget of the Republic of South Africa. A table detailing resources mobilized as well as knowledge products developed during the life of the Project related to the South African local government agenda can be found in Annex 9. 3.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) As the project was based on technical assistance not investment, no cost-benefit or cost effectiveness analysis was conducted during project appraisal. The MFMTAP was developed as a vehicle to support the GoSA to introduce municipal finance reforms to a defined number of newly created local authorities, based on a pilot case completed before national-wide implementation. The reforms were based upon a wide sweeping set of legislative changes aimed at increasing the transparency and accountability of local government as part of the democratic transformation process. The MFMTAP supported the GoSA to systematically and incrementally introduce the needed reforms within a five year window. This approach had two important and measurable consequences. First was that the process enabled the GoSA to quickly identify challenges in the reform process, thereby enabling adaptation where required and increasing efficiency in the introduction of the reform package. Moreover it facilitated the early attainment of the PDO indicators. Second, in parallel to this process was the financing of a series of reform support 20