The Local Government Development Grant System

I. Background The Local Government Development Grant System In the Policy Paper on Local Government Reform (1998), the Government of Tanzania expressed its commitment to the reform of the intergovernmental transfer system, aimed at achieving efficient use of resources for improved service delivery at all levels of government; equity in access to services; transparency; and fairness in allocation. Under the Local Government Reform Programme (LGRP) Component on Fiscal Decentralisation, a formula-based recurrent grant system as well as a formula-based local government capital development grant (LGCDG) system were conceptualized and approved by Cabinet in 2004. Phase 1 of the Local Government Reforms: LGCDG Implementation (2004-2008) At the introduction of the Local Government Capital Development Grant system, the Government stated its vision that the LGCDG system should become the primary modality for local capital development finance in the country. The Letter of Sector Policy further stated the vision that all area-based capital development programs as well as all sectoral development funds ought to be merged into the LGCDG system. In addition to substantial development of local capital infrastructure and capacity building at the local government level in accordance with local priorities, the first phase of LGCDG (2004-08) successfully achieved many of the objectives envisioned for the initial phase: The LGCDG system introduced a nation-wide development grant system which allocates formula-based and performance-based Capital Development Grants and Capacity Building Grants to the local government level. The LGCDG system successfully absorbed and harmonized numerous area-based development programs into the LGCDG. Through its Technical and Steering Committees, the LGCDG system provides a sustainable and cooperative institutional mechanism for coordinating and overseeing the local government development grants. The Government has full ownership over the system, as day-to-day management of the LGCDG system has been mainstreamed into PMO-RALG. The LGCDG system has begun accommodating sector windows, including a window for the agriculture sector development grants and a window for rural water development grants. Phase 2 of the Local Government Reforms: Consolidate LGCDG into the Local Government Development Grant System (2008-2013) Under the LGRP II, the Government of Tanzania will be undertaking reform initiatives to ensure an enabling D-by-D fiscal framework which can provide the financial resources and incentives needed to empower LGAs to enhance public service delivery, socioeconomic development and poverty reduction at the local level. One reform objective is the transformation of the LGCDG system into the Local Government Development Grant (LGDG) System as the primary modality for local development funding, fully integrated and operationalised into the government system. 1

Furthermore, the Government has set the goal of channeling 25 percent of the country s public finances to the local government level for devolved functions by 2010/11 through formula-based grants flowing directly from Treasury to LGAs. In this context, the consolidation of the LGDG system forms the cornerstone of the Government s vision for the next phase of the development transfer system for local governments in Tanzania. The Government of Tanzania and the Bi-Lateral Development Partners who are supporting the Local Government Development Grant (LGDG) System signed a Memorandum of Understanding (MOU) covering the period from 2008-2013. The MoU and the Letter of Agreement for the LDGD system determine the objectives, institutional arrangements as well as the modalities for the implementation of the LGDG system. The core aspects are summarized below. II. The Local Government Development Grant (LGDG) System The LGDG System is introduced as a unified national transfer mechanism for the provision of development funding to Local Government Authorities has the following overall objectives: to improve the access of communities especially the poor, to local services through expanding the physical stock of new and rehabilitated infrastructure; to improve the sustainability of local development infrastructure trough ensuring proper planning and adequate operations and maintenance; to enhance the delivery and management capabilities, productive efficiencies and financial sustainability of local governments; and to provide a national system for the delivery of development grants to LGAs.. The development transfers under the LGDG System adhere to five common principles: The allocations are based on an objective, equitable, efficient and transparent formula; The allocations are performance-based and subject to a common performance assessment; The rules of the LGDG system are universally applied and all councils that qualify should receive their allocations in strict accordance with the allocation formula; There is only a single PMO-RALG managed approval and disbursement process for all windows of the LGDG system, guided by a single LGDG System Steering Committee; and The LGDG system transfer resources, in combination with other recurrent and development grants and own source revenues, is to be spent by the LGAs based on their own local level planning and budgeting priorities to promote local governance, autonomy, accountability and ownership. Under the LGDG system, Government has established a performance-based grant system which allocates funding based on the annual performance assessment of LGAs in nine key areas as identified in the LGDG assessment manual (see Anlage 7 for a presentation of the 2008 Assessment System). The System seeks to promote compliance with national policies and regulatory frameworks as well as creating an incentive system that allows for adjustment 2

of the annual grant allocation to each LGA depending on the level of achievements against the set of minimum conditions and performance indicators. The LGDG will flow to LGAs through Council Development Grants (CDGs), previously known as the Capital Development Grants (CDGs) and the Capacity Building Grants (CBGs), as well as sector specific grants integrated into the system. Council Development Grants (CDG) The Council Development Grant (CDG) is provided to assist LGAs construct and rehabilitate infrastructure, according to locally-defined priorities against a broad investment menu, with a view to empowering communities, improving service delivery and reducing poverty. Those not meeting the minimum conditions will receive a base amount of 25% of their potential total CDG allotment amount and have to implement this under strict supervision of PMO-RALG and the RS. The CDG will be allocated on the following formula: 70% is distributed to LGAs in proportion to the size of population, 10% is distributed to LGAs in proportion to the (capped) land area, and 20% is distributed to LGAs in proportion to the estimated number of poor residents in each council area. All LGAs will be classified on an aggregate performance score with minimum passing scores in each functional area. Each LGA will get a minimum amount of CDG ranging from 25% to 100% depending on the assessment performance. LGAs classified as Very Good performers will receive 100% of the allocation, those classified as Good will receive 80% while those classified as Poor will receive 50% of the allocation. LGAs which fail to meet the minimum conditions will receive 25% of the LGDG allocation, subject to strict oversight from PMO- RALG and RSs. PMO-RALG and the RS will identify the causes for non-compliance for those LGAs which fail to meet the minimum conditions and take corrective and disciplinary actions. Those LGAs will also prepare a LGDG Compliance Action Plan which identifies the problems, identifies the necessary remedial action to bring the LGA into compliance, and identifies a timeline of action with clear milestones to enable the council to monitor progress towards attaining full compliance to the minimum standards the following year. The LGA will be monitored by the RS on a monthly basis and by the PMO-RALG on a quarterly basis. The LGDG can be used for a broad range of investments in infrastructure and service provision within the mandates of the LGAs. The CDG grant is a non-sectoral discretionary development transfer to LGAs for development expenditures in new infrastructure or rehabilitation of existing stock. LGAs should adhere to the following guidelines in the utilization of LGDG funding: The LGAs have a co-funding obligation (minimum 5% of the discretionary Council Development Grant (CDG) under the LGDG system). The contribution should be budgeted and funded from own sources and the General Purpose Grant,; The CDG grant should not be used to fund routine recurrent operations and maintenance activities, but a portion can be used to provide equipment and supplies needed for initial development projects to be fully operational upon completion; Up to 15% of the CDG funds may be utilized to cover costs of planning, appraisal, 3

monitoring and supervision to ensure a strong planning and project implementation at the local levels; It is expected that up to 80% of the CDG funds would be spent within the key poverty reduction areas of health, education, water and sanitation, roads and agriculture; 50% CDG investments should be identified and implemented at the Villages or Mitaa level. There are separate procedures set out in the Planning and Budgeting Guidelines for Villages and Mitaa. Capacity Building Grants (CBG) The LGDG System also provides a discretionary Capacity Building Grant (CBG) to assist LGAs improve their capacity and performance. All LGAs should meet the following conditions related to the CBG: They should have acceptable capacity building plans; They should have satisfactorily accounted for previous CBG disbursements; LGAs shall use the CBG to fund a wide variety of activities such as the eleven standardized courses, on-the-job trainings, technical assistance, study of other LGAs best practices and working tools. As set out in the LGDG System Implementation and Operations Guide, a minimum of 40% of the CBG should be utilized at sub-district level for Ward, Village and Mtaa levels. LGAs that do not meet the LGDG Minimum Conditions will receive 100% CBG but with close supervision by PMO-RALG and the RSs based on the agreed compliance action plan. Furthermore, LGAs should not spend more than 60% of CBG funds for activities of the Higher Local Government (HLG). Sector-Specific Grants In addition to the discretionary CDG and CBG grants, the LGDG System in 2009/10 includes four Sector Development Grants for Agriculture, Water, Education and Health (for more detail see annex 1 to this document on the LGDG System). During the medium term, it is expected that a separate sector window for roads will also be available to facilitate the flow of the TANROADS development funding for roads to the LGAs. Other Special Development Grants and Funds to Local Governments In addition to development transfers under the LGDG System, some LGAs will receive a variety of other development grants limited to specific regions (area-based programmes), sectors and purposes. These transfers cover the following among others:- Participatory Agriculture Development Empowerment Project (PADEP); District Agriculture Sector Investment Project (DASIP); Urban Development and Environmental Management (UDEM); Participatory Forest Management (PFM); Sustainable Wetland Management (SWM); Tanzania Social Action Fund (TASAF); and UNICEF Grant Support Each of the special development grants is earmarked for specific purposes and allocated based on purpose-specific criteria. These development funds should be allocated, planned and budgeted in accordance with the Local Government Acts and relevant financial 4

management regulations as well as the specific conditions attached to each special development grant as determined by the specific sector ministries, PMO-RALG and MOFEA. LGAs which receive these special development grants are required to consult the specific requirements and regulations and hold discussions with PMO-RALG and the various sector ministries for guidance as appropriate. III. LGDG System Vision and Way Forward A Letter of Agreement (LoA) between PMO-RALG and Development Partners regarding Consolidation and Operationalizing the Local Government Capital Development Grant (LGCDG) system into a Fully Institutionalized Local Government Development Grant System (LGDG) for Mainland Tanzania (2008-2013) has been elaborated as integral part of the Memorandum of Understanding for the LGDG system. The purpose of the LoA is to set forth the principles to be followed, under the Phase 2 (2008-2013) of the overall local government reforms, for a harmonized approach to support the further consolidation, integration and operationalization of the former LGCDG System into the government system structure and procedures. The LoA outlines 6 ambitious Key Areas to guide the LGDG Vision and the Way Forward for the period 2008-2013: Key Area 1: Consolidate Modalities of Development Transfer to LGAS into a single System The LGDG system will consolidate its position as the primary modality for local development finance in the country. Parallel funding channels will be merged into the LGDG system in order to reduce transaction costs, improve transparency and accountability, and strengthen the D- by-d process. A timetable will be adopted by the LGDG Steering Committee to facilitate the implementation and monitoring of this consolidation process, upon advice by the LGDG Technical Committee. Key Area 2: Consolidate and Harmonize the Capacity Building Grants within the LGDG System The various LGDG capacity building grants (both those under the discretionary as well as those under the sector-specific LGDG grants) will be consolidated and harmonized into a single capacity building grant for LGAs to improve consolidation and the efficiency as well as cost effectiveness of local capacity building activities. Key Area 3: Establish and Integrate Sector Windows into the LGDG System The Government has already begun to establish sector windows within the LGDG system for all devolved sectors (agriculture, water, education, health and roads). These LGDG sector windows will provide Government and DPs with a comprehensive and integrated framework for supporting local development within these sectors, without the need to establish parallel funding mechanisms. Over time, it is expected that as the D-by-D reforms are fully embedded into the government system, the level of development funding being allocated through sector-specific windows will decrease step by step as of the goal is that all development funding that goes to the LGA level will be channelled as discretionary development grants. 5

Key Area 4: Enhance Effective and Transparent Institutional and Budgetary Mechanisms for Intergovernmental Transfer System The Government will enhance effective and transparent institutional and budgetary mechanisms for all development transfers in order to ensure coordination and harmonization between the various recurrent and development transfers as well as the subventions (as appropriate). In addition, institutional mechanism for managing all intergovernmental transfers to the local government level including the LGDG system will be further strengthened and expected to lead to the emergence of a single interministerial Local Government Grants Steering Committee which will coordinate and oversee PMO-RALG will function as the administrative arm of the LGDG system and serve as the Secretariat for this Steering Committee. The Government will ensure that all intergovernmental transfers (including the LGDG) are transparently included in the government budget to enable all stakeholders to clearly identify the level of recurrent and development funding flowing from the central government to LGAs. Key Area 5: Strengthen Reporting and Oversight of LGA Finances The Government of Tanzania through PMO-RALG will both broaden and strengthen the vertical and horizontal reporting and monitoring oversight of all LGA finances, with a particular emphasis on local development expenditures in order to ensure that the development transfers (including LGDG), recurrent transfers and own source revenues are planned, budgeted and spent in an efficient, equitable, transparent and accountable manner. Priority will be on strengthening the reporting between the LGA and residents and internal reporting within LGAs to empower the elected councillors, management and staff to ensure proper planning, budgeting and oversight. Key Area 6: Streamline LGDG System Design and Implementation to reduce the projectized nature of LGDG The LGDG performance assessment system will be mainstreamed within the routine internal performance monitoring of LGAs, supplemented by external assessment / audits as required. All LGAs will conduct an internal performance assessment on an annual basis, supplemented by a system of external assessments. The LGDG incentive structure will be simplified to improve transparency and accountability and to promote improved local government governance and financial management. Minimum conditions for accessing the LGDG core and LGDG sector window grants will be kept basic to promote basic financial management accountability of funds. Councils failing to meet the minimum conditions will be eligible for a receipt of a portion of the LGDG funds but under the close supervision of an external supervision agent. All development funds will be coded and then accounted and reported for under the councils regular Development Account (Account 2). Separate accounts by source of funds will be eliminated to reduce administrative and compliance costs, promote 6

greater council ownership and enhance accountability of local level development activities. The LGDG system will be coordinated with the rest of the intergovernmental fiscal framework to ensure adequate financial resources for operation and maintenance and/or rehabilitation of local infrastructure. The entire transfer system will be balanced and coordinated to effectively link investments and the O&M of those assets to ensure sustained and improved service delivery. Council capacity will be strengthened and councils will be given greater fiscal discretion to improve local budget efficiency. The Government will identify options for adjusting the LGDG system to encourage local governments to provide the operations and maintenance (O&M) needed to ensure that the investments funded through LGDG are able to provide the services needed and do not fall into disuse. The LGDG system in under ist new MoU provides for some flexibility (within limits) to use a small proportion of the LGDG resources for funding non-infrastructure related development activities. The Letter of Agreement envisions a fully institutionalized Development Grant System as the third and final phase of the LGDG system from 2013 onwards. At this time, the LGDG would function as a fully integrated component of the Government s Development Budget. It is anticipated that a fully functioning LGDG System, with appropriate guarantees being in place, would enable DPs to shift their support for LGDG through GBS, confident that it is ensured that an adequate share of the public sector s development resources are made available to the local government level in an efficient, equitable, and transparent manner consistent with the Government s Policy of Decentralisation by Devolution (D-by-D). IV. Institutional Arrangements Overseeing the funding of the LGDG system is the responsibility of the GoT whereas PMO- RALG is responsible for its implementation. In order to ensure coherence and consistency between the various players and funding partners, the LGDG system will be managed through the several joint committees. The following institutional arrangement has been set up to oversee and manage the LGDG system: The LGDG Common Basket Fund Steering Committee (CBFSC) will continue to oversee the general and financial management of the LGDG system in a multi-donor financing environment in the same manner as it used to oversee the LGCDG management. The CBF enables the LGDG system to be implemented as far as possible through one budget and with one set of financial procedures. The LGDG CBFSC will be the same committee as the LGRP II Common Basket Fund Steering Committee to ensure proper coordination between the LRGP II and the LGDG reform activities. The LGDG Common Basket Fund Steering Committee will be chaired by the Permanent Secretary, PMO RALG or the appropriate deputy and drawing members from the Government and the Development Partners contributing funding to the LGDG Common Basket Fund. The Steering Committee will perform the following functions: Approve the financing plan for the CBF and agree on transfer of funds into and out of the CBF Account to the Consolidated Fund for transfer on to the LGAs based on authorization from the LGDG Steering Committee. 7

Approve the Medium term Plan and Budget for the LGDG System Approve the LGDG System Annual Budget Receive accounts from the MOFEA on release of LGDG systems funds from the Consolidated Fund Receive and review audit reports Ensure that the CBF operations within the Government structures, systems regulations and procedures, as well as consistent with achieving sustainability, complementarity, low transaction costs and national ownership Review and amend, as the need arises, provisions regarding the operations of the LGDG Common Basket Fund arrangements The Local Government Development Grant System Steering Committee (LGDG System Steering Committee) is composed of the following members: Permanent Secretary (PS) Prime Minister s Office (PMO), Chairman; PS PMO-RALG; Secretary; PS Ministry of Finance and Economic Affairs (MOFEA); PSs of seven sector ministries (i.e. Ministry of Water and Irrigation (MWI), Ministry of Livestock and Fisheries (MLFD), Ministry of Health and Social Welfare (MoHSW), Ministry of Education and Vocational Training (MEVT), Ministry of Infrastructure and Development (MID), Ministry of Agriculture, Food Security and Cooperatives (MAFC), and Ministry of Lands Human Settlement Development (MLHSD)); and PS of any other Ministry if deemed necessary The Steering Committee takes decision following established GoT practice. The Steering Committee is to meet at least quarterly and carry the following responsibilities and, on the basis of recommendations from the LGDG Technical Committee, will: Discuss and approve any changes in the allocation formulae, performance incentive structure, assessment procedures, etc.; Approve the assessment reports, identifying LGAs meeting the access conditions and amounts; Make final administrative decisions on cases of appeal; Approve the LGDG system grant allocations; and Approve changes in the LGDG System Assessment Manual and other LGDG System manuals and procedures. The Local Government Development Grant System Technical Committee (LGDG System Technical Committee) is composed of the following members: Deputy Permanent Secretary (DPS) PMO-RALG, Chairman; Director for Local Government (DLG) PMO-RALG, Secretary; Appropriate Heads of Department from the MOFEA and the Sector Ministries (MWI, MLFD, MHSW, MID, MEVT, MAFC, MLHSD) Representative of the Association of Local Authorities of Tanzania (ALAT); Representative of the National Environmental Management Council (NEMC); Selected LGA representatives; Contributing donor representatives. 8

The Technical Committee will have meetings with a broad representation of its members and strive to reach consensus regarding the recommendations to be made to the PS PMO-RALG and to the LGDG System Steering Committee. The Technical Committee meets at least quarterly and performs the following functions: share experiences on the LGDG system design and make relevant recommendations on the assessment manual, the assessment processes, allocation formulae, menu, etc. and make recommendations to PS PMO-RALG or through PS PMO-RALG to the Steering Committee as appropriate. review work-plans, budgets and progress reports for the LGDG system (including the Capital and Capacity Building Grants), as well as annual assessment reports, and make recommendations on the basis of the benchmarks as defined for the system to PS PMO- RALG or through PS PMO-RALG to the LGDG Steering Committee, as appropriate. The LGDG System will be implemented through mainstreamed modalities under PMO-RALG, through the Director of Local Government (DLG). Provision has been made through the Local Government Reform Programme II (D by D) to support DLG to effectively manage the LGDG system support within PMO-RALG. PMO-RALG, through the DLG, will be responsible for the day-to-day management of the LGDG system, providing support to LGA performance assessment, LGDG committees, review, technical support and monitoring. MOFEA is responsible to release the LGDG transfers in a timely and accountable manner upon instruction by PMO-RALG based on authorization form the LGDG System Steering Committee. The linkages between the various committees and secretariats for management purposes are depicted below. Steering Committee LGDG Recommend Approve Technical Committee LGDG Report Feedback Director of Local Government PMO-RALG 9

V. Budgeting and Funding of the LGDG System The Government of Tanzania has committed itself to provide increased funding to the LGDG discretionary transfer pool as it seeks to firmly integrate the LGDG system within the government own institutional and budgetary processes and procedures. To that effect, the annual level of discretionary grant funds to be allocated to LGAs will from FY 2009/10 be determined as a percentage of the government budget (minus Consolidated Fund Services (CFS) which includes National Debt as well as the salaries and pensions of designated public leaders), including the support from the Development Partners. The MOU provides that the LGDG funding will be 1.6% of the budget (minus CFS) in 2009/10 and 2% of the budget (minus CFS) thereafter. Setting this 2% level achieves two objectives for the Government: First, it provides a steady amount of development funding for LGAs, allowing LGAs to share in the fruit of development. Second, it facilitates the achievement for the Government of the PAF Matrix D by D indicator (ie, 25% of the government budget to be allocated directly to LGAs on a formula basis). Table 1: MTEF Computations for LGDG Funding (2008-09 to 2010-11) Line ITEM 08-09 09-10 10-11 11-12 1 Budget Growth Rate (assumptions) 13% 11% 10% 2 Government Budget 7'218'130 8'139'281 9'070'931 9'978'437 3 Consolidated Fund Services (CFS) 681'911 729'412 874'279 958'458 4 Budget (Exclude CFS) 6'536'219 7'409'869 8'196'652 9'019'979 5 25% of Budget PAF Target 1'634'055 1'852'467 2'049'163 2'254'995 6 % to be Development Funding 22% 25% 25% 25% 7 Assume % for Development at LGA Level 353'773 463'117 512'291 563'749 8 % to be Discretionary Development Funding 25% 26% 32% 32% 9 Assume % for Discretionary LGDG 88'443 118'095 163'933 180'400 10 % of Total Budget (excl CFS) to Meet PAF* 1.4% 1.6% 2.0% 2.0% 11 % of Total Budget (excl CFS) Strategy** 1.20% 1.6% 2.0% 2.0% 12 Actual LGCDG and Projected LGDG 78'433 118'558 163'933 180'400 13 % Increase in LGDG Amount Needed 51% 38% 10% Source for Government Budget and CFS figures from Budget Frame 2009-10 (February 2009) The budget of the LDGD system will be funded through GoT funds allocation through the budget process and DPs contributions. The LDGD Common Basket Fund, will be used to coordinate Development Partners contribution, to facilitate the budgeting and administration of the LGDG system, and through which to channel the Development Partner s funds. Within their bilateral agreements, the DPs will specify the disbursement schedules, which will be based on the budgets recommended and approved by the LGDG System Technical 10

Committee and the LGDG System Steering Committee respectively. The Development Partners will deposit funds in the LGDG Common Basket Fund accounts as agreed. In accordance with the Joint Assistance Strategie of Tansania JAST, frontloading of the DP funds into the basket is encouraged. The approval of the LDGD Common Basket Fund Steering Committee is required before the funds can be transferred to the Consolidated Fund for disbursement to the LGAs. The Government contribution to the discretionary LGDG system (both development and capacity building) will be channelled through the Government Budget and released in coordination with the funds form the LGDG and under management of the CBF to ensure coordination, accountability and transparency. GoT funds will be disbursed on a quarterly basis in equal instalments on the first month of each quarter and reported to the LGDG Common Basket Steering Committee and the LDGD Technical and Steering Committee. The LGDG Common Basket Fund will be managed by PMO-RALG, bound by the prevailing Government Financial Management Regulations, acting on a mandate agreed upon by all participants, as revised from time to time and approved by the LDGD Common Basket Steering Committee. The financial performance of the LDGD system will be audited annually by the National Audit Office or by an external auditor as will be agreed by the participating partners, and approved by the Controller and Auditor General. However, in the last few years, the audit of the joint Common Basket Fund for the LGRP and the former LGCDG-system has always been carried out by an external auditor. Audit was contracted out, to KPMG, and was carried out routinely. At first this was quarterly, then six monthly and then annually. Audit reports, management letters and management responses were tabled at meetings of the CBFSC. No adverse opinions were given and all recommendations were duly followed up. LGDG operational issues such as the LGA performance assessments, relevant committees, reviews, technical support and monitoring will be funded through LGRP II. 11

Annex: Excerpt on Sector Specific Grants from the Budget Guidelines for the Preparation of Medium Term Plan and Budget Framework for 2009/10 2011/12 The LGDG System includes both discretionary Council Development Grants (CDG) and Capacity Building Grants (CBG) as well as sector-specific development grants for agriculture (ASDG), water (WSDG), health (HSDG) and education (ESDG). All LGDG System funds are allocated on formula basis and are released based on an annual performance assessment of each LGA. The sector-specific grants are presented in detail below: Agriculture Sector Development Grant (ASDG) The Government has been providing funds to LGAs for agricultural development under the Agricultural Sector Development Programme (ASDP) to implement the Agricultural Sector Development Strategy (ASDS). Development activities under the ASDP at district level are to be implemented by each LGA, based on a District Agricultural Development Plans (DADP) which is part of the Council Strategic Plan. The majority of ASDP expenditures at LGA level are funded through the following three types of fiscal grant transfers: District Agricultural Development Grant (DADG); Agricultural Extension Block Grant (A-EBG); and Agricultural Capacity Building Grant (A-CBG). Consistent with the LGDG System, these agriculture development grants are allocated by formula and released to LGAs based on the LGDG performance assessment results. As with the discretionary CDG grant, LGAs are assessed and classified into performance categories which will determine the amount of the Agriculture Development Grant to be received, which will range from 50% to 100% of the formula-based entitlement as per the LGDG Assessment Manual. District Agricultural Development Grant (DADG): LGAs will receive the DADG to fund local agricultural development expenditures. Each LGA will be allocated DADG funds of either 50%, 80% or 100% depending on its LGDG performance assessment. A LGA not meeting the minimum conditions will receive 50% but under strict close supervision from PMO-RALG and RS as per the 2008 LDGD Assessment Manual. The DADG will support implementation of community priorities identified in the DADPs on a cost-sharing basis, with beneficiaries contributing additional labour and materials in varying proportions, depending on the nature of the investment. All activities and investments will be identified in accordance with local needs, as determined through local participatory planning and budget processes, and in line with the LGDG system. Types of investments which could qualify for financing include: environmental investments; public infrastructure, such as rural roads; small-scale irrigation schemes; group or community investments of a small scale productive nature; group or community investments in risk bearing (locally) innovative equipment. Others include agricultural inputs (seeds, fertilizers and agro-chemicals), that would ordinarily not be eligible for cost-sharing, unless they are part of participatory technology development activities. 12

Agricultural Extension Block Grant (A-EBG) The A-EBG is a sub-component of the ASDG which supports the shift to contracting of services with greater control over resource allocation decisions by farmers. It will provide funding for both public extension services, as a Government contribution, and for Non State Actors. The latter will be engaged through agreements and contracts directly between farmer groups or through local government outsourcing. It will be financed through the existing discretionary, formula based Agricultural Extension Block Grant in line with the performance assessment and conditions as outlined in the 2008 LGDG Assessment Manual. Agricultural Capacity Building Grant (A-CBG) The A-CBG is a sub-component of the ASDG which provide financing of LGAs capacity building in the context of Agricultural Development. The A-CBG will be used to improve functional areas to meet the minimum conditions and to improve on the performance criteria in subsequent years to access higher resource transfers. Each LGA will receive a capacity building grant. LGAs which do not meet the minimum conditions will receive funds under close supervision by PMO-RALG and RS in collaboration with the Ministry of Agriculture, Food Security and Cooperatives. The initial focal areas of the capacity building grant should be on improving district agricultural planning, agricultural investment appraisal and review, agricultural services reform, and enhancing stakeholder engagement. LGAs should develop a capacity building plan to systematically identify the capacity building priorities to be funded through the CBG. The DADG, the A-EBG and the A-CBG of the ASDP will be allocated according to the same formula as the Agriculture Recurrent Block Grant: Number of Villages - 80%; Rural Population - 10%; and Rainfall Index - 10%. The allocation to be received by each LGA will depend on performance assessment whereby Very good performers will receive 100%, Good performers will receive 80%, poor performers will receive 50% while failed performers (those not meeting the minimum conditions) will receive 50% under strict oversight by PMO-RALG and the RS. Water Sector Development Grant (WSDG) The Government has been implementing a Water Sector Development Program (WSDP), which includes a component on Rural Water Supply and Sanitation Program (RWSSP). The objective of the RWSSP is to strengthen decentralized planning, project preparation, funding, implementation and management through local governments as well as developing and implement strategies for sanitation, hygiene promotion and communication. Consistent with the D-by-D policy, the Government established a LGDG Water Sector Development Grant (WSDG) for the RWSSP consisting of a Water Sector Development Grant (WSDG-CDG) and a Capacity Building Grant (RWSSP-CBG). The WSDG CDG is allocated based on a formula whose variables are the total unserved population which attracts 70% of the grant pool and technological options which attracts 30% of the grant pool. The release of the Water Sector Development Grant (WSDG) funds will be determined by the level of performance status. LGAs classified as Very Good will receive 100%. LGAs classified as Good will receive 80% while LGAs classified as Poor will receive 50%. LGAs which fail to meet the minimum conditions are classified as Failed and will receive 50% but with close supervision from PMO-RALG and RS, in collaboration with the Ministry of Water and Irrigation. The WSDG CBG is allocated on an equal lump-sum basis. All LGAs will be allocated 100% of 13

the RWSSP-CBG. However, those councils not meeting the minimum conditions will be subject to strict supervision from PMO-RALG and RS, in collaboration with the Ministry of Water and Irrigation. The WSDG CDG funds can be used for implementation of infrastructures such as drilling of boreholes, construction of dams, installation of pumps, construction of piped systems, and construction of demonstration latrines. WSDG-CBG funds can be used in creating and strengthening District Water Sanitation Teams (DWSTs) within LGAs, enabling them to prepare RWSS Plans and appraise RWSS Projects proposed by communities. This will involve rehabilitation and construction of offices, logistical support (vehicles, motorcycles, computers, photocopiers and fax machines). Likewise the fund will be used in ICT operations; monitoring of RWSS services delivery; building community capacities to properly maintain and operate their facilities; and promoting hygiene, sanitation, and HIV and AIDS mitigation and prevention. Health Sector Development Grant (WSDG) The Health Sector Development Grant (HSDG) is a window for providing earmarked healthrelated development funds to the LGAs in a harmonised, predictable, accountable and costeffective manner. The grant is used for implementing the Primary Health Services Development Programme (MMAM) and allows for mainly rehabilitation activities and staff housing in its first years. The HSDG funds will be allocated according to the same formula as the Health Recurrent Block Grant, which accounts for 70% Population, 10% Number of poor residents, 10% Council medical vehicle route, and 10% Under-five mortality. The Health Sector Development Grant, consistent with the LGDG System, is allocated based on formula and released to LGAs based on the LGDG performance assessment process. LGAs which are classified as Very Good will receive 100%, Good will receive 80% and Poor will receive 50%. Those LGAs not meeting the minimum LGDG conditions will receive 50% but under strict oversight by PMO-RALG and RS, in collaboration with the Ministry of Health and Social Welfare. Education Sector Development Grant (ESDG) The Education Development Grant (ESDG) is designed to support LGAs in improving the accessibility and quality of primary, secondary and adult education. The ESDG resources are to be used to fund the education development priorities as identified through a local participatory planning approach. These include construction/rehabilitation of primary education infrastructures such as class rooms, administration buildings, school-related wash rooms/latrines, desks, chairs and other education-specific development investments. The ESDG funds are allocated 70% based on the number of school-aged children in each LGA, 20% based on the classroom shortage (the gap between the number of classrooms required and the actual number of classrooms, as determined by MoEVT) and 10% based on the level of poverty. All LGAs are eligible to receive the ESDG funds and the actual release is dependent on the level of assessment performance attained during the assessment exercise. The ESDG, consistent with the LGDG System, is allocated based on formula and released to LGAs based on the LGDG performance assessment process. LGAs which are classified as Very Good will receive 100%, Good will receive 80% and Poor will receive 50% of the formula-based allocation. Those LGAs not meeting the minimum LGDG conditions will receive 50% but under strict oversight by PMO-RALG and RS, in collaboration with the MoEVT. 14