Local Investment Grants (LIG)

December 9, 2018

ETHIOPIA

Local Investment Grants (LIG)

Preparation Mission

October 17 – November 4, 2005

Aide Memoire

I.Introduction

1. The second preparation mission for the proposed Local Investment Grants (LIG) program was conducted between October 17 and November 5, 2005. The mission consisted of Larry Hannah (Lead Economist and Task Team Leader), Dave DeGroot and Rumana Huque (Senior Urban Specialists), Abebaw Alemayehu (Senior Operations Officer-Urban Development), Ken Green (Environment and Safeguards Consultant) and Eshetu Yimer (Senior Financial Management Specialist). The mission met with H.E. Ato Mekonen Manyazewal, State Minister of Finance and Economic Development (MOFED), members of the LIG Task Force, regional and local officials, and donors (a list of people met is provided in Annex 1). This Aide Memoire summarizes discussions and reflects agreements reached with the government during the mission. The mission would like to thank the government and other officials met for their hospitality and assistance.

II.Objectives and Principles of LIG

1. Development objectives. The mission held extensive discussions with the LIG Task Force and regions and confirmed the understandings reached with the State Minister of MOFED. It was agreed that the development objectives of the LIG project are fully aligned with the Government’s decentralization objectives,targeted at the woreda and municipal level, to:
2. increase capital investment at the local government level for more efficient and effective service delivery; and
3. strengthen the decentralization process to local government through existing government financing channels for an array of sectoral investments based on local needs and priorities

1. To achieve these objectives, it was further agreed that LIG would be a specific purpose grant (SPG), funded by the Federal Government, and transferred, via Channel One through the regions, to local governments. LIG would be available to all local governments (woredas and municipalities). Although designated an SPG, the only restriction on LIG funds would be that they must be used only for capital investment purposes in any sector within the jurisdiction of local governments.Better delivery of local services is understood to depend on more efficient and effective use of a significantly increased volume of investment funds. Therefore, the incorporation of incentives for good performance is a fundamental principle underpinning LIG. This means than rather than an entitlement, like the block grant, that LIG access would depend on how capable and how effective local governments were in using these resources. In order to introduce and sustain this principle in the public finance system of Ethiopia, LIG is conceived as a government program built upon existing channels, systems and procedures that will attract the financial support of government and donors in the near future.

1. Principles regarding allocation from federal to regional level. The following were agreed: i) LIG funds would be additional to the Block Grant, and would not offset any Block Grant allocation to the regions; ii) allocation of all LIG funds from the federal to regional level would followthe equalization formula currently used for the Block Grant; and iii) in order to ensure efficient use of funds, on an annual basis unused funds from the previous year would be added to the following year’s pool and reallocated according to the Block Grant formula. During the project preparation process, the following assessments will be carried out to ensure effective implementation at the regional level: i) clarification of what capital investments fall within the jurisdiction of local governments (woredas and municipalities) in each sector; ii) capacity of BOFEDs to manage LIG in terms of human resources and financial management; and iii) mechanisms at the BOFED level to ensure that local governments’ are using an appropriate process for investment planning and implementation.

1. Principles regarding allocation from regional to local level. The application of the basic principles for the LIG program to the regional to local level transfer was discussed with federal and regional authorities. It was agreed that LIG would be a program for all local governments and that their eligibility for LIG funding would be known as a “drawing right (DR)”. Further, it was affirmed that the right of a local government to draw funds under LIG would be a function of their ability to meet the criteria established for the program, known as “conditions of access (CoA)”. In order for LIG to function smoothly it was understood that the criteria both for DR and CoA would need to be unambiguous, objective and transparently applied so that no one could allege manipulation or favoritism in the process.

1. Since not all local governments will be able to meet the CoA at the same time, access to LIG funding would become a process of “self-selection” by local governments. In establishing the details of the CoA, the precise requirements can be calibrated in a way that LIG is phased in over a period of time. This will allow for scaling-up of LIG in an organized manner. The allocation of DRs to all local governments should also not result in allocations that are too small to be useful because local governments will be allowed to draw their entire three-year DR, as quickly as they are able. An annual reallocation of unused funds, as discussed, should also serve to direct resources to those ready and able to make effective investments.

1. The fundamental principle for distributing DRs would be to use a formula most likely based on the one presently applied to distribute the block grant to local governments. A number of issues need to be worked out during project preparation. For example, can the same formula be used to establish DRs for rural woredas and urban local governments? In addition there may be a need for regional variations in the formula if issues such as how to treat local governments already receiving earmarked capital funding are to be considered.Although such differences may exist across regions LIG should be conceived as a national program adhering to common basic principles.

1. Following the issuance of DRs for all local governments, LIG principles will need to be translated into specific regional CoA. The following factors should be considered:
2. The capacity of local governments to effectively use LIG funds would need to be confirmed. A minimum mandatory capacitystandard for local governments could be based on PSCAP, augmented by some specific LIG requirements, such as adequate technical and financial capacity related to undertaking capital investment.
3. Each participating local government would need to have a multi-year strategic plan that includes a capital investment program. The selection of projects would need to be carried out using a consultative process. In addition technical, environmental, social and economic aspects of the projects would need to be appraised and verified.
4. Future operations and maintenance (O&M) requirements would need to be explicitly identified and each local government would be required to plan for and commit to financing these O&M costs.
5. Criteria, such as past performance in implementing investments and the readiness of projects to be implemented with LIG funds, were also discussed but no specific mechanisms to use these measures to release funds have yet been developed.

1. Regional variations in the conditions of access would not violate the basic principles of LIG but rather would allow for some regional calibration of the criteria. This calibration is deemed necessary in order to phase the introduction of LIG and to confirm that the application of the conditions of access is leading to effective implementation of the program. Regions would be asked to consider how the LIG principles could best be reflected in regional conditions of access and the results of the various proposals should be discussed at a workshop early in 2006 in order to reach final agreement on operational rules for the project.

III.Institutional Arrangements for Implementation

1. The LIG would transfers funds from MOFED to regional BOFEDs who would transfer funds to municipal treasury offices and WOFEDs. MOFED would have overall responsibility for the program.

1. MOFED’s key tasks would include transferring funds to regions based on the block grant formula; ensuring that regions follow the Operational Manual (to be developed during project preparation); financial management; consolidation of monitoring and evaluation reports from regions and reporting to the World Bank.

1. The responsibilities of regional BOFEDs would include applying the agreed formula to award local governments drawing rights and transferring funds to the local governments who have met the conditions of access and who are proceeding with an eligible investment with funds from LIG. BOFEDs would also ensure that local governments follow the Operational Manual in selecting and implementing projects; assist local governments as necessary in LIG implementation through capacity building, arrange for technical support through regional sector bureaus, and other means; monitor and evaluate local government performance and report to MOFED.

1. The responsibilities of WOFEDs and municipal treasury offices would include preparing multi-year capital investment plans and annual investment plans; assuring funding for O&M for the investments; acquiring/building up capacity for implementation through PSCAP and other means; selecting and implementing projects according to the Operational Manual; ensuring technical, environmental, social and economic aspects are adequately addressed through the involvement of the appropriate sector representatives/officers at the local level; procurement and financial management; and monitoring and reporting to BOFEDs on the use of funds.

1. The full responsibilities for each level will be worked out in more detail during the preparation process and clearly described in the Operational Manual.

IV.Timetable for Project Preparation and Action Plan

1. The proposed IDA credit for the LIG program is scheduled for consideration in FY06 which ends June 30, 2006.This schedule implies a pre-appraisal mission around the end of February 2006 at which time draft reports from all consultants would need to be available for review. Based on the readiness of these inputs, the Bank and Government will need to agree that an appraisal mission, possibly combined with negotiations in Ethiopia,could start on or about April 10, 2006. The satisfactory completion of preparation inputs and negotiations following this schedule are essential for the IDA creditto be presented to the Board of the World Bank in late June. The key documents required for review at appraisal are: (1) the draft Operational Manual; (2) the draft Project Implementation Plan; and (3) Safeguard products including the Environmental and Social Management Framework and the Resettlement Action Framework.

Bank pre-appraisal missionFebruary 27-March 10, 2006

Safeguard Disclosure and ConsultationEarly April, 2006

Appraisal and NegotiationsApril 10-21, 2006

Submission of WB board documentsMay 15, 2006

Board presentationJune 20, 2006

1. Actions to be taken by MOFED. The most urgent action to assure timely preparation of the project is for MOFED to designate personnel to manage LIG.It was understood that adequate staffing would require some fulltime assignments. Preparation activities will include extensive dialogue with the regions and local governments on the design of the program, including organizing/facilitating a number of workshops; periodic meetings with the LIG Task Force for sectoral input into program design; coordinating the preparation of the Operational Manual and other required project documents; working closely with the World Bank team; and liaising with donors who may be interested in joining the LIG program.

1. It was agreed that MOFED would use the approved PHRD project preparation grant (US$495,000, Grant Agreement signed in September 2005) to finance the following consultancy contracts:

i)PHRD Coordinator: a technical expert (individual) to assist in managing the PHRD funds, including procurement of consultants and managing contracts, and providing technical input for the coordination of the project preparation process. The Coordinator could be a local consultant, and would be required for approximately 12 months. (Draft terms of reference attached as Annex 2)

ii)Preparation of the Operational Manual: this would require an international consultant (individual) with experience in preparing projects, particularly World Bank projects, with expertise in decentralization and local government reform. (Terms of reference under preparation)

iii)Additional consultancies to provide input for the Operational Manual including the following: (terms of reference under preparation)

1. An individual consultant to review the variety of local investment planning processes that currently exist (Strategic Plans for the Block Grant; Woreda Development Plans under ESRDF; Integrated Woreda Development Plans under ERTTP; Integrated Development Plans following the South Africa IDP model; etc), and provide recommendations for standardizing and/or providing guidelines for the minimum requirements of a multi-year integrated capital investment plan for LIG.
2. An individual consultant to determine the level of additional effort that will be required at each level (MOFED, BOFED, and WOFED) to implement LIG, including personnel, hardware/software and logistics needs and cost estimates.
3. An individual local consultant to compile all legislation (including regional constitutions, proclamations, directives, etc) regarding the assignment of expenditures and revenues for woredas and urban local governments in each region, and prepare a summary in English, including indication of any differences that may exist between regions.

iv)Preparation of documentation required for environmental and social safeguards. It was agreed that there is no need to develop new safeguards information since these procedures have been developed for Bank supported projects for numerous sectors under the LIG list of eligible projects. Consequently, initial analysis identified several key existing products that would serve as the foundation for the LIG Environmental and Social Management Framework and the Resettlement Policy Framework. An international consulting firm will be required to (i) prepare the two frameworks, (ii) provide input to the Operational Manual, and (iii) a set of practical guidelines and checklists for sector safeguard procedures to be used at the local government level.

v)Additional local consultants may need to be hired on a short term basis to work with any individual international consultant working under the PHRD grant.

1. In order to have inputs ready for the anticipated pre-appraisal mission in February, the schedule for hiring the PHRD consultants will need to be the following, and procurement will have to be carried out by MOFED on a fast track:

PHRD Coordinator on boardNovember 30, 2005

Other PHRD consultants on boardDecember 31, 2005

Consultants draft reports availableFebruary 24, 2006

1. Actions to be taken by the regions. As indicated above, regions will need to prepare the following: i) a formula for allocating drawing rights that is consistent with LIG principles and ii) conditions of access that taking into account capacity for implementation, the planning and capital investment decision-making process, the eligibility of investments selected and their conformity with sound technical and sectoral standards, the commitment to O&M and possibly the readiness of projects to be implemented. The regions will also need mechanisms to reallocate funds from year to year in order to reward performance and effective fund use. While the consultants hired using the PHRD funds will assist the regions in coming to final positions on these issues, it is critical that regions begin a discussion immediately so that they can have proposals ready for discussion when the consultants come on board at the end of December 2005.

1. In addition to the above, regions should do a quick assessment of the investment planning process of their local governments and their capacity for implementing LIG in order to:i) calibrate their criteria for selecting local governments; ii) determine any capacity building needs that could be met in the coming year; and iii) provide input to the program design. BOFEDs should also do a quick assessment of their own capacity and needs (human resource, hardware/software, etc) to manage LIG in order to provide input to the consultants.

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December 9, 2018

Annex 1

List of People Met

[not complete yet]

Ministry of Finance and Economic Development (MOFED)

H.E.Ato Mekonen ManyazewalState Minister

Berhanu LegesseDepartment Head, Regional Affairs Department

Ethiopia Social Rehabilitation and Development Fund

Ethiopia Roads Authority

Mulugeta DemissieERTTP Coordinator

Ministry of Education

Tenaye Assefa Expert

Amhara Region

Regional Food Security Coordination Office

Food Security Programme

Addisu TadegeMonitoring and Evaluation Officer

SNNP Region

World Food Programme

Nasiba Nabi, Head

Yohannes DestaProgram Assistant

Rural Development Coordination Bureau

Temesgeh KedirHead

Bureau for Water Resources

Head

Technical Coordinator

Bureau of Agriculture and Rural Development

Head

Alaba Woreda

Woerda Agriculture and Natural Resource Office

Mesfin TseqayeHead, Natural Resources Desk

Melese TeshomeSafety Net Programme Co-ordinator

Annex 2

DRAFT

TERMS OF REFERENCE

PHRD GRANTCOORDINATOR/PROJECT PREPARATION COORDINATOR

I.OBJECTIVES OF THE ASSIGNMENT

The Ministry of Finance and Economic Development (MoFED) has obtained a grant of US$495,000 from the Japanese government (a PHRD Grant) for the preparation of a Local Investment Grant (LIG) operation. The objectives of this operation are to:

1. increase capital investment at the local government level for more efficient and effective service delivery; and
2. strengthen the decentralization process to local government through existing government financing channels for an array of sectoral investments based on local needs and priorities

LIG is being designed as a specific purpose grant which would be transferred from the Federal Government through the regions to local governments, to finance capital investments in eligible woredas and municipalities. Investments would include all activities that are within the jurisdiction of local governments, e.g. health posts, primary schools, water supply, rural roads, drainage, etc.