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AFRICAN DEVELOPMENT FUND
PROGRAMME: PROMOTING BASIC SERVICES (PBS - III)
COUNTRY: FEDERAL DEMOCRATIC REPUBLIC OF
ETHIOPIA
APPRAISAL REPORT
Date: July 2012
Appraisal
Team
Team Leader:
Co-Team Leader
Team Members:
Sector Managers:
Resident Representative:
Sector Directors:
Regional Director:
Victor C. NDISALE, Chief Governance Expert, OSGE.2/EARC
Mulle CHIKOKO, Principal Social Protection Officer, OSHD/1
Peter MWANAKATWE, Chief Country Economist, ETFO
Justin, MURARA, Chief Socio-economist, OSHD.1
Frank MVULA, Chief Regional Procurement Coordinator, EARC
Francis MKANDAWIRE, Principal Reg. Fin. Mgmt. Coordinator, EARC
Tonaina NGORORANO, Principal Governance Expert, OSGE.2
Caroline JEHU-APPIAH, Principal Health Economist, OSHD.3
Brenda Akinyi ALUOCH, Principal Legal Counsel, GECL.1
Maria T. M. MDACHI, Senior Education Analyst, OSHD.2
Edward GONDWE Senior Governance Officer, OSGE.2
Admit Zerihun, Macro-economist, ETFO
Rosemond OFFEI-AWUKU, Young Professional, OSHD.1
Ezzeddine LARBI, Consultant, OSHD.0
Jacob D. MUKETE, OSGE.2
Mohamed YOUSSOUF, OSHD.1
Lamin BARROW, ETFO
Isaac LOBE-NDOUMBE, OSGE
Agnes SOUCAT, OSHD
Kupukile MLAMBO, OREB
Peer
Reviewers
Internal reviewers:
External reviewers:
Eshetu LEGESSE, Chief Financial Management Specialist, ORPF.2
Michel MALLBERG, Chief Macro-economist, OSGE.2
Suwareh DARBO, Principal Country Economist, OREB
Budali ISSAHAKU Principal Socio-Economist, OSHD.1
Joseph MUVAWALA, Principal Education Specialist, OSHD 2
Robert CHASE, Lead Social Protection Economist, World Bank, Ethiopia
Peter HAWKINS, Human Development Team Leader, DFID, Ethiopia
Bizuwork KETETE, Senior Governance Programme Manager, Irish Aid,
Ethiopia
TABLE OF CONTENTS
Acronyms and Abbreviations .................................................................................................... ii
Loan Information ...................................................................................................................... iv
Executive Summary ................................................................................................................... v
I. THE PROPOSAL ................................................................................................................... 1
II. COUNTRY AND PROGRAMME CONTEXT ................................................................... 2
2.1 Overall Development Strategy and Medium-Term Reform Priorities ........................... 2
2.2 Recent Political, Economic and Social Developments, Perspectives, Constraints and
Challenges .................................................................................................................................. 3
2.3 Bank Group Portfolio Status ........................................................................................... 8
III. RATIONALE, KEY DESIGN ELEMENTS, AND SUSTAINABILITY .......................... 9
3.1 Link with the CSP, Analytical Underpinnings and Country Readiness Assessment ..... 9
3.2 Collaboration and Coordination with other Development Partners ............................................ 9
3.3 Outcomes of Past and On-going Similar Operations and Lessons ............................... 10
3.4 Relationship to On-going Bank Operations .................................................................. 10
3.5 Bank’s Comparative Advantage and Value-added ....................................................... 11
3.6 Application of Good Practice Principles on Conditionality ......................................... 11
3.7 Application of ADB policy on non-concessional borrowing ....................................... 11
IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS .................................. 12
4.1 Programme Goal and Purpose ...................................................................................... 12
4.2 Programme Components, Operational Objectives and Expected Results .................... 12
4.3 Financing Needs and Arrangements ............................................................................. 16
4.4 Sustainability................................................................................................................. 17
4.5 Beneficiaries of the Programme.................................................................................... 17
4.6 Impact on Gender .......................................................................................................... 18
4.7 Environmental Impact ................................................................................................... 18
V. IMPLEMENTATION, MONITORING AND EVALUATION ........................................ 18
5.1 Implementation Arrangements...................................................................................... 18
5.2 Monitoring and Evaluation Arrangements.................................................................... 19
VI. LEGAL DOCUMENTATION AND AUTHORITY ........................................................ 19
6.1 Legal Documentation .................................................................................................... 19
6.2 Conditions Associated With Bank’s Intervention......................................................... 19
6.3 Compliance with Bank Group policies ......................................................................... 20
VII. RISK MANAGEMENT ................................................................................................... 20
VIII. RECOMMENDATION ................................................................................................ 21
i
List of Appendices
Appendix 1 – Letter of Development Policy
Appendix 2 – Eligibility Criteria
Appendix 3 – PBS III Contribution to Social Sectors
Appendix 4 – IMF Press Release
Appendix 5 - GoE’s Policies to Curb Inflation
List of Tables
Table 1: Results Based Logical Framework x
Table 2: Ethiopia: Key Macroeconomic Indicators 4
Table 3: PBS – III Linkages with GTP and the Bank’s CSP 9
Table 4: Trends in Block Grants and PBS Donor Funds 16
Table 5: Fiscal Indicators, 2009/10-2014/15 16
Table 6: Risk and Mitigation Measures 20
List of Technical Annexes
Annex 1 – Selected Macroeconomic Indicators Annex 2 - Ethiopia Comparative Socioeconomic Indicators Annex 3 - PEFA Performance Indicators Annex 4 - PBS Performance Assessment Framework Annex 5 - Lessons Learnt from Implementation of PBS I & II and related Improvement in
the Design of PBS III
Annex 6 - Changing Priorities of PBS
Annex 7 - Decentralisation in Ethiopia Annex 8 - Fiduciary Risk Assessment
Annex 9 - A Summary of Selected Results of Phases I and II of the Protection of Basic Services Annex 10 - Overview of Governance Indicators and Competitiveness Annex 11 - Progress Towards Achieving the MDGs Annex 12 - ADB On-Going Operations in 2011/2012 Annex 13 - PBS III Results Framework Annex 14 - Federal Block Grant Transfer to Regions
Annex 15 - Map of Ethiopia
List of Graphs
Graph 1: Real GDP Growth (%) 3
Graph 2: Inflation Rate: Simple and
Moving Averages 4
Currency Equivalents
(As of June 2012)
1 UA = ETB 27.0959
1 UA = US$ 1.51026
1 US$ = ETB 17.9412
Fiscal Year
July 8 – July 7
ii
Acronyms and Abbreviations
ADF African Development Fund
AFRITAC Africa Technical Assistance Centres
AFS Annual Financial Statement
APR Annual Progress Report
BoFED Bureau of Finance and Economic Development
CIA Certified Internal Auditor
CIFA Country Integrated Fiduciary Assessment
COPCU Channel One Programme Coordination Unit
CPIA Country Policy and Institutional Assessment
CPAR Country Procurement Assessment Report
CPPR Country Portfolio Performance Review
CSA Central Statistical Agency
CSI Core Sector Indicators
CSO Civil Society Organization
DBSL Development Budget Support Lending
DFID Department for International Development
DLDP District Level Decentralisation Programme
DP Development Partner
DSA Debt Sustainability Analysis
DQAF Data Quality Assurance Framework
EFY Ethiopian Financial Year
EMCP Expenditure Management and Control Programme
EMIS Education Management Information System
EPRDF Ethiopian People’s Revolutionary Democratic Front
ESF Exogenous Shocks Facility
ETB Ethiopian Birr (currency)
ETFO Ethiopia Field Office of the African Development Bank
EU European Union
FDI Foreign Direct Investment
FGD Focus Group Discussions
FPPA Federal Public Procurement and Property Administration Agency
FTA Financial Transparency and Accountability
FTAP Financial Transparency Accountability Perception Survey
FY Financial Year
GDP Gross Domestic Product
GRM Grievance Review Mechanism
GTP Growth and Transformation Plan
HDI Human Development Index
HMIS Health Management Information System
HEWs Health extension workers
IBEX Integrated Budget and Expenditure System
IFAG International Financial Accounting Guidelines
IFMIS Integrated Financial Management Information System
IFR Interim Financial Reports
IIA Institute of Internal Auditors
iii
IMF International Monetary Fund
JBAR Joint Budget & Aid Review
JRIS Joint Review and Implementation Support
MDGs Millennium Development Goals
MEFF Macroeconomic and Fiscal Framework
MIC Middle Income Country
M&E Monitoring and Evaluation
MoFED Ministry of Finance and Economic Development
MOH Ministry of Health
NAO National Authorising Officer
NBE National Bank of Ethiopia
OFAG Office of the Federal Auditor General
ORAG Office of the Regional Auditors General
PAD Project Appraisal Document
PASDEP Plan for Accelerated and Sustained Development to end Poverty
PBL Policy Based Loan
PBOs Programme Based Operations
PBS Protection of Basic Services
PCR Project Completion Report
PEFA Public Expenditure and Financial Accountability
PFM Public Financial Management
PFR Public Finance Review
PFMC Procurement and Public Financial Management Committee
PPPs Public Private Partnerships
PRSP Poverty Reduction Strategy Paper
PSCAP Public Sector Capacity Building Programme
RBCSP Results-based Country Strategy Paper
S-N Sub-national
SNNPR Southern Nations, Nationalities, and Peoples Region
T-Bills Treasury Bills
TSA Treasury Single Account
TVET Technical and Vocational Education and Training
UA Unit of Account
WCPB Woreda Community Planning and Budgeting
iv
Loan Information
CLIENT’S INFORMATION
Borrower
Federal Democratic Republic of Ethiopia
Executing Agency
Ministry of Finance and Economic
Development
FINANCING PLAN
Source Amount (Million UA)
Share (%)
Instrument
African Development Fund 166.00 7.4
Loan
World Bank 397.28 17.7 Loan
DFID 307.97 13.8 Grant
EU 41.06 1.8 Grant
Austria 1.64 0.1 Grant
Italy 8.66 0.4 Loan
Other 169.54 7.6 Grant
Government Contribution 1,146.16 51.2 n.a
Total Cost 2,258.30 100
ADF’s KEY FINANCING INFORMATION
Loan currency
UA
Service Charge 0.75% yearly on amounts disbursed and not
yet repaid
Commitment Fee 0.5% yearly on undisbursed loan amount,
beginning to run 120 days after the signing
of the loan agreement
Tenor 50 years including the 10-year grace period
TIME FRAME - MILESTONES
Bank Programme Board Consideration July 2012
Effectiveness July 2012
Indicative First Tranche Disbursement July 2012
Indicative Second Tranche Disbursement July 2013
Indicative Last Tranche Disbursement July 2014
Completion July 2015
v
Executive Summary
Programme
Overview
Programme Name: Ethiopia – Promoting Basic Services (PBS - III)
Geographic Scope: Countrywide
Overall Timeframe: Three fiscal years: FY2012/13 to 2014/15
Programme Cost: UA166.00 million (to be disbursed in three tranches)
The objective of the programme is to contribute to reducing poverty and improving the standard
of living of Ethiopians by expanding access and improving the quality of the decentralised
delivery of services in education, health, agriculture, water supply and sanitation; and rural roads
while continuing to deepen local accountability and transparency in basic service delivery. There
is a critical link between the two selected components of the PBS III since more robust PFM
systems and structures would enhance delivery of quality basic services.
Program
Outcomes
The expected programme outcomes1 are (i) primary completion rate increase from 49.4% to 64%;
(ii) maternal mortality ratio down from 470 to 367; (iii) agricultural productivity for major food
crops increased from 15 quintal per hectare to 20; (iv) average time to nearest all-weather roads
reduced from the current 4.5 hours to 1.6 hours; (v) access to potable water supply increased from
71.3% to 92%; (vi) budget and financial reports generated using IBEX increased to 300 from 0;
(vii) increased external audit coverage at woreda level from 24% to 40%; (viii) procurement
performance and compliance audits have been rolled out in 50% of woredas; (ix) citizens who are
informed about woreda budget increased from 19% to 23%, and; (x) citizens who report that
woreda officials have sought the views of people on improving quality of basic services increased
to 50% from 48%.
Needs
Assessment
Overall PBS regional block grants have increased since FY 2006/07, which reflects the
Government’s commitment to ensuring smooth implementation of the PBS as well as its
decentralisation strategy. Over the last six years, DPs’ share in the regional block grants has been
declining in relative terms. The programme is needed now to consolidate the gains made under
the Bank’s previous programmes PBS I and II thereby contributing towards reaching MDG goals.
The PBS III will provide needed resources to safeguard and scale up expenditures on pro poor
basic services. In addition, it will help in maintaining macro stability by easing pressure on
domestic borrowing.
Bank’s Added
Value
The Bank is a major DP providing earmarked budget support to Ethiopia and areas of intervention
under the programme are those where the Bank continues to exercise a leadership role in its
Regional Member Countries. The Bank has gained significant experience from the
implementation of PBS I and PBS II and as such has consolidated its comparative advantage
which is derived from: (i) flexibility in responding to the need for financial resources to meet
financing gaps, (ii) ability to leverage its budget support with policy development and institutional
building actions to respond to capacity challenges in PFM and pro-poor spending priorities; and
(iii) the Bank’s enhanced presence in the country. ETFO will continue to coordinate with GoE,
through MoFED and other development partners and jointly monitor programme implementation
within the Joint Review and Implementation Support/Joint Budget & Aid Review (JRIS/JBAR) framework.
Institutional
Development
and Knowledge
Building
The programme will contribute to institutional development and knowledge building in the
area of PFM reform and strengthening transparency and social accountability in basis services
delivery in the context of decentralisation. The Bank will also undertake a study on Domestic
Revenue Mobilisation with a view to supporting policy dialogue on improving domestic
resources mobilisation for enhanced basic service delivery and sustainability of the PBS.
Furthermore, a flagship study on promotion of sustainable innovative approaches in the
delivery of decentralised basic services in Ethiopia will be undertaken. The Bank will capture
and disseminate lessons learned and good development practices from this operation through
careful monitoring and evaluation of the programme implementation, JRIS/JBAR reviews,
and Programme Completion Report to inform policy dialogue and programming going
forward. The Bank is also undertaking analytical work on the legal and institutional
framework for setting up of Public Private Partnerships (PPPs) in Ethiopia that could assist in
easing the pressure emanating from mega infrastructure projects competing for public
resources.
1 Baseline of 2011 and target of 2014
vi
Table 1: Results Based Logical Framework2
RESULTS CHAIN
PERFORMANCE INDICATORS MEANS OF
VERIFICATION
RISKS/MITIGATION
MEASURES Indicator Baseline
2011
Target
20
IMP
AC
T
Impact: Reduced poverty and
improved standard of
living of Ethiopians
GDP annual growth rate 11.4% 11.2%3 by
2014 GTP and MDG
annual progress
reports, Household
Income,
Consumption and
Expenditure Survey
(HICES) reports
#1 Macroeconomic/External shock
Risk: Ethiopia’s vulnerability to external
shocks such as the global financial crisis, droughts, and hunger that inter alia
induce high inflation.
Mitigation: Government continued
implementation of fiscal and monetary policies and its good track record of
implementing important economic
reforms to stabilise the economy and enhance fiscal discipline; and continued
implementation of budget support
operations and enhanced domestic revenue performance.
#2: Deterioration in Political
Governance Risk: Political distortions
in PBS resource allocations leading to
suspension of the PBS instrument.
Mitigation: Resource utilisation is
targeted using the inter-governmental fiscal transfers’ formula to monitor the
extent to which government and PBS
resources are allocated and used fairly and equitably.
#3: Competing Demands on
Government Public Resource: Government’s commitment to the PBS
Programme might be reduced due to competition for public funds arising from
mega federal infrastructure projects
envisaged under the GTP.
Mitigation: GoE has shown strong
commitment in supporting pro poor expenditures, with block transfers at the
core of this effort. In addition, the
JRIS/JBAR reviews and analysis will assure early detection of potential
problems and development of common
solutions.
#4: Weak Institutional Capacity: weak
institutional capacity at regional and
woreda level could undermine the implementation of PFM reform
programme.
Mitigation: Continued implementation
of the integrated PFM reform programme
through capacity building for budgeting
and financial reporting to improve
fiduciary environment.
#5: Unfavourable CSO regulatory
environment :Restrictive rules and procedures governing civil society could
undermine PBS operation
Mitigation: Dialogue with government
through the steering committee on social
accountability and High Level Forum to
Population below
poverty line (%). 29.6% 22.5% by
2014
OU
TC
OM
ES
Outcome 1: Expanded
and enhanced access to quality basic services at
the local (Woreda) level
through block grants
GTP and MDG annual
progress reports
Welfare Monitoring
System Reports
JRIS/JBAR Mission
Reports
Sector Monitoring
Reports
DHS Reports
1.1 Improved access to quality primary
education
1.1.1 Primary completion rate
(grade 8)
male
female
49.4%
52.5%
46.2%
64% by 2014
63% by 2014
64% by 2014
1.2 Improved access to
Health care 1.1.2 Maternal
Mortality Ratio (number per
hundred thousand)
470
367 by 2014
1.3 Improved access to agricultural extension
services
1.1.3 Agricultural productivity for
major food crops (in
quintal per ha)
15 20 by 2014
1.4 Improved access to roads
1.1.4 Average time to nearest all-
weather road (in
hours)
4.5
1.6 by 2014
1.5 Improved access to
water 1.1.5 Access to
potable water
supply (rural)
71.3% 92% by 2014
Outcome 2:
Strengthened accountability and
transparency in the use
of public resources
2.1 Improved public
financial management
and procurement
2.1.1 Number of
budgets and
financial reports generated by using
IBEX 2.0
0 300 by 2014
PEFA/JRIS/JBAR
Review Reports
2.1.2 % of external
audit coverage 24% 40% by 2014
2.1.3 Woredas
where procurement
performance and compliance audits
have been rolled out
0%
50% by 2014
2.2 Increased Financial Transparency and
Accountability (FTA)
and Social
Accountability
mechanisms
2.2.1 Citizens who are informed about
Woreda budget
(disaggregated by
gender)
19% 23% by 2014 Citizen score card
Citizens report
Impact Evaluation
Reports. Social audit
reports SA programme
Management Agent report
2.2.2 Citizens who
report that Woreda officials have
sought the views of
people on improving quality
of basic services.
(disaggregated by gender)
48% 50% by 2014
2 The targets are as agreed between the Government and development partners and are consistent with the GTP targets 3 This represents the average % GDP growth rate during this period, as reflected in the GTP
vii
RESULTS CHAIN
PERFORMANCE INDICATORS MEANS OF
VERIFICATION
RISKS/MITIGATION
MEASURES Indicator Baseline
2011
Target
20
OU
TP
UT
S
Component 1: Basic services block grant review existing CSO Law. The
Government has provided assurance that
social accountability activities will not be affected by this Law
Output 1 : Adequate
local budgets for
communities basic service requirements
through increase in
federal block grants to regional and woreda
levels
Total amount of
block grants
allocated to regions and
woredas per year
ETB 23.6
billion
ETB 92
billion by
2013
IFMIS Reports
Revised Federal
block grant
allocation formula
(Trigger)
Inadequate
block grant
formula
Revised
forumal by
2013
Approved revised
formula
Output 2: Improved quality of basic services
in health, education,
agricultural extension services, rural roads,
and water and sanitation
at the local level
Percentage of qualified primary
school teachers by
gender (CSI)
47.2% 72% by 2013 EMIS Reports
Ratio of health
extension workers
to population
1:2,578 1:2500 by
2013 MOH HMIS reports
Development agents with
specialisation on
agro-ecological zones
5130 39,000 by 2013
MoA Annual Reports
Woreda road
desks with
appropriate staff
155 390 by 2013 Roads Sector reports
Reduced non-
functioning water supply schemes
20% 14% by 2013 MoWE
Component 2: Strengthened local accountability and Transparency systems
Output 1: Improved
performance and
reporting of financial management and
procurement in Woredas
Development of
comprehensive
Public Financial Management
action plan
(Trigger/CSI)
No PFM
Action Plan
Completed
by end 2012
JRIS/JBAR Review reports
No of woredas
where IBEX is effectively rolled
out
0 734 by 2013
% Audit findings
followed up at woreda level
6% 30% by 2013
% of woreda’s by region with
operational
procurement functions
0% 15% by 2013
Output 2: Strengthened
citizen engagement to
enhance economic governance at sub-
national level.
No of Woredas
that post budget
and expenditure template for the
public
70 80 by 2013 JRIS/JBAR
Reports
Bi-annual progress
report
No of Woredas where PBS SAIPs
facilitate use of
Social Accountability
tools
50 100 by 2013
SAIP Woredas that have
developed joint
action plans for service quality
improvement
based on interface meetings between
service users and
0 70 by 2013
viii
RESULTS CHAIN
PERFORMANCE INDICATORS MEANS OF
VERIFICATION
RISKS/MITIGATION
MEASURES Indicator Baseline
2011
Target
20
providers
Submission of
updated Social Accountability
interim report
(Trigger)
Report is out
of date
Report
submitted by June 2012
Number of regional level
GRM that conform to agreed
standard of
grievance procedures and
handling
2 10 by 2013
KE
Y A
CT
IVIT
IES
(a) COMPONENTS:
(b)
Component 1: Basic services block grant
Component 2: Strengthened local accountability and
Transparency systems
INPUTS
Development Partners financial resources, including ADF Loan of UA 166
million
GoE Funding
JRIS / JBAR Missions for supervision and policy dialogue
Existing capacity building project for PFM and FTA federal, regional and woreda levels and for monitoring and evaluation
Multi-donor support to Integrated Public Financial Management Reform
Programme
Financial support for the PBS Secretariat
1
REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE AFRICAN
DEVELOPMENT FUND TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN
TO THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA TO FINANCE THE
PROMOTING BASIC SERVICES PROGRAMME (PBS - III)
I. THE PROPOSAL
1.1 Management submits the following proposal and recommendation for a loan of UA
166 million to the Federal Democratic Republic of Ethiopia to finance the Promoting Basic
Services Programme (PBS - III). This is the Bank’s fourth budget support operation in
Ethiopia. The operation has been jointly designed with the Government and other PBS Donors
and will be implemented over three fiscal years, FY 2012/13 to 2014/15. The programme was
appraised on the basis of discussions with the Government of Ethiopia (GoE), Development
Partners (DPs) and civil society organisations (CSOs). The programme is aligned with the
country’s 2010/11-2014/15 Growth and Transformation Plan (GTP) (in particular pillars 5 and
64) and it will support the implementation of activities prioritised by this plan. In addition, the
programme is consistent with Pillar II of the Country Strategy Paper for the period 2011 to 2015,
which prioritises enhancing access and accountability in basic services delivery with a focus on
measuring results and aid effectiveness principles. The significant results achieved under PBS I
and II are summarised in Technical Annex 9.
1.2 The purpose of the operation is to support the GoE in its efforts to reduce poverty and
improve the standards of living of Ethiopians. In this context, the operational policy
objectives focus on: (i) expanding access and improving the quality of decentralised basic
services in education, health, agriculture, water supply and sanitation and rural roads by
contributing to block grants and; (ii) strengthening local systems by supporting improved
financial transparency and accountability systems and social accountability at the decentralised
level. The latter is divided into two sub components: (i) Public Financial Management (PFM)
and; (ii) citizens’ engagement at the sub-national level. A distinguishing feature of this third PBS
program is the way in which it aims to strengthen the linkages between the demand and supply
side of governance, by better mainstreaming social accountability mechanisms and supporting
government systems to be more responsive to citizens’ needs.
1.3 The PBS III will provide needed resources to safeguard and scale up expenditures
on pro-poor basic services. In addition, it will help in maintaining macroeconomic stability by
easing pressure on domestic borrowing. The programme, which is articulated within the Letter of
Development Policy (Appendix 1), will support the GoE to sustain the gains in basic service
delivery and contribute towards strengthening sub-regional accountability and transparency
systems. This is expected to be achieved by deepening PFM reforms, and strengthening citizen’s
engagement in quality basic service delivery.
4 GTP pillars: i) sustaining faster and equitable economic growth; ii) maintaining agriculture as a major source of economic
growth; iii) creating favourable conditions for the industry to play a key role in the economy; iv) enhancing expansion and quality
of infrastructure development; v) enhancing expansion and quality of social development; vi) building capacity and deepening
good governance; and vii) promoting women and youth empowerment and equity.
2
II. COUNTRY AND PROGRAMME CONTEXT
2.1 Overall Development Strategy and Medium-Term Reform Priorities
2.1.1 Ethiopia’s strategic development agenda is articulated in the GTP. The GTP has as
its overarching goal: sustaining the rapid, broad-based and equitable economic growth path
witnessed during the past several years and significantly ending poverty. It is anchored on four
main objectives: (i) maintaining at least 11% average annual growth rate and attaining
Millennium Development Goals (MDGs); (ii) expanding and ensuring quality of education and
health services and achieving the MDGs in the social sector; (iii) establishing suitable conditions
for sustainable nation-building through the creation of a stable democratic and developmental
state and; (iv) ensuring growth sustainability by fostering a stable macro-economic framework.
Although the GoE’s targets in the GTP are ambitious, Government is committed to their
realisation. Through PBS III the Bank will contribute towards the achievement of these
objectives in the medium and long term.
2.1.2 To consolidate the gains achieved in the basic services sectors and deepen
transparency and accountability, GoE has continued to pursue public sector reforms for
effective and responsive public service delivery. In PFM, the Government has since 2002 been
implementing reforms under the Expenditure Control Management Programme (EMCP) and the
Public Sector Capacity Building Programme (PSCAP), which are two of the five sub-
programmes of the Civil Service Reform Programme. Reforms under the EMCP have
concentrated on: (i) strengthening of PFM systems and processes, including medium-term
program-based budgeting; (ii) budget execution; (iii) internal controls and audit; (iii) cash
management; (v) accounts reforms and; (vi) computerised financial management information
system (IBEX). In order to strengthen and deepen PFM reforms, the Government has with
assistance from DPs embarked on the elaboration of a PFM Reform Action Plan. In addition,
GoE is undertaking significant actions to improve equity in the allocation of federal resources to
regions and woredas (districts) by revising the existing federal subsidy grant sharing formula
which will guide the block grant allocation for at least three years, effective 2012/13 fiscal year.
2.1.3 Decentralisation has been one of the cornerstones of GoE’s development agenda
since the early 1990s, and is rooted in the federal constitution. The instruments for
implementing decentralisation were defined in the 2004 Fiscal Decentralisation Strategy with
block grants as the main instrument. The first and second waves of decentralisation were
initiated in 1994 and 2002 by devolving firstly to the regional governments and secondly to the
woreda (district) administration respectively. Fiscal federalism is an important facet of the
decentralisation process in Ethiopia and is aimed at addressing the vertical and horizontal fiscal
imbalances among the Federal, regional and woreda levels. This strategic priority for
Government has helped guide the design of PBS. Thus, PBS has had at its core the promotion
and protection of quality basic services, defined as education, health, agriculture, water supply
and sanitation and rural roads, while deepening transparency and accountability.
2.1.4 As part of the Civil Service reforms programme, in 2005 GoE undertook the
Business Process Re-engineering Reform with the aim of achieving effective and efficient
public sector service delivery outcomes. A notable aspect of this is the Citizen’s Charter which
aims at providing the framework that increases public awareness on services provided by
government; improving accountability; and promoting transparency in basic service provision to
communities. Further, the enactment of the charities and societies act of 2009 has provided the
legal underpinnings for all CSO activities. Nevertheless, the proclamation is perceived as
3
restricting CSO’s contribution to social and economic development5. The GoE’s commitment to
promoting citizens participation as expressed in the GTP presents building blocks for fostering
citizen’s role in enhancing transparency and accountability in basic service delivery thereby
promoting achievement of MDG goals.
2.2 Recent Political, Economic and Social Developments, Perspectives, Constraints and
Challenges
Political context
2.2.1 The last national elections in Ethiopia were held in 2010, and the ruling party, the
Ethiopian People’s Revolutionary Democratic Front (EPRDF) emerged as the winner with
an overwhelming majority. The elections were peaceful and the political environment has since
remained stable. The EPRDF Government has in the GTP committed to strengthening the
democratic system of governance and to advance the decentralisation process. However, there is
growing concern among some stakeholders, including the opposition and the media, that the
political space in Ethiopia is narrowing.
2.2.2 Ethiopia occupies a strategic geo-political position in the Horn of Africa, and is
playing a vital role in efforts to enhance regional security as part of a coordinated
response. After withdrawing from Somalia some years ago, Ethiopia joined Kenya in the peace
keeping mission in Somalia in late 2011. The instability in Somalia has persisted and continues
to pose a major security threat to Ethiopia and the wider region. Furthermore, relations with
Eritrea remain tense.
Economic Context
2.2.3 For eight consecutive years, Ethiopia’s economy has enjoyed robust growth, driven
primarily by government led development
policies focused on public investment in
infrastructure, commercialisation of
agriculture and expansion of non-traditional
exports. Real GDP Growth averaged 11.3%
for the period FY 2004/05–2010/11,
significantly higher than the minimum of 7%
required to meet the income poverty MDG.
Under the GTP, a minimum growth rate of
11% is targeted, with a view to accelerating the
attainment of MDGs and achieving Middle
Income Country (MIC) status by 2025.
Source: AfDB/MOFED, May 2012
2.2.4 Ethiopia’s exports have surged in recent years despite the slow-down in the global
economy. In FY 2010/11, exports grew by 38% in value which together with the increase in
private transfers and FDI led to improvement in the current account and the rebound in foreign
exchange reserves. On the fiscal side, the GoE has maintained a prudent fiscal policy stance to
ensure macro stability. The fiscal deficit declined from 2.9% of GDP in FY 2007/08 to 1.6% in
5 The Charities & Societies Act restricts foreign funding of CSOs involved in advocacy work and has imposed a 30 % cap on
administrative costs. In PBS II, Government provided donors an assurance that the Charities & Society Law will not hinder
smooth implementation of social accountability activities. The DAG and Government review regularly the impact of the CSO
Law as part of the High Level Forum.
-5
0
5
10
15
2003 2004 2005 2006 2007 2008 2009 2010 2011
Graph 1: Real GDP Growth (% )
Ethiopia East Africa Africa
4
FY 2010/11 due in part to strong revenue mobilisation performance on account of enhanced tax
administration and tax reforms.
2.2.5 The period of high economic growth and strong export performance has, however,
been characterized by macroeconomic imbalances, notably high inflation. In FY 2007/2008,
end of period inflation accelerated to 64% in July 2008, and reserves plummeted to 1.2 months
of imports. The adverse macroeconomic situation was partly induced by the global financial,
economic and food crises, exacerbated by demand pressures due to high growth and the surge in
public sector borrowing for infrastructure investment. GoE responded through fiscal and
monetary tightening, as well as administrative measures. The macroeconomic adjustment efforts,
which were supported by the International Monetary Fund (IMF) under the 15 months
Exogenous Shocks Facility (ESF) were successful in restoring macroeconomic stability. After a
short period of relative price stability, inflation re-emerged as from the second half of FY
2010/11 and reached 40.1% in August, 2011, from 2.1% the previous year, underlining the
fragility of Ethiopia’s macro-economic framework.
Table 2: Ethiopia: Key macroeconomic indicators (% of GDP, unless otherwise indicated)
2006/07 2007/08 2008/09 2009/10 2010/11
Real GDP growth 11.8 11.2 10.0 10.6 11.4
Consumer prices (% moving avg)
aveave.)
15.8 25.3 36.4 2.8 18.1
Fiscal deficit, excl. grants 8.0 6.9 5.2 4.9 4.8
Fiscal deficit, incl. grants 3.6 2.9 0.9 1.7 1.6
Current account deficit, incl. grants 4.4 5.7 5.1 4.1 3.1
External debt/GDP (%) 11.9 10.3 12.9 12.9 25.3
Usable gross official reserves
(months of imports)
1.9 1.2 1.9 2.1 2.3
Source: AfDB, MoFED, June 2012
2.2.6 Graph 2 depicts the recent trends in inflation. Although global commodity price
shocks have been a contributory factor, expansionary monetary policy, has played a
prominent role in driving inflation. For instance, reserve money, which serves as the monetary
policy anchor, surged by 41% in FY 2010/11 triggered by monetisation of the fiscal deficit. The
rapid accumulation of foreign exchange reserves
which reached 3.1 months of import cover in July
2011, contributed to liquidity expansion in the
absence of adequate sterilisation policy tools.
2.2.7 During the past one year, the GoE has
taken bold policy measures to bring down
inflation. The key macro stabilisation measures
being undertaken by the GoE are highlighted in
Appendix 5. The preliminary findings of the IMF
mission that ended on June 13th
, 2012 indicate
that GoE’s monetary and fiscal policy tightening
has led to a Source: AfDB/MOFED, June 2012
deceleration in inflation (see Appendix 4). However, implementation of these policies will need
to be maintained if single digit inflation is to be achieved. More broadly, the Government will
need to balance high growth with macro stability and ensure sustainable domestic financing of its
ambitious GTP plans while ensuring stability of its financial sector and protecting its foreign
exchange reserves.
5
2.2.8 According to the 2010/11 Debt Sustainability Analysis (DSA), Ethiopia’s external
debt stock is increasing largely due to the surge in public enterprises external borrowing.6
The DSA indicates that the Present Value of debt to GDP and Debt to Exports ratios are
projected to rise from 13.5% and 119.1% in 2010 to 18.3% and 129% respectively in 2012,
before declining in subsequent years. Despite the increase, the external debt indicators remain
within the thresholds and Ethiopia’s risk of debt distress was lowered from moderate to low.
Nonetheless a comprehensive monitoring of both external and domestic public debt will help
maintain debt sustainability7.
Macroeconomic Dialogue
2.2.9 Although the GoE has no programme with the IMF, it will continue to rely on the
IMF’s policy advice to ensure the maintenance of macro stability. At the same time, the GoE
has reaffirmed commitment to engage the wider Donor Group on broad macroeconomic policy
issues which form part of the overall implementation context for Donor funded Programmes,
including PBS. The dialogue will be conducted through the Macro Group within the DAG and
the High Level Forum (HLF).8 The Macro Group, which is at a technical level, will feed into the
HLF. Furthermore, the Government has agreed to sharing macro data and to conducting
quarterly technical discussions with major PBS Donors on measures to contain inflation. The
Joint Budget Aid Review (JBAR) will continue to provide a platform for joint analytic work
around fiscal, aid and longer term issues of fiscal sustainability and value for money to inform
the policy dialogue.9
Social Developments
2.2.10 Ethiopia has achieved significant gains in poverty reduction and all aspects of
human development. It is among the few countries in Sub-Sahara Africa making the fastest
progress towards the MDGs (see Technical Annex 11). The Government’s commitment to
sustain and promote inclusive growth through pro poor policies and poverty focused spending
has led to substantial progress in improving access to basic services and significant gains in
social indicators. Overall, Ethiopia is on track to meet 5 MDGs (1, 2, 4, 6 and 8) and likely to
meet the other 3 MDGs (3, 5 and 7). The infant mortality rate (per 1,000 live births) declined
from 123 in 2004/05 to 88 in 2010/11. The number of health posts also increased from 4,211
(2005) to 14,416 (2010) and health centres from 519 (2005) to 2,689 (2010). A total of 34,382
health extension workers were deployed in rural areas in 2011 (85% of the target). Similarly,
performance in improving primary school enrolment in 2010/11 has been encouraging. The
population of students in primary school rose from 15.8 million in 2009/2010 to 16.7 million in
2010/2011. The number of primary schools (grades 1 to 8) built was 1,398, making the increase
from 26,951 in 2009/2010 to 28,951 schools in 2010/2011. Thus primary school enrolment rates
increased from 82.1% in 2009/10 to 85.3% in 2010/11. Furthermore the completion rate of
students at grade 8 increased from 47.8% in 2009/2010 to 49.4% in 2010/2011. These
improvements have resulted from the expansion in education and health facilities and staffing,
6 See IMF, 2010, Article IV Consultation and 1st Review of Arrangement under ESF, Washington DC.. External Debt/GDP ratio
increased from 18 % in 2009/10 to 20.5 % in 2011/12 7 According to IMF press Release, June 2012 8 The Macro Group is a donor only technical group while the HLF involves Heads of Donor Agencies and is a joint platform that
the DAG uses to engage in higher level policy dialogue with senior Government officials. There are plans to transform the Macro
Group into a joint working group structure with Government participation. 99
Prior to the November, 2011 JRIS, MoFED had agreed with key PBS donors to share macro data and on a structure of regular
macro discussions on measures taken to reduce inflation. The first quarterly macro exchange between MoFED and key PBS
Donors took place in November, 2011 and since then meetings have been regularized.
6
including teachers and health extension workers. The Government remains committed to
improving social indicators with particular emphasis to increasing access and quality of basic
services as reflected in the GTP with the woreda as the platform for achieving these objectives.
2.2.11 Despite these achievements, human development indicators are still low in
comparison with other developing countries. Ethiopia ranks 174 out of 187 countries
according to the United Nations Human Development Index (2011). It is, therefore, vital to
continue improving the MDGs particularly maternal mortality which remains high at 470 per
100,000 live births and further aggravated by very low (10%-2011) skilled attendants at delivery.
In addition, the quality of basic service delivery remains low and regional disparities persist
especially in the emerging Regional State. The poverty head count10
is high at 29.6% in 2010/11,
notwithstanding the significant decline from 38.7 % in 2004/05. Similarly, the national Gini
Coefficient of 0.29 shrouds significant variations of geographical inequality which still remains
higher in urban areas despite a marked decline from 0.44 in 2004/05 to 0.37 2010/11, while it
increased marginally in rural areas from 0.26 to 0.27 over the same period. The decline in
poverty and inequality is attributable to the recent developments in the economic and social
sectors and implementation of welfare programmes such as the productive safety net programme
and urban food distribution and subsidy. This has provided support to the vulnerable segments of
the population to enhance household resilience to shocks.
2.2.12 Ethiopia is ranked 116 out of 135 according to the Global Gender Gap Report
(2011), demonstrating progress from 122 in 2009, in gender mainstreaming. This
improvement was boosted by an increase in the number of women in Parliament which rose from
12% to 28% during this period. Notwithstanding this progress, Ethiopia falls in the lower half of
the ranking for Africa and holds the global last position for literacy rate indicator (18%). The
GoE continues to show strong commitment in ensuring that both men and women participate and
benefit from development processes as stipulated in the constitution (Article 35) and the National
Gender Action Plan and the GTP. In this regard, the government has mainstreamed gender into
key sector policies and has been implementing affirmative actions to achieve gender equality. All
sectoral ministries have gender directorates that promote gender mainstreaming.
2.2.13 Unemployment and underemployment are key concerns for Ethiopia. The national
unemployment average rate of 4% masks significant variations and disparities between age
groups: Unemployment rates at 30.7% (20-24 years) and up to 20% (up to 40 years). The GoE is
however undertaking initiatives at the local level to promote micro and small enterprises
including in particular follow up on graduates by TVET institutions.
Perspectives
2.2.14 In the medium-term, the economy is expected to continue performing strongly,
which will help expand the domestic resource base, and create the space needed to finance pro
poor programmes, including decentralised basic service delivery. The GoE envisages greater
reliance on domestic resources to finance the GTP, whose estimated cost is about USD 77
billion. Due to implementation of a comprehensive tax reform and improvement in enforcement,
tax revenue collection has improved significantly, trebling since 2008/09 (see Table 5).
However, despite this strong effort, tax revenue/GDP ratio is still low at 11.3%. In order to
ensure fiscal sustainability of its pro-poor spending, the GoE has committed to scaling up
domestic resource mobilisation reforms. This should also help address concerns related to the
10 Ethiopia’s Progress Towards Eradicating Poverty: An Interim Report on Poverty Analysis Study (2010/11), March 2012.
7
sustainability of PBS, and government’s financial capacity to finance the programme.
Discussions are already underway between DPs and government authorities to determine a long
term strategy for the phasing out of donor support to PBS. Lastly, on-going policy efforts to
develop the private sector and attract foreign direct investment are also expected to contribute to
the broadening of the tax base.
Governance
2.2.15 The country’s governance indicators show mixed results (see Technical Annex 10).
While progress has been made in economic governance, challenges still remain concerning
political governance. The World Bank’s 2010 Worldwide Governance Indicators11 (WGI) shows
that out of the 213 countries surveyed, Ethiopia is within the 25th
– 50th
percentile range in three
out of the six dimensions of governance (government effectiveness, rule of law, and control of
corruption) and is below the 25th
percentile range in the three remaining dimensions (regulatory
quality, political stability/absence of violence and voice and accountability).
2.2.16 Furthermore, the 2010 Mo Ibrahim Index of African governance12
shows that
Ethiopia only scored 45.8 out of 100, (ranking 34th
out of 53 African countries), compared
to 46.1 in 2009 and 47 in 200813
. The Bank’s overall Country Policy and Institutional
Assessment (CPIA) indicators for Ethiopia dropped slightly from 3.8 in 2010 to 3.6 in 2011. As
regards the level of corruption, according to the Corruption Perception Index (CPI) of
Transparency International for 2009, Ethiopia ranked 120th (out of 183 countries), with a CPI
score of 2.7 (out of 10) in 2011 compared to 116 out of 178 countries in 2010 with a score of 2.7
out of 10. Nonetheless, under PBS II, Ethiopia has made strong progress, especially as regards
strengthening fiduciary safeguards.
Constraints and Challenges
2.2.17 Although Ethiopia has achieved notable development results underpinned by strong
and inclusive growth, it faces major development deficits and challenges which render the
gains fragile. The country’s development challenges range from a weak human capital base to
low agriculture productivity, low savings and weak infrastructure. These challenges have been
exacerbated by Ethiopia’s vulnerability to exogenous shocks, particularly droughts which cause
food insecurity among the most vulnerable segments of the population. There are also gaps in
access to quality basic services, especially in emerging regions which tend to hinder Ethiopia’s
efforts to improve the welfare of its people. Thus, continued expansion in access to basic
services to meet rising demands while improving quality, is crucial to meet the MDGs and build
the human capital required for Ethiopia to attain middle income country status (see Technical
Annex 11 on MDGs).
2.2.18 Limited fiscal space also poses a major constraint in the achievement of these
objectives. The low domestic revenue base limits the capacity of the GoE to fully meet the
financing requirements of basic service delivery. Subsequently, woreda budgets which are
funded largely from block grants are in most cases only sufficient to cover salary and part of non
–salary operational costs, which are critical to ensure quality of basic services and sustainability.
External financing thus remains important in supplementing government’s budgetary resources
11 Source: World Bank, http://info.worldbank.org/governance/wgi/index.asp, 12 Source: Mo Ibrahim Foundation, http://www.moibrahimfoundation.org/en/section/the-ibrahim-index 13 Ethiopia scored below the continental average in three of the four categories of the Ibrahim Index: Safety and Rule of Law;
Participation and Human Rights; and Human Development.
8
for decentralised basic services and other pro-poor programmes to enable Ethiopia to accelerate
progress towards the MDGs. Limited fiscal space has been compounded by the challenges that
exist in some aspects of Ethiopia’s PFM architecture, particularly at the woreda level, which are
manifested in delays in financial reporting, low quality of financial reports and weak follow up
of audit queries. Moreover, more effort is needed to institutionalise social accountability
mechanisms in order to foster greater citizen engagement in planning, financial management and
budget implementation.
2.2.19 While fiscal decentralisation has contributed to democratic governance and
improvement in basic service delivery, major challenges remain. The main instrument of the
District Level Decentralisation Programme (DLDP) is the woreda block grant which makes
resources available to woredas through transfers from regions. However, in practice woredas are
unable to fully exercise budgetary discretion as envisaged in the decentralization policy as these
transfers are not deemed adequate. This is why the GoE is expanding resource flows to the sub-
national level to deepen decentralisation and ensure that woredas effectively exercise planning
and budgeting responsibilities which were earlier accorded to the Zonal and Regional authorities
in the first wave of decentralisation. The Government has also revised the transfer formula to
foster greater equity and efficiency in resource allocation. Limited capacity and high staff
turnover at the woreda level also continues to constrain the effectiveness of governance and
fiduciary systems which are vital for improved decentralized basic services. Furthermore,
complaint handling and grievance redress mechanisms remain weak in many regions. There is
therefore need to strengthen and scale up accountability and transparency mechanisms
particularly at the regional and woreda levels to ensure provision of quality basic services.
2.3 Bank Group Portfolio Status
2.3.1 The recent improvements in the performance of the Bank Group’s portfolio in
Ethiopia are being consolidated. The 2010 Country Portfolio Performance Review (CPPR)
showed an overall rating of 2.51, compared to 2.15 in 2008. As at 30 May 2012, there are 10
on-going public sector operations in the portfolio amounting to UA 628.76 million (Technical
annex 12). The transport sector accounts for 47% by commitment value, Public Utilities (energy,
water and sanitation) for 45% and Agriculture for 8%. The disbursement rate currently stands at
32.52%, which is partly explained by the recent entry of two major infrastructure projects that
were approved in late 2011. The average age of projects currently stands at 5.3 years. Since
2010, operations have exited the portfolio mainly as a result of project completion. In addition,
there are 2 private sector operations for an amount of US$ 95 million.
2.3.2 In recent years, there has been a significant improvement in quality at entry for
new operations, which is partly attributed to the adoption of a “Readiness Filter” that
strives to ensure that new operations are better designed for smoother implementation.
Currently, there are no problem projects. Since 2008, the number of Projects at Risk has
decreased from 4 to 2 while Commitments at Risk have similarly dropped from 33% to 7%.
Gains in fiduciary compliance are also being sustained, reflected in the timely submission of
audited financial statements. These improvements notwithstanding, the portfolio continues to
experience implementation delays, as evidenced by frequent requests for extension of
disbursement deadlines for Bank’s loans and grants. A strengthened Ethiopia Field Office
(ETFO) has improved coordination with the Government and more pro-active portfolio
management and supervision activities
9
III. RATIONALE, KEY DESIGN ELEMENTS, AND SUSTAINABILITY
3.1 Link with the CSP, Analytical Underpinnings and Country Readiness Assessment
3.1.1 Link with the CSP: PBS III has been designed to support GoE in achieving the GTP
objectives. The operation is fully aligned with the Bank CSP strategic objectives, which are
articulated around two pillars: (i) support for improved access to infrastructure; and (ii) support
for enhanced access and accountability in basic services and improving the business climate.
Table 3 illustrates the alignment of PBS-III with both the GTP and the CSP.
Table 3: PBS – III Linkages with GTP and the Banks CSP
PBS III Component GTP Pillar CSP Pillar Key reforms supported by PBS
III
Basic services block
grant
Enhancing expansion and
quality of social
development
Support for enhanced access and
accountability in basic services and
improving the business climate. (Pillar 2)
Revision of block grant allocation
formula
Strengthening local
accountability and transparency systems
Building capacity and
deepening good governance
Support for enhanced access and
accountability in basic services and improving the business climate. (Pillar 2)
PFM information management
system Internal and External Audit, and Procurement, information
disclosure and engagement of
citizens in budget processes.
3.1.2 Link with Bank Group Strategies: The two components of the programme are aligned
with the GAP 2008-12. Furthermore, the programme is embedded within the overarching
framework of the Bank’s Medium Term Strategy 2008-2012 and Bank Group Policy on
Programme Based Operations.
3.1.3 Country readiness assessment: Ethiopia meets the eligibility criteria for programme
based operations (PBOs) as outlined in Appendix 2. The third phase for the PBS Programme
will assist the country to sustain the significant gains that have been made under PBS I and PBS
II.
3.1.4 Analytical work and underpinnings: The design of the budget support operation has
been guided by various diagnostic studies conducted jointly by the GoE and its development
partners and various programme progress reports. These include the Country Governance Profile
of March 2009; the Country Policy and Institutional Assessment (CPIA); the Public Expenditure
and Financial Accountability (PEFA) assessments of 2007 and 2010; the 2011 Public Finance
Review; Country Procurement Assessment Report (CPAR) of 2011, the Country Integrated
Fiduciary Assessment (CIFA) of January 2012, macroeconomic assessments of Ethiopia by the
International Monetary Fund (IMF); the 2012 Multi Annual Review of PBS Programme; the
Evaluation and Design of Social Accountability component of PBS programme; Study on
Strengthening Grievance Redress Mechanism for PBS; the fiscal decentralisation strategy; the
Multi-annual Review of the PBS Programme; and JRIS reports.
3.2 Collaboration and Coordination with other Development Partners
3.2.1 It is envisaged that the PBS III Programme will be supported by at least nine DPs14
reflecting the importance of this instrument in the overall aid architecture, and in
financing pro-poor expenditures relating to decentralised basic services. The JRIS and the
JBAR framework have proved to be effective for consolidating partnerships around the common
objectives of improving basic service delivery, as they facilitate joint reviews of federal and
14 AfDB, DFID, the European Union, Italy, World Bank, KfW, Spain, Austria, the Netherlands and Irish Aid. The World Bank’s
proposal is scheduled for Board presentation in September 2012.
10
regional expenditures and resource flows and progress in fiduciary system strengthening. These
reviews allow DPs and government to develop common solutions to identified challenges. The
PBS Donor Group, which serves as a coordinating structure, has two co-chairs one of which is
permanently held by the World Bank and the other rotates15
. ETFO has played an active role in
PBS donor activities and its contribution to the dialogue will be further strengthened by
augmenting the skills mix of the PBS team with sector experts. 16
3.2.2 To support the coordination and programme supervision activities, Donors
established a Secretariat under PBS I, which is funded from a Multi Donor Trust Fund
managed by the World Bank. The Secretariat’s core functions include the planning and
organisation of semi-annual JRIS missions which trigger disbursements, analytic work to inform
programme monitoring and dialogue, and technical support to DPs in relevant operational areas
such as financial reporting and results monitoring. The Secretariat has proved effective in
coordinating PBS activities and providing strategic support to partners, which has contributed to
the progressive improvement in the quality of the JRIS. The Bank has provided parallel support
to the Secretariat in the form of a PFM Specialist and is considering scaling up support to the
Secretariat under PBS III contingent upon availability of funds from Trust Funds.
3.3 Outcomes of Past and On-going Similar Operations and Lessons
3.3.1 Technical Annex 6 shows the intervention areas of PBS III compared to PBS I and
II, whilst highlighting the greater selectivity in the choice of priority actions and the
additionality that this third program brings. Furthermore PBS III takes into account the
lessons learnt from previous PBS operations as demonstrated in Technical Annex 5.
3.4 Relationship to On-going Bank Operations
3.4.1 There is a strong relationship between the proposed PBS Programme and other
Bank operations in the country. The proposed operation will help improve the cost-efficiency
and effectiveness of sector-based on-going Bank operations by further: improving PFM;
providing fiscal space to cover recurrent and capital expenditures; strengthening and scaling up
citizens’ participation and engagement; and supporting sectoral monitoring and evaluation
activities. On-going programmes likely to benefit from PBS III include: (i) the Agriculture
Sector Support project17
; (ii) Rural Water Supply and Sanitation Project 18
; (iii) Jima Mizan Road
Upgrading Project19
; and (iv) the Bedele-Metu Road Upgrading Project20
.
3.4.2 Furthermore, the Government and DPs have agreed on mechanisms to enhance the
linkages between PBS, sector programmes and thematic programmes. This is in recognition
of the fact that PBS provides an important platform for addressing cross-sectoral and financing
issues that impact on the effectiveness of sector programmes in improving access to and quality
of basic services. Through its support to local PFM system strengthening, financial transparency,
and social accountability, the PBS operation complements and reinforces sectoral operations
implemented at the local level (such as the Water, Sanitation & and Hygiene Programme ) which
are making crucial contributions for the achievement of MDGs. Efforts to foster closer linkages
15 The AfDB served as co-chair of the PBS Donor Group in 2010 and 2011. 16 The PBS was show cased at Busan as a model of Aid Effectiveness 17 Ref: ADF/BD/WP/2003/136, 5 November, 2003 18 Ref: ADF/BD/WP/2005/135, 21 December, 2005 19 Ref: ADF/BD/WP/2006/141, 15 December, 2006 20 Ref: ADF/BD/WP/2011/119, 30 November, 2011
11
include, deepening the involvement of sectors in the JRIS and more regular and systematic
interactions between Ministry of Finance and Economic Development (MoFED), sector
ministries and the PBS Donor Group. This is especially around effectiveness in budgetary
resource utilisation, local fiduciary and governance systems, and results. Increasingly, annual
joint sectoral reviews, such as in health and education will be coordinated with the PBS reviews
to ensure that the PBS dialogue is informed by the outcome of these reviews and vice versa to
facilitate information flows on financing and key sectoral performance indicators. PBS III is also
linked to key multisectoral programmes such as PSCAP, PSNP, and the Good Governance
Package.
3.5 Bank’s Comparative Advantage and Value-added
3.5.1 The Bank plays an instrumental role in promoting good governance and human
development in Africa, which are also areas of special focus in the GTP. Since adopting its
GAP 2008-12, the Bank has streamlined its approach to governance, focusing primarily on PFM.
In so doing, it has scaled up its resources and reoriented its policy and institutional actions
towards its RMCs so as to respond to their challenges in key PFM reform areas.
3.5.2 The Bank has also gained significant experience by implementing PBS I and PBS II
and as such has consolidated its comparative advantage which is derived from: (i) flexibility
in responding to the need for additional financial resources to meet financing gaps through a
supplementary loan, (ii) ability to leverage its budget support with policy and institutional
building actions to respond to capacity challenges in PFM and social spending priorities; and (iii)
the Bank’s enhanced presence in the country, which reinforces policy dialogue, aid coordination
and portfolio management. ETFO will continue to coordinate with GoE (MoFED) and other DPs
and jointly monitor programme implementation within the JRIS/JBAR framework.
3.6 Application of Good Practice Principles on Conditionality
3.6.1 Reinforce ownership. The programme is fully owned by the GoE and reflects the
orientations of the GTP, various sector programmes and PFM reforms being implemented.
3.6.2 Coordinate the accountability framework. The PBS programme provides a forum and
mechanism to bring together several donors’ financial contributions to support overall
programme goals. Government and DPs agree on these overall objectives and jointly support
them. The PBS is also based on a set of interrelated “Core PBS Principles” that guide
programme implementation and define the partnership between government and DPs (see
Technical Annex 4).
3.6.3 Customise the accountability framework and modalities of Bank support to country
circumstances. The Bank’s support reflects the GoE’s expressed intentions and is appropriate
for decentralised service delivery. PBS III includes strengthened efforts to ensure that
governance and accountability is supported and continues to improve.
3.6.4 Select only actions that are critical for achieving results as conditions for
disbursement. The triggers for disbursement have been defined and agreed with the authorities
and other development partners.
3.7 Application of ADB policy on non-concessional borrowing
3.7.1 Ethiopia is classified as an ADF country eligible for ADF loan financing only. The
proposed operation fully complies with the principles of the Bank Group policy on non-
concessional borrowing and debt accumulation.
12
IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS
4.1 Programme Goal and Purpose
The goal of this programme is to contribute to reducing poverty and improving the
standard of living of Ethiopians. In this regard, the purpose of the programme is to expand
access and improve the quality of decentralised delivery of services in education, health,
agriculture, water supply and sanitation and rural roads. Enhanced delivery of quality basic
services is reliant upon more robust PFM systems and structures, which in turn is enhanced by
deepened local accountability and transparency in basic service delivery. PBS III provides a
framework within which the GoE can be supported at various levels to achieve these goals.
However, to remain selective and in recognition of support being provided by other DPs, the
proposed programme will focus on the first component (block grants) and two out of the four
sub-components of the second component (see Technical Annex 6 ), notably: (i) Basic Services
Block Grants; and (ii) Strengthening Local Accountability and Transparency Systems. PBS III
therefore takes into account outstanding challenges in basic services delivery and PFM reform
initiatives emanating from the 2010 PEFA and CIFA, as well as on-going social accountability
initiatives.
4.2 Programme Components, Operational Objectives and Expected Results
Component 1: Basic Services Block Grants
4.2.1 Context and Challenges: Although budgetary resource flows to regions have expanded
significantly due to PBS, the needs are huge and the amount of resources available is still not
sufficient to enable woredas improve the quality of basic services and ensure universal coverage.
The Government recognizes the necessity of expanding fiscal space in woredas to enable them
increase discretionary spending on non-salary operations costs and capital, thereby ensuring
effectiveness and efficiency in basic service delivery. Therefore, by scaling up financing for
block grants, PBS III will contribute to deepening decentralization. This component will as such
complement sectoral efforts by supporting woreda level recurrent expenditures in the targeted
sectors (see Appendix 3). In addition, this component will support government actions to further
improve the sharing of the block grant allocations to regions to promote equity with a view to
narrow the service delivery gap between the big regions and the developing regional states. A
complementary flagship study will also be undertaken by the Bank during PBS III
implementation to promote sustainable innovative approaches in the delivery of decentralised
basic services in Ethiopia.
4.2.2 The block grants constitute the major source of the financing of decentralised basic
services and the increase in the volume has contributed significantly to Ethiopia’s impressive
development results (see paragraphs 2.2.10 and 2.2.11 and technical annex 9). Although the
architecture of PBS will remain largely the same, the Government recognises the need for the
programme to adapt and respond to emerging challenges, risks and opportunities. The focus on
results, effectiveness, equity, and fairness in basic services as well as fiduciary probity and
predictability will, therefore, be further enhanced in PBS III. With respect to equity, PBS III will
complement existing sectoral initiatives through block grants to help bridge the gap in access to
basic services between the emerging and the big regions.
4.2.3 PBS III Measures: PBS III will support the improvement in quality of extension services
in the agriculture sector and enhance performance through strengthening monitoring and
evaluation systems. PBS III will also continue to contribute to financing recurrent expenditures
13
for quality improvement in education and health. In the road sub-sector, the programme will
contribute to the building of management capacity at the woreda level. Finally, the PBS III will
support the GTP objective of achieving universal access to water supply by the end of 2015.
4.2.4 Expected outcomes: Federal block grant allocation formula revised to inform 2012/13
budget allocation; primary completion rate increase from 49.4% to 64% by 2014; maternal
mortality ratio down from 470 to 367 by 2014; agricultural productivity for major food crops
increased from 15 quintals per hectare to 20 by 2014; average time to nearest all-weather road
reduced from 4.5 hours to 1.6 hours, and; access to potable water supply increased from 71.3% to
92% of the population.
Component 2: Strengthening Local Accountability and Transparency Systems
4.2.5 This second component supports the strengthening of a decentralised system of economic
governance that government has established and developed, covering information, resource and
accountability flows between different levels of government and between service providers and
citizens. It is centered on woredas and provides the essential platform for improved quality basic
service delivery in particular of the five prioritised sectors highlighted above. The two sub-
components: (i) PFM and; (ii) citizens’ engagement, integrate aspects of the supply and demand
side of governance respectively. Strengthening these linkages will result in improved local
accountability and transparency systems in Ethiopia.
Sub-component 2.1: Public Financial Management
4.2.6 Context and Challenges: Significant progress has been made in PFM, that can in part be
attributed to the implementation of PBS I and II. In particular PBS, has provided an effective
framework for the GoE and DPs to work together on further strengthening decentralised
financial management. The demand for quarterly reports has stimulated the timely production of
end of year accounts by the regional and woreda level authorities and created pressures for the
system to improve. The system of continuous audits, on the other hand, has helped to identify
weaknesses which the PFM component of PBS tries to address. PBS II has been a major support
to the strengthening of the Office of the Federal Auditor General (OFAG), and has also
reinforced professional links between federal and regional audit bodies. Support was also
provided to the Public Procurement and Property Administration Agency in undertaking public
procurement, and property administrations reforms, leading to the enactment of the revised
Public Procurement Proclamation in 2009 at the federal level and subsequent proclamations at
regional levels. In addition, accompanying procurement directives and standard bidding
documents have been issued and disseminated at federal level but this is yet to be done at
regional level.
4.2.7 Despite some of these notable accomplishments, the 2010 PEFA, 2011 CIFA and CPAR
identified a number of existing weaknesses in the system. At the Federal level, these relate to: (i)
the extent of unreported government operations; (ii) composition of expenditure outturn
compared to original approved budget; (iii) multi-year perspective in fiscal planning,
expenditure policy and budgeting; (iv) oversight of aggregate fiscal risk from other public
sectors entities; (v) competition, value for money and controls in procurement in particular
compliance and performance at regional and woreda levels and: (vii) scope, nature and follow up
of external audit. Furthermore, five regional PEFAs have been produced recently, and the story
is similar to that of the Federal level PEFAs. As a result of considerable capacity constraints,
many woredas do not have fully operational procurement functions. Lastly, the absence of a
14
comprehensive PFM action plan with strategic and time-bound objectives and targets has
prevented a more systematic means of tracking progress in this sector.
4.2.8 GoE Policy Actions: The GoE has been implementing reforms to PFM systems since
2002, through the EMCP, which is comprised of 12 sub-programmes21
. In terms of
strengthening PFM related information systems, support has been provided to the rolling out to
600 Woredas of the GoE’s computerised information management system (IBEX 1.3) which is
expected to improve the quality in the generation of budgets and financial reports. This is being
closely followed by the roll out of IBEX 2.0 which is a more updated version of the system, but
which needs to be supported by increased capacity to achieve maximum roll out potential. The
GoE introduced a system of zero balanced accounts and prepared a new cash management
manual. In addition Programme Based Budgeting was introduced in 2011 and to support this, a
uniform budget structure was also adopted. In terms of procurement, Standard Bidding
Documents were revised and the preparation and issuing of relevant procurement manuals was
undertaken.
4.2.9 PBS III measures: The proposed operation will be selective and, therefore, support the
adoption of important measures expected to strengthen PFM institutional reforms and build
capacity, in particular at the woreda level, linked to basic service delivery. This is being done in
the context of ongoing and anticipated PFM reforms and will be achieved by focusing on
procurement and audit reforms, as well as promoting more rigorous information systems with
wider coverage to improve financial reporting. In this regard, the Bank will support GoE’s efforts
to develop a comprehensive medium term PFM action plan for a more systematic and holistic
approach to the implementation of PFM reforms. The Bank will conduct regular dialogue with
the authorities through the PFMC and provide the necessary technical advice to ensure effective
implementation of the Action Plan.
4.2.10 Expected outcomes: Number of budget and financial reports generated using IBEX
increased from 0 to 300 by 2014; percentage of external audit coverage increased to 40% by
2014, and; number of woredas where procurement performance and compliance audits have been
rolled out increased to 50% from 0% in 2014.
Sub-component 2.2: Citizens’ Engagement
4.2.11 Context and Challenges: The implementation of Financial Transparency and
Accountability (FTA) has been a successful tool in providing information to citizens on budget
planning and expenditures. Furthermore, the Social Accountability pilot in 85 woredas increased
citizens’ participation in monitoring access to quality basic services with feedback to service
providers. The joint-action plans developed through interface meetings were breakthrough
platforms and significantly contributed to improvements in social indicators particularly in
health, education, water and agriculture. The Government’s efforts at promoting public forums at
the kebele and woreda levels have been a potential springboard for addressing challenges in
basic service delivery performance. These achievements were affirmed by the evaluation of
Social Accountability Phase I which noted that “apart from realizing their rights to basic
services, citizens were also more aware of their responsibilities and potential for mobilising
community resources to improve these services.”
21EMCP 12 sub-programs include: i) Public Finance Legal Framework; ii) Public Procurement; iii) Budget Reform; iv)
Expenditure Planning Reform; v) Accounts Reform; vi) Internal Audit Reform; vii) Cash Management and Disbursement System
Reform; viii) Integrated Financial Management Information Systems (IFMIS) Reform; ix) Government Property Management
Reform; x) External Audit Reform; xi) Accounting and Auditing Profession Reform and; xii) Budget/Financial Transparency and
Accountability.
15
4.2.12 Despite these achievements, the fundamentals of social accountability (the demand and
supply prongs) have lacked adequate complementarity. While there has been significant
coverage in the disclosure of budget/expenditure and service delivery information, demand-side
social accountability has limited coverage and remains ad-hoc. On the demand side, social
accountability requires citizens to exercise their rights and responsibilities with respect to access
and the use of quality basic public services. Similarly, the supply side requires that government,
and public service providers, establish mechanisms that provide and receive information to and
from citizens, and respond to their demands accordingly. Thus, it is essential to foster linkage
between FTA and Social Accountability if the two mechanisms are to be complementary and
deepened. There is the need to consolidate and strengthen achievements of PBS II by
institutionalizing citizens’ engagement mechanisms.
4.2.13 GoE Policy Actions: GoE has established a national Steering Committee on Social
Accountability to provide oversight and policy direction. Given that PBS III has the overarching
goal of improving quality and access to social basic services at the woreda level. GoE is also
regularising and strengthening broader community and stakeholder engagement with government
service providers in participatory service delivery, budgeting and performance monitoring. As
PBS channels high volumes of resources through block grants to support decentralised social
basic services, transparency and accountability is critical to ensuring value for money,
contributing to making service delivery more responsive, effective and efficient.
4.2.14 PBS III Measures: In this regard, GoE seeks in PBS III to consolidate and strengthen
citizen’s engagement in quality basic service delivery inter alia from an all-inclusive social
accountability outlook. This involves the strengthening of on-going initiatives in financial
transparency and accountability; social accountability; and grievance redress mechanisms. The
Bank will, therefore, continue to support FTA initiatives at the decentralised level to promote
citizens information on budget and expenditures. In addition, the Bank will support social
accountability and GRM, considering that these constitute vital elements in promoting quality
basic services. This will further enhance stronger linkages of the supply and demand sides of
accountability.
4.2.15 To this end PBS III will reinforce citizen’s participation in monitoring the performance of
basic service delivery at the woreda and kebele levels through stronger linkages of FTA and
Social Accountability. Scaling up and formalising citizens participation in budgetary processes
and monitoring of social basic service delivery performance will be a key feature of PBS III. The
engagement of all stakeholders including government and citizens will promote sustainability
and also increase the impact of social accountability outcomes on service delivery.22
4.2.16 Strengthening the existing GRM mechanisms at the sub-national level is a crucial pre-
condition for promoting accountability and improving the quality of public services. GRM is
considered as a critical element of social accountability in achieving the overarching goal of PBS
III. The presence of government apparatus for redress of grievances could promote citizen’s
feedback on the quality of basic services. A fully functioning GRM system has the potential to
reduce the incidence of erroneous and/or arbitrary administrative decision-making, deter fraud
and corruption, and increase stakeholder and citizens’ participation in quality basic service
delivery.
22 Financial Transparency and Accountability (FTA) aims to strengthen the capacity of citizens and citizen representative groups
in public planning, budget processes, and public service delivery at local level.
16
4.2.17 Expected outcomes: Citizens who are informed about woreda budget increases from 19%
to 23% by 2014; citizens who report that woreda officials have sought the views of the people on
improving the quality of basic services increases from 48% to 50% by 2014; and an updated
interim report on the social accountability component of PBS III that includes GRM, and that
demonstrates continued GoE commitment to demand side accountability.
4.3 Financing Needs and Arrangements
4.3.1 As shown in Table 4 below, overall PBS regional block grants have increased since
FY 2006/07 while DPs’ share in the regional block grants has been declining from 43.7% in
2006/7 to 23.10% to in 2011/12. This reflects the Government’s commitment to ensuring
smooth implementation of the PBS as well as its decentralisation strategy. A key underlying
principle of PBS is that the share of regional block grants in the budget, regardless of the
financing source, should increase each year relative to the base year within a sustainable macro
framework. This share stood at 32.45% in FY 2009/10, declined slightly to 31.28% in 2010/11,
and increased to 39.4% in 2011/12. It is expected to increase to 41% in 2012/13. This principle
of the PBS also aims at ensuring sustainable financing for the delivery of basic services, at a pace
needed to reach the 2015 MDG goals.
4.3.2 However, this has contributed to increasing budget deficits that cannot be covered
by domestic borrowing without causing macroeconomic imbalances. The Macroeconomic
and Fiscal Framework (MEFF) for FY 2010/11-2012/13 demonstrates this financial imbalance
and hence the need for external resources from DPs to supplement the Government’s own
resources.
Table 4: Trends in Block Grants and PBS Donor Funds
(in billions of ETB unless otherwise stated)
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12*
PBS federal block grants
(A)of which
DP contribution (B) 4.091 5.477 6.328 6.816 8.225 10.534
DP share in PBS block
grants (B/A)43.70% 40.50% 38.20% 34.90% 32.20% 23.10%
45.5569.365 13.532 16.555 19.556 25.556
4.3.3 Table 5 presents the financing needs and expected sources of financing for FY
2012/13 to 2014/15. Total revenues for FY2012/13 are estimated at ETB 135.573 billion. The
latter takes into account the PBS assistance from DPs for FY 2012/13 (ETB 8.626 billion), of
which the ADF’s first tranche of PBS III amounting to UA 56 million represents 17%. For FY
2013/14 and 2014/15, the Bank’s contribution will represent 20% and 25% respectively. Total
expenditures are estimated at ETB 164.853 billion, of which 58% is for capital expenditure and
42% are for the transfers (block grants) to the regions. Thus, the overall deficit would stand at
ETB 29.279 billion. The budget provides for foreign loans (net) of ETB 6.118 billion and
domestic financing (net), of ETB 13.022 billion, leaving a financing gap of ETB10.139 billion.
*includes MDG Fund amounting to ETB15.00 billion; Source: MoFED, May 2012; and staff estimates.
17
Table 5: Fiscal Indicators, 2009/10-2014/15
(In billions of ETB)
FY
2009/10
FY
2010/11
FY23
2011/12
FY
2012/13
FY
2013/14
FY
2014/15
Actual Estimated Budget Forecast Forecast Forecast
Total Revenue and Grants
Of which: Tax revenue
Of which: Non-tax revenue
66.241
43.318
10.546
85.617
58.986
10.139
122.942
87.132
14.090
135.573
107.761
13.556
163.975
134.375
15.325
184.930
166.966
17.964
Of which: Grants 12.377 16.492 21.720 14.256 14.275 12.705
Total Expenditure 72.599 93.832 138.693 164.853 197.501 232.809
Current Expenditure 32.537 40.535 56.338 69.207 81.876 95.986
Of which: interest payments 1.587 1.913 3.524 3.721 4.300 5.016
Capital expenditure 40.062 53.297 82.354 95.646 115.625 136.823
Overall Balance incl. grants -6.358 -8.215 -15.751 -29.279 -33.526 -35.174
Total net domestic financing 1.758 0.111 11.051 13.022 13.701 15.837
Foreign loans (net) 4.131 7.798 4.700 6.118 8.210 7.241
Privatisation 0.697 1.458 0 0 0 0
Residual Financing Gap -0.229 -1.151 0.0 10.139 11.614 12.097
Source: Data obtained from MoFED and PBS Secretariat in May 2012.
4.4 Sustainability
The Government’s revenue remains the largest source of financing of basic service
delivery through block grants. The rising trend in government share of block grant financing
demonstrates Government’s commitment to decentralisation and to addressing the basic needs of
its citizens. The strong community participation in the financing of basic services is also
significant in ensuring long term sustainability of basic service delivery. Although external
financing will remain important in meeting the financing gap, Government recognises that this
cannot continue in perpetuity. To plan for longer term sustainability, Government and DPs have
agreed that a longer term framework for assessing the costs of basic services and financing
requirements is necessary. Thus, as part of the joint analytic work, basic services cost models and
projections will be developed for key sectors such as education to assess long term financing
requirements, the gaps and affordability of government’s basic services expansion plan. The
trends in domestic revenue mobilisation and aid will also be analysed to ensure that in the longer
run the Government is able to finance basic services without external assistance. Besides, the
Domestic Resource Mobilization Study, the Bank is also undertaking analytical work on the
legal and institutional framework for the setting up of Public Private Partnerships (PPPs) in
Ethiopia that could assist in easing the pressure emanating from mega infrastructure projects
competing for public resources.
4.5 Beneficiaries of the Programme
The 84.3 million24
citizens of Ethiopia will be the main beneficiaries of the PBS III
programme. The direct beneficiaries will be the citizens in woredas from 10 regions25
that
receive federal block grants (this excludes Addis Ababa). Through increased investment in block
23 Discussions are still ongoing with the Government authorities on how the FY2011/2012 financing gap will be filled, in the
absence of the ADF’s first tranche of US$60.00 million. The data in Table 5 will be adjusted accordingly. 24 2012 projection by Central Statistical Agency (CSA) based on May 2007 National population and housing census. 25 The regions are: Afar, Amhara, Benishangul, Dire Dawa, Gambella, Harari, Oromiya, SNNPR, Somali, and Tigray. Addis
Ababa is excluded because it is urban.
18
grants at the woreda level, the Government will be able to enhance access and quality of basic
services which will consequently contribute to achieving the MDG targets. The programme will
thus allow sector ministries and woredas to recruit more staff who will enhance service delivery.
4.6 Impact on Gender
PBS III will have an explicit focus on gender, the socially excluded and emerging
regions in the sub-components. PBS focus on basic services in health, education, agriculture,
water and rural roads at the woreda level has a direct significance on women. PBS facilitates the
expansion of extension workers in health and agriculture which has the potential for job
opportunities for women and girls. The “Citizens’ Engagement” component will strengthen the
capacity of women in budget processes. Within this component, PBS III seeks to review the
strategy for training to improve women’s participation in budget literacy to from 24% to 50%.
The PBS III results framework includes gender disaggregated data which will enhance better
monitoring of the impact of the programme on gender. Additionally, component B3, Managing
for Results26
seeks to build greater capacity of PBS sectors in gender responsive monitoring and
evaluation systems. The JRIS reviews on components will provide an on-going assessment of
PBS’s impact on gender. A study by DFID on gender in PBS is expected to analyse challenges
facing women and girls in accessing quality basic services. The programme will also ensure
focus on gender through the PBS core principles of ‘Fairness and Equality’ which has an element
of gender.
4.7 Environmental Impact
The programme has been classified under category III and is not expected to have any
negative environmental impact.
V. IMPLEMENTATION, MONITORING AND EVALUATION
5.1 Implementation Arrangements
5.1.1 Responsible institution: MoFED will be the executing agency primarily responsible for
the implementation of the programme. To facilitate programme implementation, the government
has created the Channel One Programmes Coordinating Unit (COPCU) within MoFED and
enhanced staffing and clarified authority and accountability between COPCU and other relevant
agencies. COPCU is responsible for oversight and coordinating activities across the basic services
ministries and sub-national government entities for ensuring compliance with joint legal
agreements, and it is also responsible for monitoring and evaluation. It will have the overall
responsibility for implementing the PBS III. There is also a donor financed PBS Secretariat that
coordinates activities between all DPs and Government agencies involved in the programme and
in particular organises JRIS and JBAR. The 2010 PEFA indicates that Ethiopia’s fiduciary
system is sufficiently robust to warrant the use of country systems for the programme, in line
with the Paris Declaration principles.
5.1.2 Disbursement: The proceeds of the loan, amounting to UA166 million, will be disbursed
in three tranches of UA 56 million, UA 55 million and UA 55 million during FYs 2012/13,
FY2013/14 and FY2014/15 respectively. All tranches are expected to be disbursed in the first
quarter of each Financial Year, in line with GBS best practice, which will allow for better budget
planning and predictability of flow of funds. Prior to the disbursement of each tranche, the
26 Financed by other DPs
19
Borrower shall communicate to the Fund, in original, the references of the PBS dedicated foreign
currency account, opened with the National Bank of Ethiopia, into which the proceeds of the loan
will be transferred and the former will confirm receipt to the Bank within seven working days.
Provision has been made for each tranche to be subject to specific disbursement conditions as
detailed below.
5.1.3 Procurement: As a budget support operation, procurement for the ADF-sponsored
components will be undertaken using the government’s procurement system. Although the
Government passed a new Procurement Law in 2009, implementation of procurement reforms
and capacity building has been slow. Thus, it is recognised that the country’s procurement system
needs strengthening and this will be done as part of the PFM reform agenda under the
programme. In particular, there is need to strengthen the country’s public procurement capacities,
compliance and performance at local levels and oversight at the federal and regional levels, as
some of the key activities under the PFM Action Plan.
5.1.4 Audit: The programme will produce annual financial statements which will be audited by
the Office of the Federal Auditor General (OFAG), as was the case with PBS II using TORs
agreed between the government and the Bank. The audit report, complete with a Management
Letter, will be submitted to the Bank no later than six months after the end of each fiscal year.
5.2 Monitoring and Evaluation Arrangements
The Ministry of Finance and Economic Development will have the overall responsibility
for monitoring and evaluating the implementation of the programme. The JRIS/JBAR will serve
as main framework for monitoring implementation progress against the attainment of PBS
programme objectives and principles. These reviews are conducted twice a year. The DPs also
conduct field missions to inform the JRIS. As part of the monitoring framework, DPs will
conduct a Mid Term Review of PBS III. Under the PBS programme, the Government and its DPs
have consolidated the benchmarks for each component of the programme into a single results
framework which reduces transaction costs for the stakeholders.
VI. LEGAL DOCUMENTATION AND AUTHORITY
6.1 Legal Documentation
A Loan Agreement between the Federal Democratic Republic of Ethiopia and the African
Development Fund for the maximum amount of UA 166 million.
6.2 Conditions Associated With Bank’s Intervention
A. Prior Action for presentation of the Programme to the ADF Board
6.2.1 The PBS III shall be presented to the ADF Board upon the fulfilment of the following
condition:
A satisfactory Letter of Comfort from the International Monetary Fund following the June,
2012 Article IV Consultation.
B. Conditions precedent to entry into force of the Loan Agreement
6.2.2 The entry into force of the Loan Agreement shall be subject to the fulfilment by the
Borrower of the provisions of section 12.01 of the General Conditions Applicable to Loan
Agreements and Guarantee Agreements of the African Development Fund (Sovereign Entities).
20
C. Conditions precedent to the disbursement of the first tranche in FY 2012/13
6.2.3 The obligation of the Bank to disburse the first tranche of the Loan shall be conditional
upon the entry into force of the Loan Agreement and the fulfilment of the following three
conditions:
Condition Required Evidence
1. Approval by the Ministry of Finance and Economic
Development of a comprehensive three-year PFM
Action Plan prepared in consultation with and
acceptable to the Bank by end-July 2012
A letter from the Ministry of Finance and Economic
Development to the Bank submitting a copy of
approved PFM Action Plan.
2. Submission by the Ministry of Finance and
Development of an updated 2012 Interim Report for
of the social Accountability component of the PBS
III that includes GRM by end-July 2012
A letter from the Ministry of Finance and Economic
Development to the Bank submitting the updated
Interim Report,
3. Revise federal block grant allocation formula with a
view to guiding the preparation of an improved
sharing formula for 2012/13 by end-July 2012
A letter from the Ministry of Finance and Economic
Development transmitting the revised federal block
grant allocation formula to the House of Federation for
approval
D. Conditions precedent to the disbursement of the second tranche in FY 2013/14
6.2.4 The obligation on the Fund to release the second tranche of the loan is subject to
fulfilment by the Borrower of the following condition:
⇒Overall satisfactory performance assessment of the second JRIS/JBAR in the country’s financial year 2012/13
[Evidence required: Aide Memoire of the Joint Review and Implementation Support (JRIS)/Joint Budget and Aid
Review (JBAR) expected in April-May 2013, indicating overall satisfactory performance]
E. Conditions precedent to the disbursement of the third and last tranche in FY
2014/15
6.2.5 The obligation on the Fund to release the third tranche of the loan is subject to fulfilment
by the Borrower of the following condition:
⇒Overall satisfactory performance assessment of the second JRIS/JBAR in the country’s financial year 2013/14
[Evidence required: Aide Memoire of the Joint Review and Implementation Support (JRIS)/Joint Budget and Aid
Review (JBAR) expected in April-May 2014, indicating overall satisfactory performance]
6.3 Compliance with Bank Group policies
This programme complies with the Bank Group Policy on Programme-Based Operations
(PBOs) and Guidelines on Development Budget Support Lending.
VII. RISK MANAGEMENT
The risks and mitigation measures for the programme are presented in table 6 and they
are also summarised in the logical framework:
21
Table 6: PBS III risks and mitigation measures
Risk Risk
probability
Mitigation measures
Macro-economic/External shock Risk:
External shocks related to rising food and
oil prices exacerbate rising BOP pressure
and inflation. They threaten macroeconomic
stability and GDP growth. A recurrence of
droughts and famines can also reduce
government’s ability to finance the
programme due to the need to provide for
food relief needs in the budget.
High The Government is taking measures to address these
challenges through reduced borrowing from the
National Bank of Ethiopia, increasing revenue
collection, and increased expenditure control.
Furthermore PBS III includes support for agriculture
extension services which promote increases in
agricultural production and productivity, including
using irrigation, to mitigate the effects of droughts on
the agriculture sector thereby mitigating the effects of
droughts and famines.
Political Governance Risk: Deterioration
in the political governance environment
resulting in politically-driven PBS resource
allocations and pressure for suspension of
the PBS instrument.
Medium The original programme was designed in response to
these governance concerns that led to the suspension
of DBS. The PBS programme will continue to test
adherence to the inter-governmental fiscal transfers
formula to monitor the extent to which government
and PBS resources are allocated and used fairly and
equitably. Fiduciary safeguards will also be further
strengthened.
Competing Demands on Government
Public Resource: Lack of Government
commitment to the PBS programme due to
a competition for public resources from the
mega federal infrastructure projects
envisaged under the Growth and
Transformation Plan.
Low Strong Government commitment to pro-poor
expenditure and decentralisation. In addition, the Joint
Donor review and analysis assures early detection of
potential problems and development of common
solutions. DPs will test this commitment through the
JRIS/JBAR assessments, such as additionality, and
respond appropriately to any deviations.
Weak Institutional Capacity Risk:
Government might not have adequate
personnel with the capacities required to
implement the programme as expected,
especially at the local level, due to the staff
turn-over.
High The PBS III programme will assist government in
strengthening capacities to implement the programme
by increasing the number, quality, and retention of its
personnel at the federal, woreda and zonal levels of
government.
Unfavourable CSO environment Risk: Restrictive rules and procedures governing
civil society could undermine PBS
operation
Medium Dialogue with government through the steering
committee of social accountability and the CSO
Sector Working Group to review existing CSO Law
or allow for flexibility in its implementation.
VIII. RECOMMENDATION
8.1 Management recommends that the Government of the Federal Democratic Republic of
Ethiopia be granted a loan not exceeding UA 166 million from the resources of the ADF window,
in the form of a general budget support based on the conditions, stipulated in the present report.
- 1 -
Appendix 1: Letter of Development Policy
- 2 -
- 3 -
- 4 -
- 5 -
- 6 -
- 7 -
Appendix 2: Eligibility Criteria
Eligibility Criteria Technical Observations for Ethiopia
Government Commitment to
Poverty Reduction
The GTP, covering the period from 2010 to 2015, is the country’s PRSP and it
has seven pillars. The implementation of the first year of this plan and its
predecessor (PASDEP) from 2005/2006 to 2009/2010 was quite satisfactory as it
fostered high levels of economic growth and remarkable improvements in the
country’s social indicators.
Macroeconomic stability Ethiopia’s economy has, over the past seven years, experienced rapid growth
which has, however, been accompanied by macro-economic imbalances. One of
the key sources of the imbalances was the surge in domestic borrowing to finance
mainly public investment programmes. The Government of Ethiopia has
responded to this through fiscal and monetary tightening as well as administrative
measures and remains committed to pursuing sound macroeconomic and financial
policies. Ethiopia does not currently, have a programme with the IMF. The
processing of the proposed PBS III will, therefore, require a formal IMF
assessment of Ethiopia’s macroeconomic performance. MoFED has prepared a
macroeconomic and fiscal framework for 2010/11 to 2014/15.
Satisfactory fiduciary risk
assessment
The government, with the support of the donors, is strengthening its PFM system.
The 2010 PEFA assessment showed improvements in 13 out of 28 indicators but
also revealed weaknesses in some areas. The recent PEFA, CIFA and CPIA,
concluded that the FM risk at Federal level is moderate while at Region and
Woreda level, the risk is substantial. The PFM component of PBS III, like PBS II,
is designed to improve capacity and reduce risk at these sub-national levels. In
terms of the requirements for PBS III funds, the fiduciary arrangements are
satisfactory and the JRIS/JBAR framework reviews the arrangements regularly.
Political stability The political environment in Ethiopia is generally stable. The country has
emerged from the traumatic post-2005 elections political crisis which arose from
serious disagreements over election results between the ruling party, the
Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF), and the
Opposition. The general elections of May 2010 were peaceful and the political
atmosphere has improved steadily. However, the country has domestic
governance challenges relating to the narrowing political space with some
limitations on civil society activity that are aggravated by regional insecurity and
can affect the country’s political stability.
Harmonization There is a strong partnership among donors, especially those who have been
participating in the PBS I and II. They use the Paris Declaration principles of
harmonisation and alignment with country systems to ensure programme
effectiveness and reduced transaction costs. The technical work of the PBS
Donors Group is conducted through working groups, including the Inter-
Governmental Fiscal Transfers Group, Managing for Results, the Transparency &
Accountability Group and PFM. There is a very strong partnership between the
GoE and its development partners. The Joint Review and Implementation Support
(JRIS)/Joint Budget and Aid Review (JBAR) framework and the PBS Secretariat
coordinates the activities of this framework.
- 8 -
Appendix 3: PBSIII Contribution to Social Sectors
Agriculture: The GTP aims to enhance improvements in agricultural productivity. The output of major crops
(cereals) increased slightly from 15.2 quintals/hectare in FY 2007/08 to 17.6 quintals/hectare in 2011. However,
agricultural production of cereals is expected to rise with increased numbers of development agents, providing
technical advice to small-scale farmers. By financing recurrent costs (including salaries of Development Agents),
through block grants the PBS will contribute to the achievement in the sector. In addition to contributing to
recurrent costs at the Wodera level, PBS III will support improvement in quality of extension services provided and
enhance performance through strengthening monitoring and evaluation systems both at the federal and decentralised
levels to ensure reliability of data.
Education: Expansion in enrolments in education has created a strain on the supply of resources and demand for
quality services. The GoE through the implementation of the Education Sector Development Plan (III), led to the
formulation of the General Education Quality Improvement Program (GEQIP) which has two-fold objectives: (i)
improve the quality of education services and (ii) reinforce capacity at the woredas level, with the intention of
delivering quality services closer to school communities. PBS has in the past supported GEQIP through hiring of
100,000 primary school teachers. The PBS programme supports GoE to redress the 94 per cent recurrent budget
expenditure and 6 per cent budget for quality improvement. There has been a rapid growth in qualified teachers for
the upper primary (5-8), but a decline in lower primary (1-4). Quality of primary education has not matched the
increased access to education including addressing gender equality and equity in education for the emerging regions.
Therefore, efforts to improve quality of education will need to be prioritised.
Health: The government has made strong efforts to provide basic health services to local communities, achieving
impressive gains in service expansion. The number of health posts increased from 4211 (2005) to 14,416 (2010)
and health centres from 519 (2005) to 2689 (2010). A total of 34,382 health extension workers were deployed in
rural areas in 2011 (85% of the target). Despite the significant improvements, maternal mortality remains
unacceptably high at 470/100,000 and proportion of skilled attendants at delivery is very low at 16.6% (2011). The
quality of basic health care services is also a key concern. To give increased attention and focus to health the
government and development partners agreed to separate the health component into self-standing health program ie.
the Health MDG Support Facility. Though health will not be an integral part of the PBS, the program through the
block grant will continue to support recurrent costs in the sector at wodera level. As outlined in the GTP and HSDP
III, the government will continue the expansion of quality basic health services and to roll-out its initiative of having
two health extension workers per rural Kebele.
Roads: The expansion of road network is critical to promoting access of social basic services such as health,
education, agricultural extension and marketing etc. The government has demonstrated strong commitment to
improving access through construction of rural roads under the Universal Rural Road Access Project (URRAP). The
proportion of kebeles connected by all-weather roads has increased from 39% in 2009/10 to 42% in 2010/11. About
854 kms all-weather roads were constructed in 2010/11. Through PBS support about 500 wodera road desks were
established. The PBS III will contribute to build management capacity at woreda level. More woreda road desks
with appropriate staff and resources will be recruited to enhance word’s capacity to administer management of road
maintenance.
Water Supply and Sanitation: The GoE has demonstrated strong commitment to expanding access to water and
sanitation as part of its poverty reduction thrust. The development objectives of the potable water supply sector in
GTP are to develop and utilise water resources to fulfill social and economic priorities, sustainably and equitably, by
increasing water supply coverage. In the area of sanitation, sewer line schemes financed by the World Bank are
envisioned as an improvement to sanitation across the country. The major challenges in the water and sanitation
sector are lack of necessary machinery, a lack of human resources to design, implement, and manage water supply
schemes. Furthermore, there is limited capacity of the private sector. The coverage for rural water supply increased
to 71.3 percent providing access to 4.9 million more rural people, while urban and national coverage for potable
water supply increased to 92.5 percent and 73.3 percent respectively in 2010/11.
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Appendix 4: Statement by an IMF Staff Mission on the 2012 Article IV Consultation with
Ethiopia
Press Release No. 12/224
June 14, 2012
An International Monetary Fund (IMF) mission visited Addis Ababa May 30-June 13 to conduct
discussions for the 2012 Article IV Consultation. The mission met with Prime Minister Meles
Zenawi, Minister of Finance and Economic Development Sufian Ahmed, Governor of the
National Bank of Ethiopia Teklewold Atnafu, Economic Advisor to the Prime Minister Newai
Gebre-ab, other senior officials, as well representatives of the private sector, the international
community, and civil society.
At its conclusion, the mission head Mr. Michael Atingi-Ego issued the following statement:
“The Ethiopian economy continues to grow at a robust pace, poverty continues to fall, and
inflation, while still high, has been declining. The expansion in economic activity has been
supported by robust export growth and public enterprise investments. Tight monetary and fiscal
policies have contributed to the deceleration of inflation, which also reflects declining
international commodity prices. Monetary tightening, reflected in a contraction of base money,
was achieved by terminating central bank financing of the budget and significant sales of
foreign exchange. As a result of this foreign exchange intervention, gross official foreign
reserves have declined to under two months of import coverage. The budget execution has been
prudent, but increased domestic credit to public enterprises has been providing strong fiscal
impulse.
"For 2011/12, the mission projects real GDP growth at 7 percent and end-year inflation at about
22 percent. A similar growth rate and single digits inflation are achievable in 2012/13 if
implementation of tight monetary and fiscal policies is maintained.
“Going forward, the mission recommends continuing the fight against inflation. Raising interest
rates immediately would enhance the activation of the Treasury bill market for liquidity
management and monetary policy implementation. Higher interest rates will also support
domestic savings mobilization efforts that are key for financing investment to achieve ambitious
objectives in the Growth and Transformation Plan (GTP). In addition, the policy of no central
bank financing of the budget should remain in place to send a strong signal of the government’s
commitment to fight inflation.
“The financing of the GTP should strike a balance between seeking to promote growth and
ensuring macroeconomic stability. Given the authorities’ objective of financing long-term
projects by domestic sources and the resulting strong financial real sector linkages, it will be
important to increase the oversight of the financial sector to ensure its stability. On the external
front, rebuilding gross official foreign reserves will provide a buffer against potential exogenous
shocks given the current volatile global environment. A comprehensive monitoring of both
external and domestic public debt would help maintain debt sustainability.
“The IMF Executive Board is expected to complete the 2012 Article IV consultation in mid-
September 2012.”
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Appendix 5: GoE’s Policies to Curb Inflation
Ethiopia has become more vulnerable to inflationary pressures in recent years. The recent
episode of inflation has been driven mainly by food price volatility, as food accounts for 57
percent of CPI. . In August, 2011, food inflation on a year to year to basis peaked at 46.3 %
from 5 % the previous year. While global commodity price and domestic supply shocks
contributed to the resurgence in inflationary pressures from the second half of 2011, the
evidence from the analyses by the IMF and the AfDB show that expansionary reserve monetary
policies (including negative real interest rates) has been the main determinant of current
inflation. The important role of monetary factors in explaining inflation is evidenced by the fact
that despite the decline in world food prices, inflation has remained stubbornly high. Moreover,
core inflation has remained within the 18-23 % range during the past six years The GoE has,
since July, 2011, reinforced its macro policy efforts to fight inflation. Monetary policy is
oriented towards achieving price stability with base money as the anchor. The policy measures
currently under implementation to bring down inflation to single digit include:
Elimination of direct borrowing from the Central Bank;
Adoption of base money as nominal anchor for monetary policy; the target for 2011/12
was for a shrinkage of 3.9 % in base money;
Introduction of Cash Budget System to support monetary policy tightening;
Sale of foreign exchange to mop up excess liquidity;
Activation of the TB Market to support non-inflationary deficit financing;
Importation and distribution of wheat and other essential commodities to help stabilize
prices; and
Reform of wholesale and retail marketing systems through enactment of a Trade
Proclamation Act in 2011.
Source: 2010/11 MoFED Economic Report, Quarterly PBS Donor/MoFED Macro-Exchange, IMF Reports and
AfDB Brief: Inflation Dynamics in Selected Eastern African Countries: Ethiopia, Kenya, Tanzania & Uganda,
February, 2011
