Ethiopia

Second Urban Local Government Development Program (ULGDP II) as a Program-for-Results (PforR) Operation

Technical Assessment Report

February 20, 2014

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Table of Contents List of Abbreviations ............................................................................................................................... iii Executive Summary ................................................................................................................................ VI

A. INTRODUCTION .............................................................................................................................. 1 B. TECHNICAL ASSESSMENT ........................................................................................................... 1

I. Program Description ........................................................................................................................... 6 II. Description and Assessment of Program Strategic Relevance and Technical Soundness .............. 18

a. Strategic Relevance ...................................................................................................................... 18 b. Program Technical Soundness .................................................................................................... 21 c. Institutional Arrangements .......................................................................................................... 25

III. Description and Assessment of Program Expenditure Framework ............................................... 30 IV. Description and Assessment of Program Results Framework and M&E....................................... 32 V. Program Economic Evaluation ........................................................................................................ 35 VI. Inputs to Program Action Plan ....................................................................................................... 40 VII. Technical Risk rating .................................................................................................................... 42 VIII. Bank Inputs to the Program Implementation Support Plan ......................................................... 42

Annexes ...................................................................................................................................................... 45 Annex 1: Disbursement against the Performance on the DLIs-Disbursement Linked Indicator Matrix 45 Annex 2: Result Framework ................................................................................................................... 53 Annex 3: ULGDP Performance-Based Grant Indicative Planning Figures (IPFs) ................................. 56 Annex 4: ULGDP – Investment Menu for the Performance-Based and CB Grants ............................... 58 Annex 5: MUDHCO – Organizational Structure of Ministry ................................................................. 62 Annex 6: MUDHCO – Overview of the Main Institutional Arrangements ............................................ 65 Annex 7: Minimum Conditions and Performance Measures .................................................................. 67 Annex 8: ULG staffing positions ............................................................................................................ 85 Annex 9: ULGDP II- Capacity Building Support –Design .................................................................... 87

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List of Abbreviations

AACG Addis Ababa City Government

AF Additional Finance

ARAP Abbreviated Resettlement Action Plan

BOFED Bureau of Finance and Economic Development (Regional)

BTIUD Bureau of Trade, Industry and Urban Development (Regional)

CB Capacity Building

CBDSD Capacity Building for Decentralized Service Delivery Project

CD Capacity Development

CIP Capital Investment Plan

CSA Central Statistics Agency

DDCA Dire Dawa City Administration

DRS Developing Regional States

EC Ethiopian Calendar

ECPI Ethiopian Cities Prosperity Initiative

EFY Ethiopia fiscal year

EMP Environmental management plan

EOI Expression of Interest

ECPI Ethiopian Cities Prosperity Initiative

ERCA Ethiopian Revenues and Customs Authority

ESMF Environmental and Social Management Framework

ETB Ethiopian birr

GC Gregorian calendar

GIZ German Society for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit)

ICB International Competitive Bidding

ICR Implementation Completion Report

IDA International Development Association

IPA Independent Procurement Audit

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IFR Interim Financial Report

IGFTS Intergovernmental Fiscal Transfer System

IMF International Monetary Fund

LG Local governments

MC Minimum (access) Conditions

MOFED Ministry of Finance and Economic Development (Federal)

MTR Midterm review

MUDHCo Ministry of Urban Development, Housing and Construction (Federal)

NBE National Bank of Ethiopia

O&M Operations and maintenance

OFED Office of Finance and Economic Development (city level)

APA Annual Performance Assessments

CB Capacity Building

FY Fiscal Year

OM Operational Manual for ULGDP

PBG Performance-Based Grant

PBGS Performance-Based Grant System

PBTS Performance-Based Transfer System

PM Performance Measures

PPA Participation and Performance Agreement

PSCAP Public Sector Capacity Building Program Support Program

QCBS Quality and Cost Based Selection

RAP Resettlement Action Plan

REOI Request for Expressions of Interest

REP Revenue Enhancement Plan (AACG)

REPA Regional Environmental Protection Agency

RG Regional Government

RPF Resettlement Policy Framework

SME Small and Medium Size Enterprises

SNNPR Southern Nations, Nationalities, and People’s Region

SOE Statement of Expenditure

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TA Technical Assistance

TOR Terms of Reference

UGCBB Urban Governance and Capacity Building Bureau (Federal)

UGDP Urban Governance and Decentralization Program

ULG Urban Local Government

ULGDP Urban Local Government Development Project

UNCDF United Nations Capital Development Fund

USD United States Dollar

WB World Bank

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Executive Summary

The second Urban Local Government Development Program (ULGDP II) is designed as Program for Results (PforR), which scales up the ongoing ULGDP (2008/09-2013/14) – a performance-based grant (PBG) program, with financing from the World Bank and Government of Ethiopia (GoE), in the form of contributions from the regions and participating urban local governments (ULGs). The GoE has expressed a strong wish and commitment to scale up the program to cover 44 major cities under its second phase, as part of its urban development vision and strategy as outlined in the Growth and Transformation Plan (GTP) for 2009/10-2014/15, the Urban Development Policy (2005), the Fiscal Decentralization Policy (2004) and the Ethiopian Cities Prosperity Initiative (ECPI): “Building Green Resilient and Well Governed Cities 2013/14-2015”.

The second phase of ULGDP (ULGDP II, the Program) will be based on the lessons learnt from the first phase, which was successful in getting funds out to the local (city) level for investments in core urban infrastructure and services, delivery of numerous infrastructure investments, and in enhancing the capacity of the participating cities in planning, budgeting, financial management, procurement, accountability and social and environmental systems management. The Program will also address the challenges identified in the first phase such as the timing of the annual performance assessments (APAs), the need to involve and strengthen the regional governments, and the need to supplement the supply driven capacity building support with a more demand-driven approach, ensuring that cities can respond to the capacity weaknesses identified and the incentives provided in the performance-based allocations, the need to strengthen own source revenue mobilization, and the need to strengthen the intra-governmental coordination, monitoring, evaluation and oversight in this area. It will also further strengthen the incentives of all actors in the Program through the result-based budget allocations.

ULGDP II will enhance the institutional performance of participating ULGs 1 in developing and sustaining urban infrastructure and services, through provision of three interlinked and mutually strengthening tools: (i) Performance-based investment grants, (ii) objective and neutral annual performance assessments, linked to the size of allocations and (iii) comprehensive capacity building support to the cities and to the regions to enhance their capacity in supporting ULGs as well as support to the implementing agency. The Ministry of Urban Development, Housing and Construction (MUDHCo, the Ministry) will be the agency in charge of the Program, as under ULGDP. The Ministry will be supported in areas of capacity building framework for regions, monitoring, reporting and project management and the Program also encompass capacity building to the Ministry to perform its core role related with the Program objectives.

This technical assessment report is structured in the following way: First, follows a brief overview of the country and sector context, followed by the description of the ongoing program. It then introduces the proposed PforR and reviews the Program’s strategic relevance, technical soundness and assesses the expenditure framework, results framework and the M&E system and capacity. It then reviews the Program’s economic rationale, expected impacts and associated technical risks. The Program action plan is presented to mitigate those risks and finally the assessment encloses the implementation support plan.

1 Also referred to as “cities”.

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Second Urban Local Government Development Program (ULGDP II) - Technical Assessment

A. INTRODUCTION

1. This technical assessment has been prepared for the proposed Second Urban Local Government Development Program (ULGDP-II) as a Program-for-Results (PforR) operation, in accordance with Operational Policy/ Bank Procedures (OP/BP 9.00), Program-for-Results Financing. 2. The technical assessment is carried out within the limited scope of the proposed ULGDP-II Program, and provides an assessment and a summary of the main issues, which are relevant for the successful implementation of the Program. The support is based on previous experiences from Bank operations with support to ULGs in Ethiopia, and the assessment is based on the review of experiences with implementation of the first ULGDP in the period from 2008/09-2013/14, including the results from the Midterm Review in 20112, and other studies, see below. Box 1. Analytical work which underpins this analysis The analysis in this report draws upon a large body of analytical work conducted on the ULGDP and the urban sector in Ethiopia to date. These include: (i) the annual ULGDP independent performance assessments of the performance in 2008/09 (EFY2001), 2009/10 (EFY2002), 2010/11 (EFY2003) and 2011/12 (EFY2004); (ii) evaluation of municipal service delivery of cities participating in ULGDP commissioned by the ministry and undertaken independently; (iii) annual reports of related programs; (iv) ULG audit reports; (v) value for the money reports supported by GIZ (2011); (vi) field data collected by SuDCA consultants in connection with the Program’s fiduciary systems assessment; (vii) and a large number of monitoring reports and data from the ULGDP data base. In addition to this existing body of knowledge, a separate detailed study was undertaken which collected detailed field-level data from a sample of 12 ULGs under the “Analysis of urban Local Government Fiscal Position in Ethiopia” non-lending technical assistance activity3.

B. TECHNICAL ASSESSMENT Country and Sector Context for the Program 3. Ethiopia is a large and diverse country. It is located in the Horn of Africa and is a land-locked country with an area of 1.1 million square kilometers—about the size of Bolivia. Its bio-physical environment includes a variety of contrasting ecosystems, with significant differences in climate, soil properties, vegetation types, agricultural potential, biodiversity and water resources. Ethiopia is a country of many nations, nationalities and peoples, with a total population of 91.7 million (2012).4 Only 17 percent of the population lives in urban centers, the great majority of them in Addis Ababa. At a current annual growth rate of 2.6 percent, Ethiopia’s population is estimated to reach 130 million by 2025, and is projected by the UN to be among the world’s top ten, by 2050. Ethiopia is vulnerable to terms of trade

2 Note that additional funding was added to this project in 2011, based on the successful and fast implementation rate, see Project Paper on an Proposed Additional Credit in the amount of SDR 94.7 Million (USD 150 Million equivalent) to the Federal Democratic Republic of Ethiopia for the Urban Local Government Development Project, June 2011, World Bank. 3 Dege Consult (www.dege.dk) in cooperation with Urban Institute and SuDCA, named Ethiopian Local Government Revenue Study (ELGRS) in this assessment. 4 Source: United Nations. According to the Ethiopian Central Statistical Agency, the population is 82.6 million.

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shocks from international food and fuel prices, and to large domestic weather-related shocks as the 2011/12 East Africa drought demonstrated. 4. Ethiopia has experienced strong economic growth over the past decade. Economic growth averaged 10.7 percent per year in 2003/04 to 2011/12 compared to the regional average of 5.4 percent. Growth reflected a mix of factors, including agricultural modernization, the development of new export sectors, strong global commodity demand, and government-led development investments. Private consumption and public investment have driven demand side growth, with the latter assuming an increasingly important role in recent years. On the supply side, growth was driven by an expansion of the services and agricultural sectors, while the role of the industrial sector was relatively modest. More recently annual growth rates have declined slightly, but still remain at high single-digit levels. Growth in the export of goods has also moderated in recent years and a decline was observed in 2012/13 for the first time since 2008/09. There have been bouts of high inflation in recent years and, while inflation is currently much lower, keeping it down remains a major objective for monetary policy. 5. Ethiopia is one of the world's poorest countries, but has made substantial progress on social and human development over the past decade. The country’s per capita income of US$370 is substantially lower than the regional average of US$1,257 and among the ten lowest worldwide. 5 Ethiopia is ranked 173 out of 187 countries in the Human Development Index (HDI) of the United Nations Development Program (UNDP). However, high economic growth has helped reduce poverty, in both urban and rural areas. Since 2005, 2.5 million people have been lifted out of poverty, and the share of the population below the poverty line has fallen from 38.7 percent in 2004/05 to 29.6 percent in 2010/11 (using a poverty line of US$0.6/day). However, because of high population growth the absolute number of poor (about 25 million) has remained unchanged over the past fifteen years. Ethiopia is among the countries that have made the fastest progress on the Millennium Development Goals (MDGs) and HDI ranking over the past decade. It is on track to achieve the MDGs related to gender parity in education, child mortality, HIV/AIDS, and malaria. Good progress has been achieved in universal primary education, although the MDG target may not be met. The reduction of maternal mortality remains a key challenge. 6. The Government of Ethiopia is currently implementing its ambitious Growth and Transformation Plan (GTP) 2010/11–2014/15, which sets a long-term goal of becoming a middle-income country by 2023, with growth rates of at least 11.2 percent per annum during the plan period. To achieve the GTP goals and objectives, the government has followed a “developmental state” model with a strong role for the government in many aspects of the economy. It has prioritized key sectors such as industry and agriculture, as drivers of sustained economic growth and job creation. The GTP also reaffirms the government’s commitment to human development. Development partners have programs that are broadly aligned with GTP priorities. 7. Ethiopia’s constitution creates a highly decentralized, federal structure. Formally promulgated in 1995 following the end of the military junta -the Derg-, the constitution’s decentralization framework presents a fundamental shift from the highly centralized system under the Derg. The federal structure takes into consideration the rich ethno-linguistic and multi-cultural diversity of Ethiopian nations, nationalities and peoples. The

5 Gross National Income, World Bank Atlas Method.

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constitution recognizes and assigns powers, functions and revenues between the federal government and the nine member states of the federation 6 . These entities are generally referred to as ‘regional governments (RG)’. In addition, two cities—Addis Ababa and Dire Dawa—are chartered by federal proclamation (law) as state-level city7 governments.

8. Although the federal constitution formally establishes two government levels, in practice, Ethiopia has three main government levels: Federal, regional, and local government 8. Each regional

government (RG) can create its own local government structure and while there are slight variations in the sub-regional structures among RGs, the most prevalent local government level is formed by elected woredas or district-level governments. Regional states are typically subdivided into administrative zones, which are deconcentrated territorial levels (see figure). Woredas are generally semi-autonomous local government entities, which have a separate legal status as corporate bodies with their own political leadership (council) and their own budget accounts. The woreda council members are directly elected to represent each kebele (ward) in the district. In practice, the terminology used to designate local

governments varies: some use the term woreda strictly to refer to rural districts, whereas others consider district-level urban units also to be woredas.

9. RGs have the power to create urban local governments (ULG) either at the woreda, or at the sub-woreda level, while the general practice is to establish them at woreda-level. There are 84 ULGs in Ethiopia with populations of over 20,000 (excl. Addis Ababa),- Addis Ababa as the primate city with a population of over 3 million9. ULGs are managed by city administrations and have a long list of mandates and responsibilities, which include both the woreda-level functions, which are concurrent state functions, as well as city affairs of delivering services and providing urban infrastructure.

10. A unique feature of the expenditure assignments in Ethiopia, which has important implications on the delivery of infrastructure and services to citizens, is the distinction between “state” and “municipal” functions. State functions include most social services such as education and health, among others, and municipal functions comprise most infrastructure and other services such as urban transport, urban roads, solid waste management and abattoirs. In urban areas, both functions are administered by ULGs. State functions are delegated from RGs to ULGs, whereas municipal functions are considered to be the exclusive functions of ULGs. This conceptual distinction has important funding implications, which directly affect service and infrastructure delivery: ULGs generally receive transfers in the form of block grants/allocations from RGs in order to fund state functions. However, they are expected to fully fund their municipal functions from municipal revenues.

6 These nine regional governments are Tigray, Afar, Amhara, Oromia, Somalia, Benishangul Gumuz, the State of the Southern Nations, Nationalities and Peoples (SNNP), Gambela and Harar. 7 As each regional government in Ethiopia is authorized to issue city proclamations as they see fit, there is no formal common definition of what constitutes a city. Therefore, the words “city” and “ULGs” are used interchangeably throughout this document. 8 The constitution refers to “member states”. 9 Addis’ population is 10 times larger than Dire Dawa, the second largest city in the country.

Institutional structure of the public sector in Ethiopia

Dark blue indicates government jurisdictions with their own budget sources; grey indicates de-concentrated entities.

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11. To meet these municipal functions, ULGs are largely enabled to set their own local tax rates within the context of regional law and raise revenues. However, as discussed in more detail in the Strategic Relevance section below, these revenues are simply not sufficient to meet the rapidly growing municipal functions. The rapid growth in municipal functions is associated with the rapid urbanization in the country: Ethiopia is one of the most populous countries in the World10 and is urbanizing rapidly at about 4.1 percent per year11. The UN estimates that Ethiopia’s urban population will expand from 17% in 2013 to 19.0 % in 2020, reaching 23% in 2030. As an indication of rapid urban growth, the capital city, Addis Ababa, more than doubled its population in 23 years, from 1.4 million in 1984 to 3.1 million in 2012. 12. Given the consistent increase in the number of Ethiopians living in cities on the one hand and the lack of municipal revenues to meet the growing financing needs on the other, significant gaps emerge in access to basic services and infrastructure in cities. This prevents cities from maximizing the potential productivity and agglomeration effects and limits their ability to contribute to economic growth even further than their current level. As shown in the table below, an independent urban infrastructure study conducted in 201312 indicated the significant gaps in services and infrastructure in essential core urban services and infrastructure water supply, roads and sanitation in Addis and 18 other cities, which include Ethiopia’s largest urban areas. Table 1: Level of access to urban services and infrastructure in 19 ULGs

Service/Infrastructure Level of service Provision/Coverage Water supply coverage 59.1%

Sewerage and sanitation 57.3% Solid waste Disposal collected of estimated waste 52.0%

Liquid Waste Disposal collection ratio 1.5% Paved Road (Surfaced with Asphalt or cobblestone) of total roads 22.8%

Roads with Pedestrian Walkways 8%

13. The GoE is fully aware of the importance of cities for the country’s growth and prioritizes urban as an important sector in overall economic growth. Government’s effort to anchor urban in its core policy and strategy notes started with the issuance of its first Urban Development Policy Note in 2005, continued with its recognition of the urbanization agenda in the second Poverty Reduction Strategy Paper and later in the Growth and Transformation Plan (GTP) for 2010/11-2014/15. GTP is a national medium term strategy policy document, which articulates of the overarching national development goals and the accompanying implementation strategy for the country. Most recently, the government has further elaborated the importance of urban governance under MUDHCo’s new Initiative: “Ethiopian Cities Prosperity Initiative (ECPI): Building Green, Resilient and Well Governed Cities 2013/14-2015”, which aims to provide strategic guidance to city governance and management and align urban governance with overall national policies. Collectively, these policy measures mark a robust focus on urban-based industrialization, complemented by a growing service sector, and a focus on urban centers to stimulate overall development. 14. The World Bank and the international development community have been supporting the decentralized service delivery framework and policy of GoE and its focus on and support to urbanization. The Bank has been supporting the government’s efforts to build capacity across the country’s urban local governments to enable them to effectively meet their important responsibilities. This partnership has been

10 With an official population of 86.6 million, Ethiopia is currently the 14th most populous country in the world. 11 World Bank Development Indicators (2012 figures), based on official estimates. 12 “Evaluation of Municipal Service Delivery of cities participating in ULGDP for EFY 2004”, SuDCA Development Consultants, August 2013.

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ongoing through a series of projects, starting with the Capacity Building for Decentralized Service Delivery project (2003) and later the Public Sector Capacity Building program (2004).

15. In this context, the government introduced its Urban Local Government Development program (ULGDP) in 2008, henceforth the government’s program. ULGDP provides grants to 18 urban local governments (ULGs) and Addis Ababa, based on their performance against a range of key urban institutional areas such as participatory budgeting, fiduciary management, social and environmental systems management, among others. The local governments, who receive funds from the program based on their performance, use these funds on urban infrastructure such as urban roads, solid waste management, drainage, water supply and others.

16. ULGDP, the government program, is jointly funded by the government and the World Bank. Of the total US$ 416 million program budget envelope, GoE provides 28% (US$ 116 million) and the World Bank provides 72% (US$ 300 million). Half the government contribution comes from regional governments and the other half comes from cities themselves. The program budget envelope, at the onset in 2008, was US$208 million which comprised of US$58 million of government own sources and US$150 IDA financing. As a result of program’s successful implementation and results, the program budget was doubled in 2011 through an additional US$208 million (US$58 million government and US$150 IDA funds). During additional financing in 2011, the program scope was adjusted to include capacity building for an additional set of 18 ULGs, in anticipation of including these ULGs in the fiscal transfer scheme in the future.

17. GoE’s ULGDP is one of the key tools in implementing of its overall development strategy discussed above as framed under the GTP and ECPI. The strategies, and the program, which is their key implementation tool, collectively mark an important shift in focus from rural-based agricultural growth which has been the focus of development in Ethiopia, to a more urban-based industrialization, complemented by a growing service sector, and a focus on the urban growth centers to stimulate the overall developed in a phased manner. The geographic scope of ULGDP has mostly comprised the country’s most populous 18 urban centers and its capital, Addis. This scope marks the first phase of the approach and strategy described above, and the government intends to ultimately expand the geographic scope to cover all 85 cities in Ethiopia with a population of more than 20,000 people. Various development partners, such as the French Development Agency and the European Investment Bank, have expressed preliminary interest in supporting the government’s efforts in this respect.

18. Consistently with its planned phased approach, the GoE wishes, after satisfactory track record of program implementation since 2008, to expand the program, using its own funding and World Bank financing through the use of the Program for Results (PforR) modality. The proposed PforR Program, named the second ULGDP (ULGDP II), will add 26 new ULGs to the geographic scope of the current 18 (for a total of 44 ULGs), and the 9 regional governments (RGs). It will maintain the result/performance-based disbursement modality established under ULGDP to ULGs and expand this modality to its financing of key results at the RG and the federal government levels. This expansion marks the second phase in the GoE’s intension to roll out performance-based fiscal transfer modality to all 85 ULGs in the country with more than 20,000 habitants. The Program will be based on successful experiences and lessons learnt of the first phase under ULGDP (2008-2013). It will target, particularly at the ULG level, the fiscal and capacity building gaps identified, in areas relevant for urban development.

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I. Program Description

The government program, ULGDP 19. The ongoing program – the ULGDP- has a total budget envelope of US$ 416 million (US$ 300 million IDA, US$ 116 million GoE) and has the following three main elements:

i. Performance based grants (PBG) to 18 ULGs and Addis for urban infrastructure investments ($403 million);

ii. Capacity building to (US$7.5 million) • This covered 36 ULGs (the 18 PBG recipient ULGs plus another set of 18 ULGs included in

the program at additional financing in 2011 as described above in paragraph 16) • Implementing federal ministry, the Ministry of Urban Development, Housing and Construction

(MUDHCO) to strengthen their capacity to support and guide the cities through the regions; iii. Implementation support to support, MUDHCo ($5.5 million)13.

20. As mentioned above, the ULGDP was preceded by a series of Bank supported interventions, which aimed to build capacity at urban local governments 14 . Based on local government capacity enhanced through these projects, the ULGDP was introduced as a performance-based programmatic fiscal transfer to urban local governments in 2008. The overall goal of the government program is to support improved performance in the planning, delivery, and sustained provision of urban services and infrastructure by local governments. It aims to fulfill this goal by providing grants to urban local governments based on their performance across a range of areas including fiduciary management, management of environmental and social systems, budgeting practices, governance, transparency and participation, among others. The program funds are disbursed against institutional and implementation performance and the size of the ULGs (number of inhabitants) and are earmarked for expenditure on local urban infrastructure. 21. All ULGDP funds are allocated according to a simple population-based formula. The actual disbursement from these allocations to each local government is determined by the performance of that local government, as measured in the annual local government performance, and takes into account the population amount in the said local government. A simple average of US$ 16 per capita per annum has been disbursed using IDA funds over the life of the program (2008/09-2013/14)15. These funds are complemented by 20% matching funding from the ULGs and 20% from the regional governments. Depending on the performance of ULGs in each program year, the specific per capita amount disbursed for that year changes. For instance, in the most recent assessment year, the program disbursed a total of US$ 68 million IDA funds to 17 ULGs, which passed the minimum set of conditions to qualify for the grant for that year. The total amount, divided by the total population by these ULGs, indicate an average US$ 26.4 per capita per annum disbursement for this year. The disbursement to each ULG in this year

13 Part of these funds was utilized for technical consultants who supported ULGs in procurement, engineering, environment and social systems management. Additionally, these funds were used by MUDHCo to procure consultancy services for annual performance assessment, environment and social audits, among other items. 14 The government and the Bank have been working in partnership since the early 2000s to help Ethiopia’s urban local governments effectively meet their responsibilities. The partnership has been through a series of projects, starting with the Capacity Building for Decentralized Service Delivery project (2003) and the Public Sector Capacity Building program (2004). These projects also supported the establishment of an accredited master’s degree program in urban management at the Ethiopia Civil Service College. To data more than 2000 students have graduated from this program, and the great majority of them are working in the administrations of ULGs. 15 This amount is calculated by dividing the total funding disbursed over the life of the program to 18 ULGs by the population in these local governments: A total of US$ 286,902,532 IDA funding has been disbursed to date as performance based grant under ULGDP. US$20 million of this amount has been disbursed to Addis (in two program years) as explained in detail below. The US$16 per capita is calculated by dividing the total IDA funding to the 18 program ULGs (except Addis) by the population in these local governments (US$ 266,902,532/ 2,782,971/6 years = US$ 16).

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varied between the highest amount of US$ 7.9 million to Mekele, and the lowest amount of US$ 1.6 million to Axum. 22. Disbursement of the allocations is made after ULGs undergo an annual assessment. The assessment is carried out by an independent private firm, procured by the government. The performance of local governments is measured in the areas of financial management, participatory planning, investment, operation and maintenance of infrastructure, and transparency and accountability in operations. Under ULGDP, ULGs need to perform a certain level in order to access the program funds. They cannot access the ULGDP funds if they fail to meet certain conditions, or perform below 50 percent in the overall assessment. This is necessary to ensure that the funds are used effectively, efficiently, and with integrity. Those ULGs, which fulfill this requirement, receive their full allocation. If they perform above the expected target score, they are rewarded by an amount equal to their allocation plus a 20 percent acceleration. Through this system, the program was able to accelerate the use of funds compared to the original targets. ULGDP’s achievements and lessons learned 23. Throughout the six year implementation period (starting in 2008/09, currently under implementation), the program has recorded a number of tangible achievements in the following key areas:

i. Institutional improvements at the ULG level; ii. Wider impact on the urban and economic development in line with the GoE’s urban

development policy; iii. Physical urban infrastructure investments.

24. First, the program has made achievements in terms of ULG institutional capacity in areas such as citizen participation in local government budgeting and project execution. Citizens are increasingly actively involved in the planning process, with a doubling of the number of citizen groups taken part in the annual planning process from 226 citizen groups in 2008/09 to 521 in 2012/13. All program cities have increased the involvement of citizens by more than 85% from the baseline in 2008/09 as of 2012/13. 25. The second area of institutional improvement pertains to budgeting and the production and use of key local government planning documents. At the program’s onset in 2008/09, none of the ULGs had urban development plans, rolling capital investment plans (CIP) or assets management plans. As of 2012/13, all 18 program ULGs produce timely annual plans, comprehensive 3-years rolling CIPs and asset management plans, including budgeting for maintenance and operations, and related procurement plans. Majority of program ULGs (12) are also able to establish proper links between all these core planning and budgeting instruments and ensure consistency across the planning documents. Improvements are needed in the remaining (6) ULGs to ensure robustness and consistency of the figures across the various plans.

26. Third, the level of overall local government transparency has increased. While at the program onset in 2008/09 there was hardly a culture of making local government budgets public or sharing other information pertaining to local governments, all program ULGs now disseminate information to citizens, and 12 ULGs achieved highest score on the program’s transparency indicators by making public all core documents for the citizens which include plans, budgets, bid evaluations and physical progress on infrastructure investments.

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27. Fourth, ULGDP has supported management and incentives around own source revenues (OSR)16. All ULGs are now able to produce revenue enhancement plans and the focus on OSR has increased with improved collection, which has doubled from 2008/09 to 2012/13. The aggregate nominal OSR amounts of all program ULGs has increased by 135% over the period. In inflation adjusted real terms, however, aggregate OSR has been stable over the five years, with 11 ULGs recording a net increase while the remaining ULGs have recorded stable or slightly lower OSRs. There is, therefore, a need to continue focusing on improvements in this area, particularly through stronger involvement of the regional government tier, which regulates the local government OSR legal and regulatory framework, and through strengthening of the performance measures on OSR and stronger targeting on the municipal revenues17.

28. Fifth, financial management has improved over the implementation period, indicated by number of ULGs, which can produce financial reports, which increased from zero in 2008/09 to all program ULGs in 2012/13. In the most recent program annual assessment, 14 ULGs received the top score with all reports submitted on time. The reason why four other ULGs did not get top score was only because they missed one of the annual submission deadlines, for one quarter. A similar track record is observed on financial audit status: At the program onset, nearly all ULGs had long backlog of audit reports, many of them with adverse audit opinion. As of 2012/13, 18 out of the 19 program ULGs had cleared the audit backlog of the last six years, with one ULG clearing up its backlog of five years. Importantly, whereas 6 ULGs had adverse audit opinions as recently as 2009/10, none of them had adverse audit opinion in the most recent audit round, with all ULGs obtaining qualified audit opinions.

29. In terms of wider impact on the urban and economic development, ULGDP has enhanced financing for urban infrastructure by ULGs by providing financial reward to the institutional improvements recorded above. By providing an average of US$16 per capita per annum additional financing to 18 ULGs, the program has more than doubled the amounts available for urban capital investments in these local governments. A rough estimate of the average funds available for urban investments countrywide -excluding funding from ULGDP- indicates that the spending has been in the tune of US$11.0 per urban resident per annum for the entire country, excluding Addis18. The bulk of this amount comes from ULG own source revenues (US$8.7 per urban resident excluding Addis) and the remaining US$2.3 is regional spending and investments by woredas. In the 18 ULGDP ULGs (excluding Addis), per capital own source revenue in 2011/12 was on average US$12.9. Thus, the ULGDP IDA funding (average 16 US$ per capita) augmented the discretionary funding in program ULGs by approximately 124% or 149%, if the amounts from the regional co-funding (US$ 3.2 on average) are factored in.19 30. Physical urban infrastructure investments have been achieved as a result of the program’s design, which mandates ULGs to invest these enhanced funds in areas with high rate of economic return, such as roads, water and sanitation. To date, 33% of ULGDP funds have been invested in cobblestone roads, 15% on drainage and 10% on gravel roads, with the remaining 43% on a range of other urban infrastructure investments. It is estimated that the urban investment projects funded through ULGDP have created 312,460 jobs and that these are targeting areas of high unemployment. Importantly, a large number of small and micro enterprises have been involved in project execution, contributing to future local economic development. Of particular note among urban infrastructure investments is the use of funds for cobblestone streets and drainage systems. To date, 670 kilometers of roads, 588 kilometers of drainage

16 The net increase in actual OSR in real terms has been constrained by the legal framework and the lack of sufficient support from the regions, including lack of consultations on the changes/setting of tax rates/tariffs. 17 The existing performance measures are focusing only on revenue enhancement planning and achievement of planned targets. 18 This figure goes up to US$16.7 per capita if Addis is included, where the OSR from cities were estimated at US$ 11.2 and the expenditures by regions and woredas at US$ 5.5 per capita. 19 Figures based on the recent study – Ethiopian Local Government Revenue Study (abbreviated: “ELGRS”) conducted by Dege Consult, Urban Institute and SUDCA, Component 2a Final Report, November 2013.

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system, 171 latrines and 110 community water points have been constructed, with 29,000 people given access to improved water sources. As a result of the roads built by program funds, particularly cobblestone, mobility for residents has increased, flooding has diminished, property values and small enterprises have increased. These changes are transforming city centers into lively and welcoming places in which to live and work. Program’s challenges 31. The ULGDP is not without challenges. The chief shortcoming of the system has been the delay in the procurement of the independent annual performance assessment (APA) by the government, specifically by the Ministry of Urban Development, Housing and Construction (MUDHCo). Since the findings of the assessment determine the amount of program funds to be allocated to local governments, the delay in the procurement of the assessment has caused significant challenges with aligning the allocation with the budgeting cycle and the regional and city council approval of the overall budget including ULGDP funding on time (i.e. June of each year). Additionally, while the performance orientation of the program has been a major strength, some of the indicators used to measure performance, and determine disbursements have, at times, been complex for the assessors to determine20 and/or not been sufficiently targeted at core development objectives of the program. There is, therefore, a need to carry out the performance assessment on time, sync the grant cycle with local government budgeting period (ensure that results are ready prior to the start of the ULG planning and budgeting process), streamline and sharpen the performance measures to eliminate subjectivity and to provide a stronger focus. 32. Secondly, differently than the 18 ULGs, the program has faced a challenge in leveraging the intended institutional performance of Addis. The primary reason is that while the level of financial incentive the program has offered has been attractive in these 18 ULGs, it has remained too low for Addis. Due to this factor, Addis has recorded satisfactory performance only twice over the implementation period, each time with relatively low scores (score of 51 over 100 in 2008/09 and 61 over 100 in 2011/12). 33. Thirdly, while capacity in the 18 program local governments has increased, there is need for further improvements particularly in the areas of (i) municipal planning and budgeting – in ensuring the quality of and consistency among local government budgeting and planning tools such as CIP, revenue enhancement plans and budgets, (ii) OSR enhancement, (iii) social and environmental systems management and (iv) procurement.

34. Fourthly, while the program fund transfers are captured in the national public financial management system at the federal level and the expenditure of funds are tracked, it is often done by using an excel based system, which runs parallel to the national public financial management system, IBEX. This makes it challenging to centrally track the use of funds at the decentralized level. Therefore, there is a need to further integrate program funds expenditures at the regional and ULG levels in IBEX, with an accompanying coding system to capture main local government expenditures. 35. Finally, there is a need for a stronger involvement of the regions in capacity building of ULGs and supporting and monitoring their core mandates such as municipal revenues, financial audit and compliance with the national environmental and social safeguards regulations, and to strengthen the entire capacity building support to ULGs from the Program in the light of the expansion of the Program and the end of other CB programs such as the previous PSCAP.

20 In the most recent assessment, more than 70 data collection points were applied.

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36. In sum, the government program has made tangible progress in enhancing the institutional capacity of urban local governments for service delivery, while a number of areas including the administration of the performance assessments, refinement of performance measures, capacity at the local level, reporting structure of program expenditures and a more direct involvement of regional governments require continued focus and improvement. These are reflected in the design of ULGDP II. Proposed ULGDP II, the PforR Program

37. In this context, the government wishes to continue the program’s support to the 18 ULGs and expand the geographic coverage to include 26 new ULGs. The main policy reason for the government’s decision to scale up the program comes from its goal of rolling out the performance based fiscal transfer instrument as the main vehicle for promoting institutional and infrastructure results to all the country’s 85 ULGs over time, in a phased matter. The 18 ULGs under the program represent the first phase of the implementation of this policy, while the 44 ULGs (along with the new 26) under the proposed expansion represent phase two. Ultimately, the government wishes to include all 85 ULGs in the country as part of the program. These 26 ULGs represent the next tier of important cities in the country with the highest populations, following the top 18 already included, and they had been receiving capacity support21 to help them respond to the performance incentives.

38. In addition to increasing geographic coverage to a total of 44 ULGs, the government also wishes to include the country’s nine regional governments (RG) in the proposed second phase. Regional governments in Ethiopia have a legislative mandate to backstop and support ULGs in carrying out core local government functions. They also monitor the compliance of ULGs with various fiduciary, social and environmental systems management rules and regulations. The regional audit offices (ORAG), for example, are tasked with carrying out external financial audits of local government in their jurisdictions, while the regional environmental protection agencies (REPA) are mandated with ensuring compliance at the ULG level with environmental and social regulations. To date, only four RGs have been involved in ULGDP and their involvement has been limited to (i) transferring program funds which they receive from the federal government to ULGs and (ii) providing matching contribution (20% of the annual IDA amount) for program financing to the ULGs in their constituency, as described above on paragraph 14. The government, in the proposed second phase, wishes to deepen the involvement of RGs and include technical areas to be leveraged.

39. Thus, the Program’s boundaries will be defined as follows:

i. Program duration: July 2014 through December 2019; ii. Program budget envelope: US$ 556.53 million22;

iii. Main expenditure items; i. Performance-based grants to 44 ULGs for infrastructure investments as listed under

Program investment menu - US$ 499.53 million23; ii. Capacity building and ULG support by regional governments – US$ 30.00 million;

iii. Federal support and capacity building Program administration – US$ 27.00 million.

40. The Program Development Objective (PDO) is to enhance the institutional performance of participating urban local governments in developing and sustaining urban infrastructure and services. The

21 18 of the 26 ULGs have been supported under ULGDP and 8 under a separate GIZ program under close cooperation with the ULGDP. 22 This financing framework will comprise US$176.53 million GoE resources and US$ 380.00 million IDA funds. 23 This is made up of US$ 176.53 million GoE and US$ 323.00 million IDA funds.

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PDO for ULGDP II is a slightly refined version of that of ULGDP. The refinement has been made to reflect the changes brought under PforR. Key results of the institutional performance improvements will be (i) enhanced participation of citizens in ULG planning and budgeting, (ii) efficient fiduciary management and procurement, (iii) increased amount of own source revenues at the ULG level; (iv) improved infrastructure, service delivery and O&M systems, (v) strengthened accountability and oversight systems and improvements on environmental and social safeguards. 41. Similar to ULGDP, the Program financing framework will comprise IDA and GoE funds. Under ULGDP II, however, there will be a differentiated approach to the contribution from ULGs. While the 18 ULGDP ULGs will continue to provide a higher level additional to the IDA financing for the performance based fiscal transfer element, the new 26 ULGs will be required to match at lower levels in line with their financial resources. This nuance reflects the realistic analysis of the budget position of the new ULGs and indicates how much they can contribute from their own source revenues. The funding contribution rates of ULGs to the Program will range from 30% of the IDA funding for existing 18 ULGs (increase from the current level of 20% under ULGDP) to 20% for the 22 new ULGs in the four ULGDP regions and 10% for 4 new ULGs in the emerging DRS. These will be minimum requirements, which will be monitored by the independent assessment annually. If, in any year, a ULG exceeds these minimum levels, and matches IDA amount at a higher rate, than that will be reflected as a performance enhancement and will be rewarded under the follow year’s performance-based grant cycle. The contribution of regional governments will continue to be 30% of the IDA funding amount in the existing regions and 20% in the DRS regions. Dira Dawa and Harar will contribute with 50% of the IDA funding amount, each.

42. The Program will maintain the existing design features of ULGDP such as the performance orientation and the measurement of progress and results through independent annual and performance assessments (APA). The APA will assess (i) a set of minimum conditions (MCs) which each ULG will be required to fulfill each year of the Program and (ii) a list of performance measures (PMs) which will determine the ULG’s progress each year. MCs will function like green and red lights and the PMs will determine the ULG’s score and the actual disbursement. 43. In order to keep the system simple and to ensure a strong link between performance, absorption capacity and allocation, the system will be based on a common set of minimum conditions and performance measures. However to ensure that new ULGs have sufficient capacity to be enrolled in the full system, they will be introduced in the phase manner where only the MCs will apply in the first fiscal year and the related allocations, as explained in further detail in paragraph 50, below. Prior to the first allocation and in the first year of the program, the 26 new ULGs will receive a substantial capacity building and technical assistance from mobile teams, from training courses at the ECSU and from the supply driven capacity building support, as explained in detail in Annex 8.

44. ULGDP II will also provide improvements to the challenges discussed above including the timing of the APA alignment of the grant cycle more closely with local budgeting cycle24; streamlining and sharpening the indictors used in APA to strengthen the focus on the key results areas25; continuing to build the capacity of ULGs and the inclusion of local government expenditures in IBEX. ULGDP II will ensure full alignment of the APA with the ULG budgeting process and the integration of ULG expenditures in the national budgeting and accounting system.

24 Timely APAs will be supported by DLI 9. 25 An example of this is within the area of municipal revenue mobilization where the previous APA only focused on the planning of the revenues (state and municipal) and achievement of planned targets. The new APA will strengthen these performance measures through focusing on the quality of these plans, actual results made in revenue mobilization (focusing on municipal revenues) and contribution by the ULGs to their urban investments from these collected OSR (rewarding matching contribution to the PB grant investments). These initiatives will strengthen accountability and longer term sustainability of the Program, and will be further supported through a specific DLI focusing on the regional support to the ULGs within this pertinent area.

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45. The scope of ULGDP II will not include Addis. As indicated above, the institutional, infrastructure and financial needs of Addis are distinctly different than all the other ULGs in Ethiopia. Therefore, a possible Addis-specific project with the goal of responding to the capital city’s specific institutional and infrastructure needs is currently being discussed between GoE and the World Bank. 46. Importantly, under ULGDP II, financing for the regional governments and federal government entities, including the implementing ministry, MUDHCO, will no longer be input-based as ULGDP, but will also be results based. As detailed in the disbursement-linked indicators (DLIs), which target these two levels of government, Program funds will be disbursed to these entities only after the verification of the results for which they are responsible.

47. ULGDP II is expected to run for a period of five years – from 2014/15 (Ethiopian FY2007) to 2018/19 (EFY2011) with the first disbursement year 2014/15 (EFY 2007). As explained above, the focus of the performance grant to ULGs will be the country’s most populated 44 cities of the total 85 ULGs (except Addis Ababa) with a total population of 4,348,85326, which is about 26% of the total urban population. The Program also covers all nine regions in the country. 48. Like under ULGDP, the ULGDP II expenditure framework will comprise three following major items.

i. Performance based funding for 44 ULGs’ urban infrastructure investments US$ 499.53 million (of which US$ 176.53 is from contributions from regions and cities and US$ 323.00 is from the IDA funding);

ii. Capacity building and ULG support by regional governments (US$ 30.00 million); iii. Federal support and capacity building Program administration (US$ 27.00 million).

Performance Grants to ULGs 49. As shown in detail in the table below, performance-based grants (PBG) to ULGs will be the biggest item of program expenditure, and are expected to total US$ 499.53 million, including the contributions from the regions and the ULGs (US$176.53). As under ULGDP, these funds will be allocated using a simple formula based on population size and the performance of the ULGs. Disbursements will flow through the regular treasury system, similar to the current ULGDP, but with a clear timing and in two annual tranches. 50. The Program will provide capital discretionary financing a simple per capita per annum average of US$ 14.85 through IDA funds. When disaggregated, the simple average for the new 26 ULGs will be US$13.38 and US$15.69 for the 18 ULGs currently participating in ULGDP (see table below for details). When the financing from the ULGs and RGs are taken into account, which are expected to total US$176.53 million, the per capita per annum amount will be US$24.88 and US$19.58 for the current 18 and new 26 ULGs, respectively.

26 The most recent official national census dates back to 2007. The official Central Statistics Agency (CSA) has provided an estimate to this in 2013. As agreed with GoE, the Program uses these figures.

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ULGDP II detailed performance based fiscal transfer amounts over the life of Program – 5 years Population

(CSA 2013)

IDA allocation

2014/15 (For Program year # 1)

EFY 2007

2015/16 (EFY 2008)

onwards (For 4 years)

Total IDA allocation

during Program life (EFY 2007-EFY 2011)

Average per

capita per

annum IDA

GoE Funding27 Total IDA+ GoE

IDA+ GoE per

capita per

annum

Current 18 ULGs

2,782,971 $43,653,775 $43,653,775 $218,268,873 $15.69 $127,965,958 $346,234,831 $24.88

New 26 ULGs

1,565,882 $6,481,211 $24,562,477 $104,731,127 $13.38 $48,565,356 $153,296,483 $19.58

Total for 44 ULGs

4,348,853 $51,134,995 $68,216,251 $323,000,000 $14.85 $176,531,315 $499,531,315 $22.97

51. The size of this amount has been determined as a function of various factors: International good practice from an expanding number of countries with performance-based grant allocations and considerations on the costs of investments, expenditure needs and current level of investments. Experiences from e.g. Uganda, Tanzania, Ghana, Nepal and Bangladesh show that in order for a performance-based grant function to work well, the size of the transfer needs to be adequate to create response from LGs and their constituents28. In other words, the potential financing should be attractive enough to bring about the institutional change sought at the local government level. Specifically in the Ethiopian urban context where there are significant urban infrastructure gaps, and costs of urban investments, the annual allocation needs to be adequate to fund urban investments in order for the LGs to respond to the incentive mechanism, within their absorptive capacity constraints. In the context of this Program, a band around approximately US$13-16 per capita per annum has been determined to be the optimal level by a comprehensive review of local government fiscal and revenue position by the study mentioned above in box 1, which has included extensive field-work across sample Program ULGs29. 52. The system of allocations takes into the fact that the 26 new ULGs have not been part of a performance-based grant system before and the larger capacity gaps in these ULGs. Therefore, the PBG element of the Program will be introduced gradually. In Program year 1, the 18 current ULGDP cities will be measured against Program’s minimum conditions and performance measures. The new 26 cities, however, will only be subject to minimum conditions in this year. From Program year two onwards, all 44 ULGs will be measured against all minimum conditions and performance indicators and will get access to similar amount of average funding per capita. This will mean that allocation to the new 26 ULGs will start from a lower level in Program year 1, with an increase later on in tandem with the capacity building activities (see table above for the differentiated amounts for the new 26 ULGs vs existing 18 ULGs in year 1). This will create the per capita amounts of US$15.69 and US$13.38 for the existing and new ULGs, respectively, over the life of the Program. This will mean that in aggregate terms, the per capital allocation of IDA funds to existing 18 ULGs under ULGDP II will be slightly lower than the average allocation to these ULGs under ULGDP, which is US$16. The US$0.31 difference has been assessed to be negligible and it is expected that the Program will continue to leverage performance and results. The phased introduction of the performance system, while capacity is built, and the allocations against performance determined in the APA, will ensure that allocations are provided to ULGs with sufficient capacity to handle the discretionary funds. 53. This formula and the resulting per capita amounts will broadly maintain the level of discretionary spending provided to 18 ULGs under ULGDP. In terms of its impact on the development budget of the 26

27 As explained above, funding will be provided by regional governments and cities with various levels depending on the location and time for enrollment in the ULGDP. 28 UNCDF: Performance-Based Grants- Concept and International Experience, 2010 for a review of the experiences from 15 countries in Africa, Asia and the Pacific. 29 Dege Consult, Urban Institute and SuDCA Development Consultants, Analysis of Urban Local Government Fiscal Position in Ethiopia, November 2013 (ELGRS).

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new ULGs, the US$13.38 average per capita per annum allocation to these new ULGDP local governments will come in addition to the funding available for investments from existing sources of revenues for capital investments. OSR and the actual capital expenditure of sample of new ULGs in 2011/12 (EFY 2004) were per capita US$5.87 and US$7.07, respectively30. 54. In terms of the total ULG allocations, the Program’s first year allocates a simple average of US$ 1.1 million to ULGs, with a range of US$ 108,583 allocation to the smallest ULG and US$4,495,993 allocation to the largest Program ULG (see Annex 3 for exact figures per ULG). When the Program reaches full cycle starting in year 2, the simple average amount will rise to US$ 1.6 million, with a range of approximately US$ 411,507 to the smallest ULG and approximately US$ 4,495,993 to the largest Program ULG. As the Program funds will be based on actual performance, the actual grant disbursement from these allocations will be determined by the annual performance of ULGs. 55. The allocations are based on estimated targets for ULGs’ performance. If they achieve more that these annual targets (as determined in the annual performance assessments), the allocations can be accelerated and the funds in the program utilized earlier than the five-year program period. In this case, it is expected that additional funding may be mobilized. 56. The basis to determine these allocations will be the annual performance assessments (APA). The ministry will procure an independence private firm to conduct the annual assessment, as under ULGDP to ensure independence of results. Because the Program will leverage institutional strengthening of ULGs for sustainable provision of urban services, the assessments will focus on measuring ULG capacity improvements in planning, budgeting, assets management, fiduciary, environmental and social systems management, revenue generation, good governance and transparency areas (see Annex 6 for a detailed list of the performance areas, and the section below on DLIs and verification protocols for more information on how the APA results will be verified). 57. Similar to ULGDP, once ULGs receive Program funds, they will be mandated to use these to only finance core infrastructure investments –spelled out in detail in Program’s investment menu (see Annex 4) – such as roads, water supply, sanitation, solid waste, greenery, street lighting, etc. Compliance with the investment menu will be a minimum condition and be verified by APA each Program year. If a ULG has not invested Program funds in full compliance with the investment menu, it will be sanctioned in the following year.

58. ULGs will be required to prepare the project in a participatory manner and use the planning tools developed under ULGDP, the assets management system, capital investment plans, annual plans and budgets. Participatory approach and proper planning and budgeting will be promoted through the annual assessments. Capacity building support 59. Under ULGDP II, a structured and systematic approach will be adopted for CB activities and focuses on all three government levels – federal, regional and local. Firstly, CB activities for all levels throughout the program period will be supported by dedicated federal and regional mobile teams. In addition, CB support will be tailored to the needs of federal, regional and local levels: (i) for ULGs, both supply and demand side interventions will be provided to raise their general capacity and enable them to respond to the performance incentive mechanism; (ii) regions will be supported to strengthen their urban governance and management roles and in turn, provide CB support to ULGs under their charge; and (iii)

30 Based on data collected under the ELGRS, Dege Consult, UI and SuDCA, November 2013.

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for the federal level, CB support will aim to strengthen their capacity building coordination, oversight and backstopping functions in serving the regional and local governments. 60. In terms of the demand-driven CB support, all ULGs will be allowed to spend up to 5 % of the investment grants on CB, supported within a defined menu of activities, see Annex on Investment Menu. The supply driven CB for the 44 ULGs will focus on the distinctly different needs of Program ULGs, with a more comprehensive support to the newly enrolled ULGs. The 18 ULGs have benefitted from capacity building through CBDSD, PSCAP, ULGDP and GIZ for almost a decade and the 4 well established regions, have a higher capacity and several cities to support under the coming program. Therefore, in addition to the general CB from the program, the new 26 ULGs will be provided with a 8-modules CB support at the ECSU in the first half year of the program, covering core areas such as planning, budgeting, financial management, procurement, etc. 61. Technical assistance from the federal/regional government will be organized differently for the new DRS regions, Diwa Dira and Harar, with CB delivered directly from the federal mobile team comprising experts in multi-sectoral core areas of urban development and the established 4 regions, with multiple ULGs to support – Amhara (10 ULGs), Oromia (11 ULGs), SNNPR (9 ULGs) and Tigray (8 ULGs). In those established areas, regional mobile capacity buildings teams will provide the supply driven CB support to ULGs, with backstop from MUDHCo, see Annex 8 for further details on the CB design. Capacity Building to ULGs 62. Assessment of capacity building activities under the ULGDP shows that current ULG capacity building activities largely focus on backstopping support from the federal MUDHCO contracted team (engineers, procurement and M&E experts) and training –formal training in particular. Under ULGDP II, this type of supply-driven support will be provided to the ULGs by the regions progressively overtime to align the actual practice with the functional mandates of regional governments, which is to provide support ULGs. This supply-driven CB support will be supplemented with the opportunity for ULG for more demand-driven activities through use of up to 5 % of the PB grants on CB activities within a defined allowed investment menu to address the gaps and weaknesses identified during the APA. Using a combination of supply and demand-driven CB support reflects global good practice, which shows that such approach helps to ensure that ULGs address their unique needs and build their ability to plan for and procure capacity building services, while the higher tiers of government ensure the core areas of urban management are addressed. To ensure that the demand-driven CB funds are planned for and utilized properly by ULGs, the Program, through the federal and regional teams as well as backstopping from the centre ensures that ULGs conduct proper planning of their capacity building activities, are reporting on these, and use certified service providers. The CB support will be applied and follow-up in the areas measured in the APA, including planning, budgeting, revenue mobilization, assets management, procurement, PFM, accountability and environmental and social safeguards. The demand-driven CB support, funding from the performance-based grants can also be used for equipment, installations related with the focal areas of the Program. Capacity Building to RGs 63. In line with the increased responsibility of RGs under the Program, support to the RGs will be increased to help raise capacity to backstop ULGs. Through RG focused DLIs, they will be incentivized and support the various technical aspects of ULG management and capacity building support. RGs will be required to develop CB plans for the planned support to ULGs. Implementation of these plans will be part of the DLI verification process. The support of mobile teams from the federal level to support this will continue with the transfer of responsibilities to the regions over time. For the four most developed

15

regions/regions with many ULGDP ULGs – Amhara (10), Tigray (8), Oromia (11) and SNRP (9 ULGs), those regions will be in charge of regional mobile capacity building teams to support the ULGs directly from the regional level. 64. The main focus of capacity building architecture is to enhance urban governance and management to achieve better service delivery. Due to the cross-cutting nature of the subject, CB will aim to strengthen the governments’ capacity in a variety of subject matters, such as participatory planning, budgeting, revenue mobilization, financial management, procurement, infrastructure asset management, contract management and execution, urban planning, environmental and social safeguards, audit, ethics, fraud & corruption, monitoring & evaluation among others. The intention is both to strengthen the human capital capabilities as well as systems improvements in these related areas (such as IT system, accounting system etc.). The APA, integral to the ULGDP II, will provide a comprehensive, regular check on the capacity improvement and achievement or identify gaps and weaknesses to be improved upon in these areas (such as e.g. procurement and financial management) for each ULG. 65. The CB activities will be carried out in two phases considering the transition between ULGDP and ULGDP II and the key activities are captured in the table below: Table: Main Capacity Building Activities in Each Phase

Phase 1 (Nov 2013 – Dec 2014) Phase 2 (Aug 2014 – Dec 2019) 1. Federal mobile team 2. Two technical consultant teams with CB support

for ULGs (phased out by end of period) 3. CB support to ULGs under program funded by

GIZ (phased out by end of period)

1. Expanded federal mobile team and functions

2. Four new regional mobile teams 3. New urban management course for ULGs 4. Demand-driven CB for ULGs

66. Further details on the overall design of capacity building activities under ULGDP II are included in Annex 8. Choice of instrument 67. Choice and justification of instrument - the Program will be financed through the Bank’s PforR instrument. There are three primary reasons for this. First, the ULGDP II is the extension of the current Government program and forms a core part of the existing intergovernmental fiscal architecture. The program will continue on a permanent basis, as an ongoing fiscal program leveraging GoE resources. Second, the basic goal of the ULGDP II is to leverage the institutional performance of the local governments it will target in an enhanced manner, while ensuring that expanded local urban infrastructure is developed. Because of the direct relationship between the local government institutional results, and the Program disbursements to federal and then to local governments, the PforR instrument allows for a directly incentive-driven approach to achieve the PDO. Through the use of DLIs targeted specifically at federal and at the regional government actions required to optimize the administration and execution of local governments, ULGDP II ensures that incentives of the federal, regional and local levels of government are effectively aligned around the goals of the Program. Finally, the Program will use, improve and integrate GoE and local government systems, including public financial management, social and environmental systems management and procurement systems.

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Program’s Disbursement Linked Indicators 68. All Program funds will be provided through disbursement-linked indicators (DLI). The first set of DLIs (1 through 3) will aim to strengthen institutions and delivery of infrastructure and services by ULGs and will be supported by US$ 323 million from IDA funds over the Program implementation period. These three DLIs will target ULGs. Each of these DLIs will represent a composite index of different minimum conditions and performance measures:

• DLI 1: ULGs have achieved Program Minimum Conditions (MCs) in the annual performance assessments 31;

• DLI2: ULGs have strengthened Institutional performance as scored in the annual performance assessments;

• DLI 3: ULGs have delivered infrastructure, maintenance and supported job creation as per their annual plans, as scored in the annual performance assessments, and ensured that value for the money audits are conducted.

69. These three DLIs in particular build on ULGDP performance assessment system and will aim to ensure that;

a. Basic fiduciary, project planning and execution, and environmental and social management conditions are in place such that local governments can absorb the Program funding;

b. ULGs continue to strengthen their institutions of urban management; c. ULGs use program funds effectively in creating infrastructure and delivering services,

achieve the targets in infrastructure delivery, maintenance and development and to promote the GoE’s strategy on urban development at the city level.

70. The disbursement system for DLI 1, 2 and 3 is flexible towards actual performance of ULGs. It is particularly important to note that if Program ULGs perform better (or poorer) that expected (as set out in the disbursement related targets in the DLI matrix), disbursements will be adjusted accordingly. This means that if Program ULGDs perform higher than expected they will receive higher than expected disbursements. If this continues throughout the Program, then additional financing will be needed. 71. The second set of DLIs (4 through 9) will target strengthening of regional and federal government capacity so that they can properly fulfill their respective roles towards ULGs. These DLIs (with allocation in the tune of US$ 57.0 million) will leverage, and disburse according to results achieved by (i) RGs in providing support to ULGs, and (ii) MUDHCO in strengthening the capacity of and backstopping regions and the regional support to ULGs as well as annual assessment and audits:

• DLI 4: Regional government capacity building and support teams in place and support urban service delivery;

• DLI 5: Regional Government Audit Agencies (ORAG) carry out ULG audits on time. This addressed a very important area of the program and timely audits is crucial for reduction of fiduciary risks as well as for the performance assessments:

• DLI 6: Regional environmental protection agencies (REPA) review of ULG safeguards on environmental and social management compliance in a timely fashion;

• DLI 7: Regional Revenue Authorities’ support to ULG revenue mobilization, - indicated through annual consultative meetings on municipal OSR, and up-dated tariff/tax proclamations in order to address and support the longer-term sustainability of the investments;

31 It should be noted that ULGs will have to comply with the MCs to get access to the allocations from DLIs II and III as well, as the MCs are the basic safeguards for handling of larger discretionary funds.

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• DLI 8: Completion of annual MUDCHo capacity building activities for program ULGs, RGs and the Ministry. This promotes that MUDHCo strengthens its capacity to service ULGs and provide CB support to regions to enable them to provide support to cities, addressing the action plan outlined for the program;

• DLI 9: Timely launch and completion of Program Annual Performance Assessments (APA)/independent Procurement Audits (IPAs) and Value for the Money (VfM)32. MUDHCo ensures timely completion of the independent annual performance assessment, and VFM audits, and establish body for approval and complaints handling – an area which is core for the result-based budget allocations.

72. Collectively the DLIs address the PDO. Performance against the first three DLIs is core to the performance of the ULGs under the ULGDP design and overall disbursement from the Bank under the Program. DLIs 4, 5, 6, 7, 8 and 9 are intended to leverage the roles to be played by MUDHCo and regional governments in strengthening the capacity of ULGs for urban development generally, and specifically for the delivery of Program results. These DLIs are designed to address the challenges and bottlenecks experiences in the implementation of the current ULG and will provide incentives to address the core issues on timely audit, social and environmental reviews/audits, revenue mobilization support to ULGs and strengthening of the entire system and procedures for capacity building. 73. The independent verification of results to trigger disbursement is key to Program. As per the current ULGDP, MUDHCo will recruit an independent firm to verify Program results on a timely manner to provide the basis for disbursements of funds under the Program to the participating ULGs – which is a specific DLI for the ministry. To mitigate the risk of subjective assessment by the assessment firm, the assessment results will be shared simultaneously with the World Bank and the government, and will undergo a quality assurance by MUDHCO (under a technical sub-committee established), and reviewed by the World Bank. Annexes 1 and 2 provide a detailed overview of the DLIs and links with disbursements. The Bank will retain a right to make the final decision whether a DLI has been achieved or not. In addition, the Bank will undertake regular independent quality assurance of the APAs to ensure continued robustness.

II. Description and Assessment of Program Strategic Relevance and Technical Soundness

a. Strategic Relevance

74. Ethiopia is urbanization rapidly – with its urban population having doubled in 35 years, from 8.5% in 1967 to 17.4% in 2012. In addition, the rapid rates of urbanization are expected to continue. The UN expects the rate of urban growth to average 3.57 per cent per annum between 2010 and 2015 placing Ethiopia among the fastest urbanizing countries in SSA. According to UN’s medium variant projection, the urban population is expected to reach 23 per cent in 2030. This is an opportunity for the country, as urbanization will be the key to Ethiopia’s transition to a middle-income country, as it will help provide the ground for the transformation of the country’s economy. Timmer and Akkus (2008) find that rapid urbanization is a necessary condition for structural change. Financing and sustaining effective urbanization will be crucial to sustaining the high rates of economic growth Ethiopia has been recording for the past decade. Ethiopia needs to shift its focus to building its urban economy, not only because this will be the source of growing competitiveness, but also because of its impact on the macroeconomic environment, livelihood improvement and poverty reduction.

32 The VfM audit will be introduced from the third assessment and will review the cost effectiveness of the ULG investments made, the benefits and targets achieved in a standardized manner with an agreed and standardized TOR. The results will fit in the performance indicators under the DLI 3 (and the results will be integrated in the results from the APAs).

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75. However, there are serious challenges to effective urbanization, and this limits the country’s overall economic growth. These limitations broadly comprise; (i) infrastructure and service delivery gaps and urban administrations institutional capacity weaknesses, as indicated above in the country and sector context section; (ii) an increasing urban population and higher demand for the already limited services and infrastructure, and (iii) a significant fiscal gap to help ULGs overcome these challenges. The fiscal gap is due mainly to the inadequacy of the current fiscal system in Ethiopia to meet the financing needs of these fast growing ULGs. As explained above in the Context section, within the fiscal system, ULGs receive recurrent support from regions through block grants to meet their mandate to carry out the state functions which have been delegated to them from the regional governments and some financing for core public sector employee salaries. In addition to these resources, there is almost no support for capital investments. In most cases, ULGs have to meet the infrastructure investment financing through their own source revenues, see table below which presents the financing sources for urban development in the country.

Urban development spending at different government levels, 2011/12 (EFY 2004)

Urban development

(ETB million)

Total Public Spending

(ETB million)

Urban dev. as % of total

Urban dev. as pct

of total urban dev. Federal 232.7 52,893.8 0.4 4.5 F/R Unassigned Capital 223.7 15,532.2 1.4 4.4 Regional (Bureau) 869.6 28,534.2 3.0 17.0 Woreda Level 658.3 27,456.5 2.4 12.8 Municipal (OSR) 3,148.1 3,148.1 100.0 61.3 TOTAL 5.132.3 127,564.8 3.7 100.0 Source: Based on data from IBEX/MOFED. As consolidated budget accounts only report on spending from treasury sources (i.e., federal/state revenues and block grants) and external sources (international grants and loans), but exclude local expenditures funded from municipal own source revenues. In order to get a view that is as comprehensive as possible, it is assumed that municipal own sources are fully spent on urban development. Caution should be used in interpreting these data, as there is sometimes inconsistencies in categorization and/or coding of the underlying budget data, which makes it difficult to consistently isolate urban development spending.

76. Analysis of ULG fiscal position confirms this fiscal gap: Study of 12 sample ULGs shows that even with future improvement in revenue mobilization at current growth levels, ULGs will need substantive support in order to achieve the GoE urban development objectives: Revenues of these ULGs vary within a board range of ETB 27 (US$ 1.5) and ETB 400 (US$ 22.2) per capita. At the national level, as indicated in the table below, all municipal revenue constitutes only about 3% of total public revenues in the country33. The most significant revenue assignments are at the federal and regional levels. Given the specific figures in the sample ULGs and the aggregate national picture, the current system of relying on ULG own source revenues to meet most, if not all, ULG institutional and infrastructure/service delivery mandates is not feasible. Without additional funding, ULGs will operate at a sub-optimal level and not fulfill their roles as economic growth engines for the country.

33 Dege Consult, UI and SuDCA, ELGRS, Component 2a, November 2013.

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Revenue profile for Ethiopia (actual revenue collections, 2011/12, EFY 2004 ETB (million) Percent Consolidated (Fed / Regional) Revenue 102,863.7 97.0 o/w Federally Collected Revenues 85,879.7 81.0 o/w Regionally Collected Revenues 16,983.9 16.0 o/w Collected at Bureau Level 3,910.2 3.7 o/w Collected at Woreda Level 13,073.7 12.3 Municipal Revenue 3,148.1 3.0 Total Public Revenues (excluding Grants) 106,011.7 100.0 Source: MOFED/IBEX 77. ULGDP II is intended to address these in the context of the overall evolution of the government’s program and the intergovernmental fiscal system in Ethiopia. The Program rationale is to address the current urban infrastructure gaps and strengthen the institutions of both the ULGs involved in service delivery and the regions and the MUDHCO for support for urban management and improved urban services. The Program will be an important continuation of the improvement of infrastructure and services in the 18 cities currently participating in the program, through performance based capital grants, as well as an important kick-start on urban development in the new 26 ULGs. The Program will address urban poverty through the provision of employment opportunities during civil works activities in the ULGs, improved infrastructure important for private growth, markets opportunities and improvement of service in core areas of importance for urban development. It will also catalyze enhanced contributions from the regional and city level for core infrastructure and services.

78. To address the fiscal gap, the IDA contribution to the Program will significantly increase the resources for urban infrastructure and service delivery. The contribution of IDA to the annual performance grant of the Program, which will be around on average US$ 64.6 million p.a. (US$ 323 million /5 years) or 1,214,480,000 ETB constitutes about 24 % of the estimated spending on urban development.34

79. Importantly, the institutional focus and goals of the Program whereby resources to ULGs will be made available only as a result of proven enhancements in their institutional performance address the core issues facing the urban system. This approach is appropriate in the current policy environment where GoE is significantly enhancing its focus on and support to ULG management and service delivery. 80. There is a strong case for public funding for the Program. The types of public goods supported by the program would never be provided at a sufficient level without the ULG interventions. Private financing for key urban service delivery and infrastructure services, through public-private partnership (PPP) schemes, is an important option to consider and will play a role. However PPPs are limited in nature – they cannot be used for all urban services or infrastructure-, they require significant local government institutional capacity to formulate, contract out, properly supervise implementation and mitigate various risks of failure by the private companies contracted – which currently does not exist in the majority of local governments; and they can only be implemented in national environments where the overall legal and regulatory framework is conducive and friendly towards PPPs. Given these limitations,

34 Ibid, ELGRS, Component 2a, Table 4.5 As is the case with all reports generated by IBEX, we should be cautious in interpreting these data. For instance, it is possible (in fact, it is likely) that inconsistencies in the coding of the underlying budget data allows to identify some—but not all—urban development spending. (Exchange rate: 1 US$ =18.8 Birr to US$ is applied in this case).

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among others, in the targeted 44 ULGs in the Program, public financing is assessed to be the optimal decision. 81. The proposed Program will contribute directly to the GoE’s Growth and Transformation Plan (GTP), especially the pillar on enhancing expansion and quality of infrastructure development, enhancing expansion and quality of social development (e.g. through creation of services and employment opportunities) and building capacity and deepening good governance and the new ECPI, where the performance measures in the APA is designed in a manner closely related with the objectives of the new strategy. Urban development is a major tool for ensuring that there are efficient growth centers for the country-wide development and creation of employment opportunities through investments in infrastructure and the benefits of this afterwards for private development in other sectors. The labor-intensive investments funded under the ULGDP, and promotion of the activities of micro and small enterprise development through involvement in the execution of Program infrastructure investments, are key priorities. The focus on improved OSR in the incentive system and CB support elements are also important in providing a strong, consistent and buoyant ULG revenue base and improved future levels of infrastructure investments. Finally, the Program will provide strong incentives for ULGs to focus on improved service delivery and urban infrastructure through incentives for matching funding for urban investments, improved maintenance of the constructed infrastructure and performance measures on provision of service standards/citizens’ charter and achievement of these. 82. Given the importance of urbanization and the role of ULGs for Ethiopia’s overall economic growth on the one hand, and the current fiscal gap which prevents ULGs from fulfilling this role on the other, the Program is assessed to be strategically relevant. In addition to helping reduce the fiscal gap by raising local government institutional capacity, the Program is also fully aligned with the GoE’s policy priorities. 83. The World Bank, as a global development institution, can, together with its partners, be an effective broker of knowledge and play a catalytic role as facilitator for the urban reform process in Ethiopia. The Bank is particularly well positioned to assist the GoE with the evolution of its urban infrastructure finance and management system, due to the long standing partnership in the urban sphere (see paragraphs 14 and 15), its regional -particularly through the design and implementation of urban focused PBGs in Tanzania, Uganda and Ghana, among other eastern and southern African countries- and international experience on similar programs and their potential to provide long-term financing as required.

b. Program Technical Soundness

84. The technical design of ULGDP II draws heavily from the extensive experiences of Bank – GoE partnership in the urban sector, most recently the ULGDP. The four annual performance assessments of the ULGs supported by the program, a program midterm review in 2011, as well as a number of specific technical design studies, including a comprehensive LG revenue enhancement study 35 and a recent benchmarking study of urban service delivery needs and coverage36are among the body of knowledge produced to determine the technical elements of the Program. 85. The proposed design and the activities to be implemented under the proposed ULGDP will contribute to the realization of the Program results and development objective. Experiences from the first phase of the program and from other similar projects in relevant countries with the similar modalities have proved that the types of activities to be implemented using the Program funds at the ULG, regional

35 Dege Consult, Urban Institute and SuDCA Development Consultants: ELGRS, Component 2a Report, November 2013. 36 SUDCA, August 2013.

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and at the MUDHCO levels are highly likely to produce results of improved coverage and quality of core urban services and of strengthening of the institutional capacity of the participating ULGs, regions and the federal agencies involved.

86. The Program aims to strengthen relevant stakeholder incentives to contribute to Program objectives, through the application of the following elements embedded in its design:

• Use of enhanced government systems to strengthen capacity at both the federal, regional at city level (the participating ULGs) for urban development 37 , within flow of funds, financial management and operations;

• Focus on ULGs as the main implementing bodies - The ULGs will be responsible for the implementation of the Program activities at their level. The Program therefore provides an opportunity for the participating ULGs to improve their capacity – thus contributing to the achievement of the Program objective;

• Place natural incentives through focus on performance – although each ULG will be given a tentative allocation (also referred to as indicative planning figure (IPFs) for the duration of the Program period, the actual amount of funds they receive will be based on them meeting and maintaining the minimum condition throughout the Program period and their performance outcomes. The performance assessment system is at the core of Program design since it will be the main driver for ULG capacity building and is directly linked to the Program results and disbursements. The assessment tool, which is based on the experiences from the current ULGDP and from other relevant cases in different countries, has been refined during preparation, and will be reviewed during implementation, if necessary. By the end of the Program most ULGs are likely to receive less or more than their tentative allocations, or IPFs, depending on their results. The annual performance assessment has therefore adequate inbuilt sanctions and incentives mechanisms;

• Get the focus areas right. The incentives will support core urban management areas of such as proper planning and budgeting, revenue mobilization, asset management planning, procurement and PFM, as well as strengthening of good governance and accountability;

• Provide a flexible capacity building to allow ULGs to respond to the incentive mechanism. All participating ULGs will benefit from municipal capacity building, to prepare them to receive the significant performance grants during the next assessment and ensure improved capacity for all ULGs by end of Program period;

• Strengthen the links between investments, incentives and capacity building support, whereby the CB support and support is applied in a targeted manner to address identified gaps in the annual performance assessments;

• Support the incentives of federal and regional level for backstopping support, CB, oversight and performance of roles vis-à-vis the ULGs through result-oriented allocations.

• Introduce the PBG element gradually for the new ULGs, with a smaller grant funding in the first year linked with compliance with MCs;

• Strengthen longer-term sustainability of the investments made and the entire ULG funding system by strengthening of the focus on improved municipal revenue mobilization through introduction of strong incentives for improved ULG own source revenues and strengthening of the backstopping support and guidance from the regional and federal level of government;

37 ULGDP has developed a number of guidelines issues by MUDHCo, including for Assets Management, PFM, Capital investment planning, the program operational manual etc, which with slight up-date and refinement, will be used for the second phase as well.

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• Strengthen the oversight, audit and safeguard procedures at all tiers of government, and address the few bottlenecks identified in the first ULGDP.

87. Program design builds on the experience of ULGDP, and addresses the challenges of ULGDP raised in the earlier section of this work. These include ensuring that the annual assessments are undertaken on time, strengthening the capacity building support (supply and demand side), taking Addis out of the Program scope to ensure the unique circumstances of the primate city are addressed properly under a possible Addis specific project, and the expansion of the incentives to support at all tiers of governance (especially the involvement of the regional governments). In addition, the design of the Program has benefitted from the knowledge and experiences of internal and external experts and the experiences from performance-based grant systems from various countries. An increasing number of countries have introduced performance-based fiscal transfers to local governments, and most recently linked to PforR operations with focus on urban investments, such as Uganda and Tanzania.

Box: Implementation lesson learnt thus far of the Tanzania Urban Local Government Strengthening ULGSP PforR The design of this Program incorporates key lessons learnt of the one-year implementation track record of the Tanzania ULGSP PforR. The overall design of ULGSP is similar to ULGDP II. Under ULGSP, the objective is to improve institutional performance for urban service delivery in 18 local governments across Tanzania. Similar to ULGSP, the Tanzania Program links disbursements to the achievement of verified results in key areas of urban management and service provision, municipalities can use the funds to prepare and build basic urban infrastructure. The Tanzania Program also includes capacity building support to local governments to help them achieve the performance targets. Experience in the first year of implementation shows that the Program is on track with: (i) independent performance assessment mechanism functioning well, (ii) the first round of performance-based disbursements already made on schedule, (iii) new opportunities introduced for training and to strengthen the community of practices between municipalities, and (iv) the first phase of municipal investments already under construction. Three lessons learnt of from the implementation of the Tanzania PforR, which have been incorporated into the design of this operation, are: (i) that a randomized field-based quality assurance review of the independent assessment by the Bank is critical for good governance and to verify the accuracy of the independent assessment - a desk top review is not sufficient; (ii) given that the quality assurance review can be a sensitive process, there is benefit in utilizing members outside of the core Bank task team for the quality assurance review and obtain a fresh perspective and (iii) ensuring that all performance based indicators are unambiguous and designed in a way that is not subject to interpretation. 88. Furthermore, to ensure the sustainability of investments created by using Program funds and of the existing stock, each ULG will be supported in undertaking assets management, capital investment planning, operational and maintenance planning, and revenue enhancement planning. The support to improvement of OSR will include the update of revenue data base by source and revenue targets, billing, collection, enforcement, complain resolution, and information, communication and capacity building systems.

89. The basic features of the current assessment system have been refined to enhance ULG capacity in OSR generation, management of fiduciary, social and environmental systems, project implementation, operations and maintenance. Minimum conditions, comprising requirements in planning, PFM, social and environmental systems management and procurement must be achieved and maintained by participating ULGs throughout the Program and are put in place to ensure minimum capacity of the ULGs to handle the Program funds in full compliance with Program’s fiduciary and safeguards requirements. If ULGs do not comply with the minimum conditions, they will not get access to the funds from DLIs I, II and III, but will be supported through the capacity building activities. In addition to the minimum conditions, a set of performance measures target urban institutional performance in core areas such as planning, budgeting, PFM, OSR, procurement, assets management and governance as well as infrastructure delivery. These

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measures are detailed in a transparent performance assessment manual (as part of the Program Operational Manual/guidelines), prepared by the government for the Program. The performance results approval and verification protocol process will be formalized through systems and procedures for approval, complaint handling and publication and the assessments will be conducted in due time to fit with the ULGs budgeting and planning cycle, which will be supported through federal incentives for timely completion. The performance assessments will continue to be outsourced to a private, neutral and objective company to ensure that results are objectively measured, credible and that the general credibility of the entire system is maintained. 90. The Program will maintain the systems and procedures developed under ULGDP with the following refinement and improvements: How ULGDP II incorporates lessons learnt from ULGDP in its design Area Lessons learned Action taken Annual performance assessment cycle synchronized with ULG planning and budgeting cycle.

Important to ensure that results fit with the ULG planning and budgeting process

This will be ensured with a clear time-plan and linked with the DLI on timeliness of the APA and VFM audits. This will be monitored and disbursed against a DLI (currently, DLI 9).

Performance measures sharpened and targeted

Although there were a limited number of performance measures under ULGDP, the system of registration, data collection was very comprehensive with more than 70 data collection points.

The system will be simplified, with the number of measures reduced; and with clear description of how these are measured in the APA manual, which is annexed to the Program operation manual. The new indicators focus on results, such as delivery of infrastructure targets, value for money and actual improvements in the ULGs sustainability, such as increase in own source revenues38. Second, the system of approval of results will be formalized with the technical program committee and the Steering Committee under the leadership of MUDCo.

System of performance incentives strengthened

Performance-based grant allocations incentivises performance, but can be strengthened through a system where every incremental improvement is rewarded.

The current static system, where ULGs are grouped into (1) non-access, (2) static allocation and (3) accelerated allocation (+ 20 percent) will be improved and the system of performance will be fully integrated with the allocation formula on a continuous scale where incentives are kept on all levels of performance, on a scale between 0–100, and where every point has an impact on the allocation.

Focus on municipal own source revenue improvement and longer term

State revenues have improved faster than municipal revenues, and not all ULGs managed to improve the real value of the collected municipal

Strengthening of the incentives to improve municipal core revenue mobilization (though the MCs and PMs in the annual assessment system), and strengthening of the environment for this

38 An example on how performance measures in the coming Program have been strengthened is within the area of ULG own source (OSR) mobilization. Whereas the current APA system focus on availability of revenue enhancement plans and achieved targets (state and municipal), the future system will add assessment of the actual results – i.e. improved OSRs, improved use of these sources on municipal capital investments (reward of matching funding), and focusing on the core important municipal revenue sources, instead of the total of state/municipal revenues. Second, the OSR is supported through measures to incentivise the regional efforts to create a conducive environment for ULG OSR mobilization. Finally, the capacity building and guidance to ULGs on OSR will be strengthened from the regional and federal levels.

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Area Lessons learned Action taken sustainability strengthened

revenues. through improved dialogue between regions and municipalities and through strengthening of the CB support to ULGs within this area.

Capacity building support strengthened

Mostly supply driven, with one federal team under ULGDP.

Supply side capacity building will be strengthened and supplemented with a demand driven element. As well, regional governments will be strong involved in the capacity building support, especially in the 4 regions where many ULGs are involved. This will also be supported by DLIs for the regional and federal CB support to ULGs.

Involvement of the regions in core areas of importance for Program objectives

The ULGDP has proved the importance of the regions in the support of cities

Regions will be technically involved and incentivized to take active part in the CB support, facilitation of cities OSR, social and environmental safeguards, audits, and backstopping support as well as mentoring and monitoring. Supported by regional-government specific DLIs (DLIs 4,5,6 and 7).

The importance of timely audit

ULGDP has improved the coverage and timeliness of audit of cities’ final accounts

This will be further strengthened in the ULGDP II through a specific DLI focusing on timeliness of the audit (DLI 5), and through strengthening of the minimum conditions to focus on audit results.

Flow of funds and reporting improved

ULGDP has proved the importance of timely and up-front grant allocations and disbursements to ULGs to ensure that absorption and utilization of grants is strengthened

A more simple, timely and predictable system of disbursements of grants will be introduced with bi-annual equal installments and improved classification of the expenditures to track actual use of funds.

91. Based on the above, the technical design of the Program will contribute to the overall goal of efficiently producing results and reaching the Program’s objectives. The Program technical design reflects international good practice in the overall urban sector and specifically in technical standards and typology of Program activities. Furthermore, the design ensures, to the extent possible, that the incentives are in place for Program stakeholders to effectively contribute to the Program’s success. Therefore, the Program is assessed to be technically sound.

c. Institutional Arrangements

92. The institutional arrangements will be based on the experiences from the current ULGDP, with clear division of tasks and responsibilities between involved parties, as per the GoE structure and consistent with existing legal provisions, regulations and guidelines. An additional enhancement under the Program to the institutional arrangements established under ULGDP, as discussed earlier, will be the technical involvement of the regional governments in implementation, see Annex 5 for a diagram of the main agencies involved.

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Federal level 93. At the federal level,

i. MUDHCo will have the following main tasks: • Capacity building architecture of the Program, including direct support to

regional and urban local governments; • Establishment and operation of the federal mobile teams as described in the

annex on capacity building; • Monitoring and backstopping support of the regional mobile teams; • Program management, including the procurement and management of the annual

performance assessment and value for the money audits; • Monitoring and evaluation; • Program reporting, including the mid-year year and annual program reports. • Backstopping and guidance on issues such as ULG planning, assets management,

service delivery standards, and own source revenue mobilization (standard proclamations, guidelines, best practices, etc.).

• Accounting for the use of ULGDP II funds to the MoFED.

ii. MoFED will have the responsibility for transfer of funds, financial management, including reporting and compilation of federal fiscal reports;

iii. The Office of the Auditor General (OFAG) will be in charge of the annual Program audit, which will include all Program entities (44 ULGs, 9 RGs and MUDHCo) to ensure that Program resources are budgeted for and disbursed according to the Program’s expenditure framework, and that Program accounts are audited as per statutory requirements;

iv. Support to FEAC to strengthen their role in the Program. 94. As per the current ULGDP, MUDHCo will have the overall responsibility for accounting the ULGDP II funds to MoFED. Day-to-day coordination of the Program will be handled by the Urban Governance and Capacity Building Bureau (UGCBB) as per current practice (see Annex VII for organizational structure of MUDHCo) and the diagram with an overview of the main institutional arrangements. The division of tasks will be clearly outlined in the ULGDP-II Program Operational Manual, which is currently being updated to be ready for the start of the second phase. 95. As explained above in the capacity building section and in the annex on capacity building, MUDHCo will also be responsible for the capacity building architecture, the federal capacity building team, backstopping of the regional teams, and of the Program and management of the annual performance assessments/value for the money audits. The technical focus of the capacity building support will primarily be the gaps identified at the Program’s annual performance assessment. The results of the ministry’s capacity building support to RGs and ULGs will be annually measured through a distinct DLI (see the DLI section on this for further details). 96. MUDHCo will be responsible for overall Program reporting. It will consolidate and analyze the field data submitted by regions and ULGs and update the Program’s results framework twice a year. It will also produce and submit to the World Bank a midyear and an annual Program report, with information on the following:

97. The midyear will cover the following issues:

• Summary of aggregate Program expenditures and Program infrastructure delivered by

ULGs.

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• Execution of the MUDHCo capacity building plan. • Summary of aggregate capacity building activities undertaken by ULGs and regional

governments. • Summary of aggregate environmental and social performance reports from each ULG,

including information on grievances. • Summary of progress against Program’s performance indicators.

98. The annual Program report will include all the above, plus:

• Summary of the assessment results, including the performance of Program ULGs and the disbursed amounts.

• Summary of aggregate information on procurement grievances. • Summary of aggregate information on fraud and corruption issues.

99. MUDHCO has been implementing the current program in a satisfactory way and is to be commended for the program’s achievements highlighted above. Importantly, however, there staffing gaps in the ministry, where 73% of positions in UGCBB and 64% of positions in the program management department are filled. The ministry is also implementing other operations in the country, in addition to the ULGDP, with similar degrees of high capacity and staffing demands. The significant geographic and technical scale up of the ULGDP under the proposed PforR, and the existing staffing gaps, if unaddressed, bring considerable risk to the achievement of the operation’s development objective. Therefore there is a serious need to fill the personnel gaps and further strengthen capacity of UGCBB. The specific actions on this area are detailed in the Program Action Plan below, and the strengthening of the federal capacity through the mobile teams to provide support to regions and ULGs. 100. As per ULGDP, MoFED will be responsible for handling the flow of funds to the regions and Program ULGs. It will also prepare semi-annual and annual financial reports. The flow of funds will be simplified compared to the existing system, with two tranches per year, based on results of annual performance assessments. Regional level 101. At the regional government level,

i. Regional government Bureaus of Trade, Industry and Urban Development (BTIUD) will be the core coordinating office. They will be responsible for the following:

• Capacity building of the ULGs in their jurisdiction; • Consolidation of progress reports from ULGs; • Oversight functions and backstopping support on various tasks related with the

Program. ii. Regional audit offices (ORAG) will conduct, either directly or through delegated

authority, the external audit of ULG audits; iii. Regional environmental protection agencies (REPA) will ensure compliance at the ULG

level with the environmental regulations; iv. Bureaus of Finance and Economic Development (BOFED) will manage flow of funds at

this level, and consolidate the fiscal reporting from the ULGs for onward submission to the federal level;

v. Regional revenue authorities (RRAs) will provide support and guidance to cities within urban revenue mobilization;

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vi. Capacity building support to the ULGs, especially organized by the 4 regions Amhara, Tigray, Oromia and SNNPR where there is a stronger capacity available, and where there are several ULGs enrolled, where regional mobile teams will be established to support ULGs.

102. The track record of RG support to ULGs to date has been mixed. While some regions have been executing their capacity building and oversight mandates vis-à-vis the ULGs in a satisfactory and even sometimes proactive manner, other RGs have not performed as well, exemplified by delayed external audits, or lack of response to ULG request for the approval of bringing flexibility to tariff and tax structures. Given this mixed track record and the increase, under ULGDP II, in the technical role to be played by RGs, particularly their role for supporting the enhancement of ULG capacity, and the addition of four more RGs who did not participate in the ULGDP, collectively increase the risk at this tier of government against the achievement of Program PDO. It should be underlined, however, that the four new RGs (Afar, Benishangul Gumz, Gambella and Somali) will only have one Program ULG each in their jurisdiction, with a total population of 284,093, which constitutes 6.5% of the total population in 44 ULGs. Therefore, the addition of new four RGs to the Program is expected to add a marginal risk to the overall risk at the regional government level. The four regions will be supported by the Federal Mobile team, which will also provide support to Diwa Dawa and Harar. The Program design takes these risks into account and mitigates them, to the extent possible, through (i) DLIs which target results at the RG level and Federal level CB and backstopping support, and (ii) Program action plan elements which target this tier of government. ULG level 103. At the ULG level, the mayor’s office will be responsible for the overall performance of the ULG, and based on a signed Program participation agreement, the tasks will be clearly defined in areas of matching funding, compliance with MCs, performance criteria, accountability requirements and operations. The project selection and approval will be done at the city council level after involvement of citizens in the process of identification and prioritization and the established appraisal committees with heads of departments, chaired by the mayor or the city manager. ULGs will also ensure compliance with all financial management, procurement and environmental and social safeguards and regulations. If key parts of these areas are not complied with as stated in the Program’s minimum conditions, no Program funds will flow under DLIs 1, 2 and 3. 104. Analysis of the current staffing positions at the ULG level shows that they are substantially filled, in most of core areas of importance for the operations of the ULGDP, although there are some gaps to be addressed39. Based on data from 27 ULGs, staffing at OFEDs is 82% filled, with an average staffing number of 39. 84% of core financial management and procurement positions are filled, with an average number of 22 staff. Audit and inspection roles are 85% filled, with an average number of 5 staff. In budgeting and planning, a review of data from 15 ULGs shows gaps with 64% of the positions filled, at

39 Analysis based on a review of the following: 1) Field data collected on required vs filled staff positions for ULGDP II IFA; 2) review of the general situation in the 12 sample ULGs as part of the review under the Ethiopian LG Revenue Enhancement Study; 3) review of previous studies, e.g. supported by GTZ on the baseline for the coming ULGDP CB/Technical Assistance support and the Worda and City Benchmarking studies. It should be noted that the ELGRS did not collect quantitative data on staffing positions, but the interviews and meetings with the 12 ULGs confirmed the situation, reflected in the quantitative figures presented here and the challenges with staff turn-over and shortage of engineers/technical staff. Second, prior to the start of the ULGDP technical assistance for the preparation of cities for ULGDP II, a review was undertaken of the strengths and weaknesses of the cities in areas of PFM, procurement, environmental safeguards, internal audit, etc. (GIZ supported, un-dated documents), which has benefitted the assessment as well). Also, the Woreda Benchmarking Study WCBS V 2013: Results of the supply-side evaluation of local government in Ethiopia Draft report as of June, 1st 2013 Alexander Wegener: https://dl.dropboxusercontent.com/u/7492328/WCBS V Supply Side Report.pdf provides important information about the staffing situation and challenges at the city and woreda levels.

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an average of 4 positions filled. For 19 ULGs where data is available, the average number of engineers/similar positions is 7. In terms of educational level, the average number of staff with BA/Bsc or higher education is 15 positions but with a great variation from 3 (Motta) - 44 (Hawassa). The 26 new ULGs have a lower number of filled positions (77 % are filled (31 staff) against 86% (47 staff) for the 18 existing ULGs, and less capacity in the various core positions, see Annex 7, and the summary table below: Table: Summary of staffing positions required and filled

City Required OFED positions (#)

Actual OFED filled (#)

Position filled (average, %)

Position filled Finance/ Procurement (%)

Position Filled Audit / Inspection (%)

Position Filled Budget & Planning (%)

Position Filled - Technical Staff (engineers etc.) (#)

Staff with BA/Bcs (filled) (#)

All sample 50 39 82 % 84% 85% 64 % 7 15

ULGDP 57 47 86% 88% 86% 89% 8 17 Non-ULGDP

42 31 77% 79% 85% 61% 5 12

No. in the sample

N= 27 N = 27 N= 27 N=26 N=26 N=15 N =19 N= 27

Source: Data based on collected data from 27 ULGs by SuDCA for the ULGDP IFA preparatory work and processed for by the Technical Assistance. For some positions, only data from a lower “N” is available. For the technical staff, data is not available on the official required positions.

105. Given the substantial increase in the funds which will be made available to the new 26 ULGDP ULGs under the Program, having key staff, particularly in these new ULGs, becomes critical to ensure that the funds are used in the appropriate fiduciary, budgeting, planning, consultation and other Program framework and rules. The design of Program will mitigate this risk by making core staffing a Program minimum condition. It is the agreed with the ministry that the Program ULGs should have the following requisite staff by Program effectiveness; (i) city administrator, who is also the main coordinator of the ULGDP II operations, or another dedicated officer (ii) finance officer, (iii) 2 procurement officers, (iv) municipal engineer, (v) physical/urban planner, (vi) environmental and social systems management officers. Coordination arrangements 106. A program coordination committee (Steering Committee) will be established with representatives from MUDHCo and MOFED to ensure strong coordination of issues on planning, allocations, flow of funds, compilation of data and approval of the results from the annual performance assessments (APAs). A Program technical sub-committee (PTC) comprising key technical staff of MUDHCo and MOFED will be formed under this committee, which will, among other things, review the results of the APA and provide quality assurance of the results, as well as handling of complaints in a streamlined manner. The PTC will meet quarterly and also carry out periodic evaluation of program implementation against objectives and provide technical guidance with support from the World Bank. It will bring policy issues to the larger and higher-level coordination committee and ensure that the Program is implemented in line with the Program Operation Manual. Fraud and Corruption 107. Fraud and corruption during Program implementation that may affect achievement of results will be addressed by strengthening the implementation of existing fraud and corruption policies and measures available at the ULGs level. The detailed discussions of fraud and corruption within the country context, and mitigating safeguards are included in the IFA, and the program design contains a number of core initiatives to address the risks of this, such as especially the: i) minimum access conditions for the PB-

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grants, which also encompasses a grievance/complaint mechanism; and conditions for financial management; ii) performance measures on core areas of importance for F&C such as participation, financial management, procurement, accountability and transparency, iii) procurement audits (first as covered by the APA, and from the 3rd assessment as conducted separately by the PPRA, with results which impact on the level of funding for each ULG; value-for-the-money audits (from the 3rd APA), and iv) comprehensive CB support from the federal and regional level, including team members in the TA support with expertise on participation, accountability and ethics.

108. The Program has high levels of ownership at all levels of government (federal, regional and local). The coordinating ministry (MUDHCo) has been the lead entity in the implementation of ULGDP. The project management aspect of ULGDP has been consistently rated satisfactory – with the challenge of the timeliness of APA. The ministry, particularly the minister, is the main driver of the policy to scale up ULGDP. Regional and local governments of ULGDP also have a strong commitment to the Program, indicated by their past performance of signing participation agreements annually and having contributed a significant amount of their own revenues as counterpart funding to match the IDA funds. The new 26 urban local governments are equally committed to the Program and have expressed strong wish to be included over the various rounds of discussions during preparation.

III. Description and Assessment of Program Expenditure Framework 109. The expenditure framework of the Program will be a total of US$ 556.53 million. US$ 499.53 million will constitute the performance-based allocations for investments and will go directly to Program ULGs for investments specified under the investment menu (Annex 4). US$ 30 million will be for the results for which the regional governments will deliver (of which US$ 13 million are related with capacity building support to the ULGs) and finally US$ 27 million will support and leverage MUDHCO activities and results directly linked to the execution of the performance-based grants especially for capacity building at federal, regional and ULG levels as well as for program management, especially the APAs/VfM audits. The table below provides the overview of the main elements in the program expenditure framework. Program expenditure framework (US$, million)

Classification FY2015 (EFY 2007)

FY2016 (EFY 2008)

FY2017 (EFY 2009)

FY2018 (EFY 2010)

FY2019 (EFY 2011)

Total

Performance based -fiscal transfers to 44 ULGs (DLIs 1, 2 and 3 which measure Program minimum conditions and performance measures) Of which from regions and cities* Of which from regions only Of which from cities only

78.7340

28.60 13.13 15.47

105.2041

36.98 18.22 18.76

105.20

36.98 18.22 18.76

105.20

36.98 18.22 18.76

105.20

36.98 18.22 18.76

499.53

176.53 86.01 90.52

Capacity building and ULG support by regional governments (linked to DLIs 4, 5, 6 and 7)

5.20 5.20 7.20 5.20 7.20 30.00

Federal support and capacity building Program administration (DLIs 8 and 9)

5.40 5.40 5.40 5.40 5.40 27.00

Total 89.33 115.80 117.80 115.80 117,80 556.53

40 Comprised of US$50.13 million IDA and 28.60 US$ million GoE funds from regions and ULGs. 41 Comprised of US$68.22 million IDA and US$ 36.98 million GoE funds from regions and ULGs.

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* Regions and cities contribute to the performance based transfers in the following manner: Amhara, Oromiya, SNNPR, and Tigray: 30% funding in addition to IDA funded grants, DRS regions: 20%. Existing 18 ULGDP ULGs: 30%, new cities in the DRS regions 10% and other new cities: 20%. Harar and Diwa Dawa contribute 50% in addition to the IDA funded grants. 110. Expenditure performance under ULGDP has been satisfactory, with no major expenditure performance issues throughout implementation since 2008. Due to satisfactory implementation and higher than expected disbursements, additional IDA and counterpart funding were added to the Program in 2011. It is expected, albeit with some potential delays in the final completion, that all funds from the current ULGDP will have been exhausted by June 2014, as the ULG commitments are above the available funding from the ULGDP grants whereby ULGs will have to contribute more from OSRs and/or other sources. The new system of disbursement linked allocations linked directly with the results of the APAs, advanced timing of the APAs, and higher reliance on GoE systems and procedures, is expected to further enhance the current implementation and absorption rates. 111. The simple population based allocation formula of the ULGDP, which is adjusted according to the performance of the ULG as determined in the APAs will be maintained. The disbursement model will build on and further refine the current system, and be based on the relative performance of ULGs, where every point will count in the calculations of the disbursement amounts, and will ensure that each ULG is compared with the average performance, and rewarded if above this average. The current static system, where ULGs are grouped into 1) non-access, 2) static allocation and 3) accelerated allocation (+ 20%) will thus be improved and fully integrated with the allocation formula on a continuous scale where incentives are kept on all levels of performance, on a scale between 0-100.

112. Disbursements of Program funds from IDA to government will be in one tranche, and from government to ULGs in two predictable tranches per annum, based on the results from the DLIs linked to the assessment results42 (flows to ULGs will be in the beginning of July and January of each year). The annual disbursement amount will be predictable as determined in the APAs. Program funding will be predictable and in full sync with local government budgeting cycle. To ensure predictability, ULGDP indicative planning figures (see Annex 3) will be shared with ULGs and RGs the entire period, although actual annual disbursements will be based on performance assessment results and compliance with the DLIs. Like the current ULGDP, the Program funds will be protected from any budget cuts. Cities will be informed about their actual disbursement for the following year in Nov./Dec. of each year (preliminary figures, and in January after the results of the final audit reports have been incorporated), immediately after the assessment exercise, so as to give the ULGs ample time for their planning and budgeting process which is completed in May of each year.

113. The current ULGDP is included in the national budget and it is proclaimed at the federal level under revenue and expenditures for MUDHCo. To ensure that the reporting of the Program expenditures are integrated into the national PFM system codes will be established in the charts of accounts for regions and cities. This will bring greater ease in accounting for expenditure from the Program, consolidating aggregate ULG figures and strengthening the use of the national PFM system, IBEX. Ethiopia has a well-developed budget classification and charts of accounts, which the Program will make use of, and few additional codes will be established for the main expenditure items in the GoE’s Charts of Accounts.

114. Program grants (performance-based capital grants and capacity building funds) are to be seen as specific purpose grants in the GoE Fiscal Decentralisation Strategy, 2004 and will target specific outcomes in terms institutional improvements and infrastructure and service delivery, although these are

42 Instead of the current systems of fund requests and replenishments, based on actual use of funds.

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not sector specific, but multi-sectoral reflecting the needs for urban development across sectors. It will promote the future roll out of support to ULGs as a genuine part of the intergovernmental fiscal framework.

115. As explained in detail above in Performance Grants to ULGs section, ULGDP PBG grant will have indicative allocations -– see Annex 3 for detailed amounts per each Program ULG. The actual annual disbursement to a given local government will depend on that local government’s performance as determined by the annual performance assessments. The graph below shows the typical range of per capita disbursement depending on the performance of a ULG against the average performance (in this example set as 60 points on a scale from 0-100), and the allocation is the first year 2014/15 with an average of US$ 15.69 per capita (for the existing ULGDP ULGs), and with examples of what average performance scores on the three ULG performance-related DLIs will result in. New 26 Program ULGs will only get access to the DLI I, the MC linked allocations in the first Program year, to ensure that they gradually build up the capacity to handle and absorb funds. The allocation will range between non-compliance (US$ 0), compliance with the MCs (only US$4.14 US per capita), and top performance US$22.83 per capita in 2014/15. The system is designed in manner in which every point has an impact on the allocation. An average size ULG with a relatively small increase in average performance, e.g. on 3 point from 60 to 63 points due to improvement in the level of own source revenues collected for the 2014/15 assessment (all other ULGs equal) will receive an extra per capita allocation on 0.40 USD (3.55 %) or a significant amount: US$39,535 US. Range of annual per capita allocation for a typical ULG depending on performance on the minimum conditions and performance measures in the assessment for EFY 2007 (2014/15)

IV. Description and Assessment of Program Results Framework and M&E 116. The Program will be monitored, and evaluated through the use of number of M&E tools throughout implementation including regularly reports from ULGs to MUDHCo, the Annual Performance Assessments/independent procurement audit, Value- for-the Money Audits and Midterm Review. 117. The Program data (revenues and expenditures), including physical investments to be financed, will be captured using the national PFM system, IBEX. This financial reporting tool will be supplemented by the national ULGDP M&E system managed by MUDHCO which track, among other things, progress across ULGs towards Program’s indicators. Practice under ULGDP will be maintained where the ULGs

0

5

10

15

20

25

Allocation per capita US$ p.a. against performance

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collect key data and share it with MUDHCo. The ministry consolidates and analyzes the field data submitted by ULGs and updates the Program’s results framework twice a year. As per current practice, MUDHCO will continue to share the monitoring information and analysis with the Bank on a regular basis. As explained above in paragraph 50, it will also use this as part of the mid-year and annual Program report. The ministry will also develop reporting formats for the use of the capacity building funds (under the general PB grant) for ULGs and RGs. These reports will be aggregated and included in the annual Program report. The ministry, in addition to the regular updates of Program’s results framework, also uses the data from the national monitoring system to commission independent reviews and a series of studies of service delivery, benchmarking of services etc. This practice, established under ULGDP, will be maintained under the Program. 118. As under ULGDP, MUDHCO is also responsible for planning and supervising the implementation of the annual performance assessment, which is the major M&E tool to verify the performance of the ULGs. The annual assessment will be carried out by an independent firm to ensure the objectivity of the process. The assessment will be carried out in line with the Program Operational Manual/Performance Assessment Manual/Guidelines, which is being developed by the ministry, with its content and quality acceptable to the Bank. The manual will provide clear definitions for each indicator as well as guidance on the scoring. Adjustments, which might be needed to the performance indicators and scoring, will be done throughout implementation and particularly at the mid-term review to address any possible shortcomings or changes on the ground. The internal MUDHCo M&E system will capture key data that will allow an assessment of the decentralization support structure, e.g. capacity of MUDHCo to ensure timely and agreed transfers of funds to the ULGs and the institutions’ ability to provide needed capacity development and technical assistance to the ULGs. 119. The results of the annual audits conducted by the Office of Auditor General and the Value-for-the Money Audits which the ministry will commission and will be included in the annual performance assessments, will also be important tools in tracking the institutional and infrastructure performance improvements. As well, the Program monitoring system will include and leverage the results of the internal audit for internal control and the external audits done by (or on behalf of) the Office of the Auditor General (OAG). Internal audit will play an important monitoring role, going beyond fiduciary aspects and, will include adherence to the Program implementation framework as set in the operational manual. In addition the internal auditors report to the council and their reports are generally acted upon. Proper functioning of the ULG internal audit will be a performance indicator to promote improved performance in this area. Finally, the annual external audit reports by the OAG are tabled to the councils and at the regional level. Analysis of external audit shows that they generally adhere with international standards43 and practices. 120. MUDHCo has been monitoring and reporting on the ULGDP successfully. However, given the increase in the scope of the Program, there will be a need to strengthen the M&E unit of the MUDHCO with additional staff and capacity, which is included in the Program action plan. The focus areas of the ministry’s M&E department for the Program will be (i) generation of regular consolidated data on unit costs, spending across sectors and types of investments, as well as benefits of these investments; (ii) provision of support to 44 ULGs (focusing mainly on the new 26 ULGs) and RGs on the use of the reporting formats, application of M&E information for planning and budgeting purposes etc. and related M&E system to capture activities and impact, and (iii) production of high quality analysis regarding trends and development within ULG own source revenues.

121. The current ULGDP has shown ULGs capacity to provide physical and financial reports on a regular basis (although sometimes with delays), although the quality of these reports needs improvement.

43 See Dege Consultant, UI, and SuDCA Development Consultants: ELGRS, November 2013, Report on Component 2a.

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There will be need for a capacity building support within this area in ULGDP II, especially to the 26 new ULGs. M&E capacity at federal, regional and ULG level will be enhanced through training of staff in M&E, engineering, finance and procurement so that they are able to compile timely progress reports for monitoring the implementation progress of the various activities under the Program. The additional M&E specialist to be recruited under the Program at the ministry will provide hands on support and mentoring to the MUDHCO staff and to the regions in M&E issues related with urban development and the implementation of the ULGDP.

122. The Program PDO is to enhance institutional capacity of participating cities in developing and sustaining urban infrastructure and services. The Program will produce enhanced institutional performance in core areas such as: i) enhanced community participation in local government budgeting and planning; ii) efficient fiduciary management, iii) increased amount of own source revenues, iv) improved infrastructure, service delivery and operational and maintenance systems; iv) strengthening of accountability and oversight systems and v) environmental and social safeguards. Program’s specific outcomes, outputs and targets are included in the PAD. The annual performance assessment system and the adjustment in the allocations are designed in a manner, which ensure that the allocations can be accelerated if the average performance of the ULGs is above the expected levels. Second, each ULG has incentives to improve performance as every point is counting in the result-based allocations.

123. The Program DLIs pertaining to ULGs (the first 3 DLIs) capture the ULG’s performance in relationship with the PDO. These will be measured by: (i) number of cities in compliance with the minimum access conditions; (ii) the percentage/number of cities with strengthened performance in core areas such as planning, PFM, procurement, OSR, safeguards and accountability; (iii) percentage of total planned infrastructure completed by participating cities, and % planned capital investment plans actually implemented, maintenance performance and performance in job creation against planned targets. The federal and regional DLIs will closely monitor the federal and regional performance under the program in areas of timely annual performance assessments, CB support, oversight and timely audit. 124. First, the annual performance assessments will be synchronized with the ULG planning and budgeting processes, and will be advanced so the results are ready by November of each year with final incorporation of the results from the annual audit reports in January. Second, the M&E framework will be strengthened to ensure comprehensive information on employment generated, number of beneficiaries, and outputs of the investments in a manner, which can be quantified across the ULGs, and the physical progress reporting system will be standardardized44 and computerized.

125. Table below presents the various inter-linked tools which will be used to monitor and report on the Program:

Type of information Means Frequency Implementation experience, institutional performance, physical progress and outputs, technical aspects of the Program, and achievement of the key performance indicators.

ULGs, regional governments, and MUDHCo, each with responsibilities as described above.

Two reports a year, with the content as laid out below in paragraphs 58 and 59.

APA Annually

Achievements of infrastructure plans and targets

APA Annually

Value for the money Value for the money audits, results to feed Every year starting in the

44 The existing manual system of consolidation of M&E reports will be upgraded to a computerized electronic data system, using access, excel, or similar tools.

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Type of information Means Frequency into the APA and impact on allocations 2nd year as part of the

third APA. Financial reporting (use of funds, expenditure composition, and the like)

Annual financial statements, semiannual financial reports, internal audit reports, annual external audit reports

Semiannually Annually

Detailed review of implementation experience, achievement of the key performance indicators, and progress towards the PDOs.

Midterm review. Once in the Program (20117)

V. Program Economic Evaluation 126. Economic evaluation of performance based fiscal transfer programs internationally indicates that the economic benefits are wide-ranging and mutually strengthening. Moreover, a number of ULGDP specific reviews of the major investments show: (i) a high level value for the money; (ii) that the investment are highly labor intensive/ conducive to job creation, and income-generating for local communities; (iii) that the modalities for delivery are efficient compared to other modes of service delivery; (iv) general high levels of economic rate of return (ERR) on investments. Finally, the review under the recently conducted revenue enhancement study shows that ULGs have a strong ownership in the operations, and that the incentives provided improve performance and capacity in core areas of ULG operations and management such as procurement, revenue mobilization and assets management. The box below summarizes some of these findings. Key core benefits of ULGDP investments • Coverage of significant infrastructure and service delivery gaps with more than a doubling of the resource

available at the ULG level for urban investments; • Significant employment creation, i.e. more than 300,000 new jobs are expected based on experiences from

phase one; • High economic rate of return in areas where most of the funds are utilized, and competitive costs compared to

other modalities and investments; • Strong support of institutional improvements, incentives and longer-term sustainability in terms of

strengthening of core institutions, planning, PFM, procurement, and safeguard management. 127. Analytical work45 shows strong economic benefits of ULGDP investments, with strong focus on cobblestone road construction. The key benefits of this and other ULGDP investments include reduced transport costs, small and micro enterprise (private sector) development, and income and job creation activities. 128. A specific economic analysis, with cost benefit analysis, has been undertaken for the cobblestone investment. With and without project scenarios have been defined in order to identify the net benefits of the investment, with cash flow discounted at 10.23 percent (a discount rate developed by MoFED as a proxy for the opportunity cost of capital in Ethiopia, which is consistent with the 10-12 percent notional figure used for evaluating Bank financed projects). The analysis considers the stream of costs and benefits over a 20-year period (2015-2039). There are several other potential benefits that are not factored into the cost-benefit analysis because of lack of reliable data. Therefore, the estimated benefits from the cobblestone investments can be considered conservative, and it can reasonably be assumed that the actual

45 See GIZ: “Making Good Governance Tangible, GIZ, 2011” and the Draft Report: “Assignment on Money for Investment of ULGDP, Assessment and Evaluation Report”, Volume 1, Main Report for GIZ, 2011. See also Dege Consult, UI and SuDCA Development Consultants, “ELGRS”, Component 2a, Part One Main Report, November, 2013 for examples of the benefits.

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benefits will be much higher. Results of the project economic viability as measured by the NPV and ERR and its sensitivity analysis to changes in cost and benefit streams are summarized below:

Summary of Economic Analysis Description NPV million US$ ERR (%) Base case 98.7 20% 20% cost increase 72.7 16% 20% revenue reduction 52.9 15%

129. The NPV amounting to US$ 98.7 million and ERR of 20% indicates that cobblestone investments are economically viable, even without considering other non-quantifiable benefits. The economic impacts of the project for all economic agents, including the transport users as well as the residents of the Program cities is significant. An analysis of the project sensitivity test results at 20 percent increase in cost and 20 percent reduction in benefits shows that the rate of return and the net present value remain at acceptable levels. The internal rate of return remains higher than the 10 percent opportunity cost of capital in all cases and NPVs are found to be positive, thus confirming the viability of the project under various scenarios.

130. The economic benefit of the program towards private sector development is particularly significant. This is because a large part of ULGDP infrastructure investments, including the key infrastructure investment, which is cobblestone road construction, are executed by local small and micro enterprises at the ULG level, with the involvement of the local community. The box below illustration some of the benefits within the most important investment area: cobblestone roadwork.

Box: Example of benefits from cobblestone roads

Although many benefits were obtained by the construction of a cobblestone (CS) road, the main one resonates around the benefit related to the streamlined transport that came after its completion. Along with this is a reduction in transportation cost for the citizens living in the cities and surrounding areas. A study commissioned by the GIZ (2011 (1) and (2))46 provides detailed evidence of the benefits of this.

According to this study, residents of a locality in the city of Adama have enjoyed a significant reduction in transportation cost as a result of the introduction of a cobblestone road to the vicinity. The report further indicates that more than 7,200 people have directly benefited from this road in different ways. Taking the 4.8 average family size, it can be concluded that more than 1500 families are benefiting from the intervention. The report is sufficiently detailed in identifying the benefits of the road in relation to the saved cost of transport. As to this report, the transport cost of a single trip made out of this neighborhood used to be about ETB 40 (US$ 2.25) before the commencement of this project (people were contracting taxis to move from one place to another). However, after its completion the cost fell down to ETB 2 (US$ 0.15) per same trip, as they started to use shared taxis. (NB: the exchange rate during the 2005 EFY or 2012/2013 is $1= ETB 17.8 and this conversion has been used in this example).

In a conservatively assumed case, that a family makes an unavoidable single trip per week, the annual cost of transportation in this locality used to be (estimated) about US$ 175,500 yearly (US$ 2.25 X 1500 X 52). However, after the construction of the cobblestone road, the high transportation cost has significantly fallen to US$11,700 (US$0.15 X 1500 X 52). The difference between the two, therefore, highlights the benefit in the form of a saved

46 Ibid (2).

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cost, about US$163,800 (or equivalent to ETB 2,915,607) per year, that goes to the society per annum as a direct result of this project. If it is further assumed that the economic life of this road is 20 years, then the total benefit that will go to the society will be around US$ 3,276,000 or ETB 58,312,145. At the time, the construction cost of 1m2 of cobblestone was ETB 365 (US $20.5). Hence, it took the city only ETB 5,110,000 (2000 X 7 X 365) or US$ 287,000 (2000 X 7 X 20.5) to construct a 7 meter wide, 2km road to benefit the society.

The conclusion from the above figures is that the society can reap a benefit topping around ETB 50 million ($2.8 million) just from the saved transportation costs during the economic life of the road. In addition, the benefit does not come only in the form of saved transportation cost, but also takes many other forms, some of which are discussed below.

The second common benefit that comes with many of the ULGDP projects, particularly with cobblestone projects is the increase in value of land and even a change in the land use as a result of better accessibility that comes with the commencement of the project. GIZ (2011, (2)) indicates that there is a very common pattern of change in land use that comes with the construction of a cobblestone road. Many units that used to be residential are seen changing to commercial as a result of the projects. In addition to this, there is also a notable increase in the price of land adjacent to the projects. This increase in price of land, on top of benefiting the owners, could go to the coffers of the city if they revise their property tax and land lease prices commensurate with the introduction of such projects. If harnessed properly, this has the capacity to significantly enhance the revenue of the host cities. However, experiences have shown that there is still untapped revenue potential whereby the cities could link the investments with various taxes related to its use.

Source: Based on VFM study commissioned by GIZ, 2011 (2).

131. ULGDP investments are highly labor intensive and support job creation. The independent studies financed by the GIZ, which analyzed the ULGDP investments and MUDHCo data and monitoring reports indicate the significant impact on employment generation impact of the ULGDP investments. The MUDHCO reports show significant full and part time jobs created by the program: A total 312,460 jobs have been created in 19 Program cities between 2008/09 and 2012/13 as a result of the investments initiated and funded by ULGDP, supporting the objectives to focus on job-creation in the GoE’s development policy, the GTP, especially for the local youth and unskilled workers. It should be underlined that most infrastructure investments have a large share of women, youth and un-skilled labor, involved in project implementation as well, the figure below.47

47 Based on M&E reports from MUDHCO, 2013.

37

Employment Creation by ULGDP Investments from 2008/09 – 2012/13

132. Economic rate of return (ERR) reviewed by international institutions show the benefits of investing in areas targeted by the ULGDP grants. First, a study undertaking by “Sanitation and Water for All” indicates that the ERR is high, and in the range of 15-20 % for urban investment projects in Ethiopia. Within the most important sector for ULGDP - the road sector- gravel roads have an ERR ranging from 7 to 60%, depending on the length of the road, with the highest on the shortest length of the roads, which is typical the target of the urban ULGDP investments, exactly the types of roads to be supported by the Program48. Furthermore, cost-effectiveness analysis for the roads sector on the basis of data collected under the current ULGDP shows that unit costs for ULGDP projects are generally lower than non-ULGDP projects, and that the costs of e.g. cobblestone project costs (supported under ULGDP) are much lower than similar sized asphalt roads, but that ULGDP supported roads are creating similar benefits will less maintenance costs and other related benefits, see table below. Cost comparison of Coble stone roads with Asphalt roads

City CS Road Cost (ETB/m2)-2003 Asphalt Cost (ETB/m2) Adama 400-500 1,428.57

Hawassa 320 1,086.31 Mekelle 300 1,000.00 Axum 320 1,298.70

Source: GIZ (2011)

133. ULGDP modality of incentive based allocations promote planning, PFM, and governance improvements across a broad range of core areas, and has introduced a good sense of competition and awareness across the ULGs. Compared to the baselines, there are significant improvements in areas of audit reports, planning documents (CIP, procurement plans, revenue enhancement plans, planning and budgeting for maintenance and operations), as well as in accountability and involvement of citizen groups

48 Similar investment profiles from other countries show high IRR for urban investments in core infrastructure, see technical assessments for USMID (Uganda, 2012) and ULGSP (Tanzania, 2012).

-

20,000

40,000

60,000

80,000

100,000

19,307

65,803

92,294

47,554

87502

No. of Employment Created by ULGDP

No. of Employment…

38

in local planning. The potential for improving the ULG performance in those core areas will be further tapped with strengthening of the targeting of performance incentives under the PforR support. 134. The exact composition of investments, which will be undertaken across Program ULGs, are not known a priory since they will be determined, like under the first ULGDP, through a participatory bottom-up planning process in ULGs. The experience of the current program and other similar interventions indicate several potential benefits, which will be quantifiable after conducting post-construction evaluation. At this stage of design, baseline data and appropriate assumptions on the stream of benefits and costs over the life of the Program can be made to estimate quantifiable benefits for sample category of sub-projects which will be most likely chosen by the ULGs, like the example above of the cobblestone project and the IRR of water and sanitation projects. These results will be validated after the post construction evaluations of the sub-projects are subjected to VFM (from September 2015), cost effectiveness and cost benefit analyses are done. Assessment of (i) the counterfactual scenario where Program is not introduced and the fiscal gap mentioned above continues, and (ii) the potential economic impact of the Program discussed above, shows strong rationale for the proposed intervention.

135. Under the counterfactual scenario without the Bank supported Program, the target ULGs would continue to face the large urban fiscal gap explained above, where, as a result of the absence of necessary investments in infrastructure and institutional capacity needed to keep up with rapid urbanization and the increase in urban residents in the targeted ULGs, would hinder the economic development of Ethiopia. This alternative route will mean that the Program ULGs will face a serious challenge in meeting their ever- increasing residents’ expectations of delivering reliable urban services, as well as a possible deterioration, and in some cases, collapse of existing infrastructure. It is evident that without the proposed Bank supported Program, the support to ULGs under the existing intergovernmental fiscal architecture would be severely inadequate in achieving the proposed objective in the GTP and urban policies of increased ULGs performance in expanding urban infrastructure.

136. To the extent possible and appropriate, the Program will promote local private sector development. As under ULGDP, the implementation of almost all Program activities will be contracted out to the private sector. More than 2000 MSE were involved in the construction of investment projects from ULGDP from 2008-2011 and this is expected to expand with the proposed investment menu and likely investments49. ULGs, as implementing agencies, will retain supervisory role and the MUDHCo, as the main executing ministry, will retain oversight and quality assurance role for Program implementation. These arrangements are considered adequate in terms of economy, efficiency and effectiveness in addressing the urban development issues at hand. 137. The investments supported under the Program are core urban public goods/services such as roads, drainage, sanitation and solid waste management, which would not be provided without significant public interventions. The World Bank’s expertise within support of those areas in Ethiopia and elsewhere are comprehensive, and the experiences from ULGDP-I shows that in addition to the necessary support for financing of these interventions, the expertise the Bank can offer in the support of the design, technical advise, monitoring and backstopping, is highly appreciated and valuable for the GoE and the GoE’s urban program. Experiences from value for money audits from e.g. Uganda, also show strong VfM in investment modalities like the proposed Program. 50

49 GIZ, 2011. 50 E.g. the Value for Money Audit in Uganda: “Technical and Value for Money Audit of LGDP II, Synthesis Report, December 2007, Ministry of Local Government, Uganda.

39

VI. Inputs to Program Action Plan 138. The Program action plan (PAP) will pursue a risk-based approach and will outline the main measures through which risks to the achievement of Program’s PDO will be mitigated. These risks are broadly associated with the three tiers of government involved in the Program: • Federal government. MUDHCO, as the implementing ministry, has a significant responsibility for

ensuring the various technical elements of the Program are implemented on time, the capacity of ULG and RGs are strengthened sufficiently, that guidance and regulations are issued in core areas such as revenue mobilization, assets management and service delivery standards, and the achievements under and challenges facing the Program are pro-actively monitored, flagged and acted on. The strong track record of the ministry under the satisfactory implementation of ULGDP is a strong foundation. However, given the technical and geographic scale-up of the Program, the importance of the role of MUDHCo will significantly increase, and naturally, the risks carried by it. As per below, the PAP will, to the extent possible, have measures to mitigate this risk;

• RGs are the tier of government which will (i) provide capacity building, monitoring and support on own source revenue enhancement, and (ii) execute important functions for vis-à-vis ULGs such as external audit, providing the necessary financing for the Program, and environmental and social systems management supervision. Because these are key areas for the achievement of Program PDO, the importance of role to be played by RGs carries an equal amount of risk. The risk is heightened by the fact that four new RGs which have not thus far been involved will now be part of the Program, though the risk of this factor is considered to be low due to the fact that each of these new RGs have one Program ULG under its jurisdictions, the total of which is 6.5% of the total Program ULG population. The approach will be to differentiate the role of the regions in accordance with their capacity (four stronger and currently involved regions will have a greater role in CB support), and through a more focused backstopping support of the regions from the federal government (MUDHCo);

• ULGs will be the direct implementers of the Program and the most significant risk to the achievement

of Program PDO will be in this tier of government. The main risk at this level will be capacity as the lack of sufficient capacity could manifest itself in all areas of Program implementation. An important positive factor in this respect is that in preparation of the Program, all 44 ULGs, as highlighted above, received capacity building, albeit at different levels: 18 have been receiving capacity building and performance based fiscal transfers under the current program, an additional 18 have been receiving capacity building -though limited- under the current program, and the final 8 have been served by the GIZ technical assistance program. Despite these efforts to raise the capacity of ULGs, gaps, particularly among the 26 new ULGs, highlighted throughout this assessment, bring considerable risk. While these risks are important, it should be remembered that these risks were prevalent, arguably in a more profound way, when the program was initially started in 2008. At that point, none of the ULGs had received performance based fiscal transfers and almost none had managed decentralized service delivery. Despite these, the program has been implemented in a satisfactory success and with tangible achievements at the ULG level. ULGDP II is being designed on this foundation, while taking into account the core risks at the ULG level in its technical design and PAP.

139. These key areas, and other risks are addressed through (i) Program’s technical design and (ii) items in the Program action plan. 140. Program’s technical design mitigates main risks through the use of its performance measures and DLIs:

40

• A DLI, which targets MUDHCo are the main tools to minimize the risks of delayed procurement and completion of the APA, and the risk that the ministry fails to provide the needed capacity building to RGs and ULGs;

• A DLI which focuses on the regional roles in CB of ULGs and 3 DLIs focusing on core regional functions such as timely audits, social and environmental safeguards/audits and support to ULGs in OSR mobilization through consultations, guidance and up-date of tariff proclamations (ensuring a conducive environment) for cities’ own source revenues. These four DLIs target the main risk at the RG level by incentivizing RGs to provide the needed capacity building, support on own source revenue enhancement of ULGs, carry out ULG external audit on time and provide the necessary environmental and social systems management supervision and will address some of the bottlenecks experiences in the current program, and based on these results provides the result-based funding and incentives;

• Program’s minimum conditions which require that each Program ULG has the basic sufficient staff in order to access Program funds target the risks brought by staffing weakness;

• Program’s minimum conditions which require that each Program ULG has a complaint handling mechanism to ensue enhanced transparency;

• Program’s combination of supply and demand side capacity building, which targets all three tiers of government, with a particular focus on the 26 new ULGs aims to reduce the risk of capacity across the various tier of government.

141. In addition to these key Program design elements, the following items to be included in the PAP address other Program risks. For MUDHCO (and MoFED) some of the core activities will be to:

• Fill the current staffing gaps at MUDHCO and provide additional staffing to ensure the scale up of the technical and geographic scope under the PforR is properly staffed;

• Establish the Program coordination committee/Steering Committee for ULGDP with representatives for MUDHCo and MOFED and with a sub-technical group (PTC) to review and verify APA results and address other coordination issues, by Program effectiveness;

• Produce the Performance Assessment Manual/Guidelines, and share with 44 ULGs prior to the launch of the first APA;

• Produce mid-year and annual program reports and convene an annual Program stakeholder review meeting, which will be attended by MUDHCo, RGs, ULGs, World Bank and other development partners;

• Establish for formal approval of performance results and complaint handling as part of the above Manual/Guidelines51;

• Review and fine-tune the reporting formats on physical progress reports and computerization of the system of compilation and consolidation, as well as of the reports to be submitted to MoFED to reflect the new system of flow of funds;

• Develop formats for reporting on the ULG CB support as part of the Operational Manual; • MoFED in cooperation with MUDHCO: Establish a system of flow of funds based on half-yearly

equal installments, and classification of the main expenditure areas of urban investments; • Update ULGDP Operational Manual and financial management guidelines; • Agree with OAG that if ORAGs delay ULG external audits, independent auditors, certified by

OAG will be commissioned to carry out the necessary external audits (supported by a DLI); • Support to MUDCHO to issue standard tax/tariff declarations on ULG revenues and other core

guidelines such as assets management guidelines and standards on municipal service delivery.

51 See Dege Consult, UI and SuDCA Development Consultants, ELGRS, Report Component 2b, Part One, November 2013 for further details.

41

For RGs

• Fill staffing gaps in core positions such as procurement, M&E and engineering support; • Sign a Program Participation Agreement (PPA) with the federal government committing to the

Program’s rules and regulations, including the necessary financial contribution to the Program’s performance-based grants for ULGs;

• Ensure that the offices of the auditor general are supported and that agreements are made to cover all the enrolled cities on an annual basis, and to deal urgently with any backlogs in audits;

• CB plan for support to ULGs (one for each of the four regions which will have regional mobile teams – Amhara, Oromia, Tigray and SNNPR);

• Support to implementation of the tax declaration mentioned about and provision of a conducive environment of ULG revenue mobilization (dialogue on tax ceilings, support to revenue enhancement plans, and dialogue and consultations on taxes with ULGs);

• Support for the regions to roll out guidance, support and monitoring of service delivery standards for cities.

Cross-cutting • Ensure the objectivity of APA results by requiring the APA firm to share the first draft results

simultaneously with MUDHCo and the World Bank; • Agree that as part of its verification responsibility, that the World Bank can launch spot check

audits to complement the APA if and when needed. The TOR of these assessments have to be accepted by the Bank, and neither party can modify results except for factual errors, and for disbursement purposes, the Bank will retain the right to make the final decision whether a DLI has been achieved or not.

VII. Technical Risk rating 142. Based on the findings of assessments undertaken for the preparation of the Program, the overall technical risk rating is substantial. The overarching measures to mitigate these risks will be firstly the series of institutional enhancement activities, which will be financed by the two elements of the Program, and secondly the incentive mechanism under the performance-based disbursement mechanism.

VIII. Bank Inputs to the Program Implementation Support Plan 143. The strategic approach for the implementation support (IS) has four objectives: to (i) monitor the implementation of the risk mitigation defined in the technical, fiduciary, and safeguard assessments, (ii) provide technical advice, as necessary, to GoE in facilitating the achievement of the PDO; (iii) monitor Program implementation progress and to contribute to the quality of the capacity building of stakeholders by providing best practices and benchmarks, and (iv) ensure compliance with the provisions of legal covenants. 144. Implementation support will focus on implementation of the Program Action Plan, providing the necessary World Bank value added discussed above and monitoring progress towards the achievement of the PDO. The Bank will be primarily responsible for;

• Monitoring and Evaluation: Review APA, verification protocol and provide technical input; • Environmental and social: Provide the necessary training and support during implementation on

the implementation of the program operational manual which currently being produced by the Government for the Program.

• Fraud and corruption: Supervise the implementation of the agreed fraud and anti-corruption measures under the program and provide guidance in resolving any issues identified;

42

• Procurement: (i) review of procurement performance from annual performance assessments/independent procurement audits; and (ii) provide training and guidance on Procurement to MUDHCO, RGs and ULGs; and

• Financial Management: Review the financial reports and the assessment results reports as the basis for disbursements, audit reports, and agreement on measures to address any audit observation and monitoring their implementation;

145. Most of Bank’s implementation support team members (fiduciary, environmental and social systems, and fraud and anti-corruption), including the Task Team Leader, are based in the Ethiopia Country Office. This will ensure timely, efficient and effective implementation support. Formal implementation support missions and field visits will be carried out semi-annually, or as deemed necessary. 146. Tentative implementation support is summarized as follows:

Area Skills Needed Estimate Staff Time Needed Procurement support Procurement Specialist

5 SWs

Procurement Training Procurement Specialist 1 SW FM training and supervision FM Specialist 4 SWs Task Team Leadership TTL 10 SWs Financial Management, disbursement and reporting

FM Specialist Local Government Specialist

2 SWs 8 SWs

Technical and Procurement review of the bidding documents

Procurement Specialist Municipal Engineer

4 SWs 4 SWs

Environment/Social monitoring

Environment Specialist Social Specialist

2 SWs 2 SWs

Urban transport Urban transport 3 SWs Fiscal flows/ fiscal decentralization/ LG performance measurement

Economist 5 SWs

147. Skill-mix needed:

Skill Number of Staff Weeks

(annual)

Travel Frequency (annual)

Location

Task Team Leader 20 4 field trips Country Office based Urban Specialist 15 4 field trips Country Office based Procurement 10 2 and field trips as

required Country Office based

Financial Management Specialist 6 2 and field trips as required

Country Office based

Environment Specialist 4 2 and field trips as required

Country Office based

Social Specialist 4 2 and field trips as required

Country Office based

Senior Urban Economist 5 2 and field trips as HQ based

43

required Transport specialist 4 2 and field trips as

required Country office based

44

Annexes

Annex 1: Disbursement against the Performance on the DLIs-Disbursement Linked Indicator Matrix Disbursement-Linked Indicator Matrix

Total financing

allocated to DLI

As percent of total

financing amount

DLI Baseline Indicative timeline for DLI achievement

Year 1 FY15

Year 2 FY16

Year 3 FY17

Year 4 FY18

Year 5 FY19

DLI 1 ULGs have achieved Program minimum conditions in the annual assessment

0 44 ULGs 44 ULGs 44 ULGs 44 ULGs 44 ULGs

Allocated amount $90 million 23.68% $18 million $18 million $18 million $18 million $18 million

DLI 2 ULGs have strengthened institutional performance as scored in the annual performance assessment

0 60 (average score)

65 (average score)

70 (average score)

75 (average score)

80 (average score)

Allocated amount $158 million 41.58% $21.8 million52 $34.1 million $34.1 million $34.1 million $34.1million

DLI 3 ULGs have delivered infrastructure, maintenance and supported job creation as per their annual action plans and the capital investment plans, as scored in the annual performance assessment, and ensured value for the money

0 60 (average score)

65 (average score)

70 (average

score)

75 (average score)

80 (average score)

Allocated amount $75 million 19.74% $10.3 million $16.2 million $16.2 million $16.2 million $16.2 million

52 In the first year, the performance measures will only be applicable to the 18 ULGDP cities. The assessment of progress against performance measures of all 44 ULGs (including the new 26 ULGs) will begin in year 2.

45

DLI 4 Regional government capacity building and support teams in place and support urban service delivery 0

Capacity building plan of and terms of reference for regional government teams are place.

80 in place%53

80% in place and 80 % execution rate

80% in place and 80 % execution rate

80% in place and 80 % execution rate

Allocated amount $13 million 3.42% $2.6 million $2.6 million $2.6 million $2.6 million $2.6 million

DLI 5 ORAGs carry out ULG audits on time

554 44 ULG audits completed

44 ULG audits completed

44 ULG audits completed

44 ULG audits completed

44 ULG audits completed

Allocated amount $7 million 1.84% $1.4 million $1.4 million $1.4 million $1.4 million $1.4 million

DLI 6 Regional environmental protection agencies (REPA) review of ULG safeguards compliance in a timely fashion.

0

44 ULG safeguards reviews/audits completed

44 ULG safeguards reviews/audits completed

44 ULG safeguards reviews/audits completed

44 ULG safeguards reviews/audits completed

Allocated amount $6 million 1.58% $1.2 million $1.2 million $1.2 million $1.2 million $1.2 million

DLI 7 Regional revenue authority support ULG revenue mobilization55

0

44 ULG revenue mobilization supported

44 ULG revenue mobilization supported

Allocated amount $4 million 1.05% $2.0 million $2.0 million

DLI 8 Completion of annual MUDHCo capacity building activities for Program ULGs, regional governments and the ministry

0

Compre-hensive annual Program capacity building plan

Capacity building plan in place, 80% of people in place and minimum

Capacity building plan in place, 80% of people in place and minimum

Capacity building plan in place, 80% of people in place and minimum

Capacity building plan in place, 80% of people in place and minimum

53 See verification protocol and the Bank disbursement table for further details. 54 Five of the 18 cities currently participating in the ULGDP have received audits on time (by January 7, 2014) for financial year 2012/13 ((Ethiopian fiscal year 2005). 55 The regional revenue authorities will need time to build up the capacity within this area, and the tariff proclamations are expected to be up-dated only twice during the program period, hence results will be measured for the third and the fifth year of the Program.

46

in place and terms of reference developed

60% of the plan implemented

60% of the plan implemented

60% of the plan implemented

60% of the plan implemented

Allocated amount $22 million 5.79% 0 $4.4 million $4.4 million $4.4 million $4.4 million $4.4 million

DLI 9 Timely completion of Program annual performance assessments (APA) and value for money audits

0

APA completed on time

APA completed on time

APA and value for money completed on time

APA and value for money completed on time

APA and value for money completed on time

Allocated amount US$5 million 1.32% $1 million $1 million $1 million $1 million $1 million

Total Financing Allocated: US$380 million 100% 0 $60.7 million $78.8 million $80.8 million $78.8 million $80.8 million

The details of the DLIs matrix, total disbursement amount for each DLI and the corresponding percentage to total disbursement (Program cost) are presented in the table below. Verification protocol – The above DLI will be verified by an independent firm which will be hired to conduct annual assessments of the performances of ULGs using the verification protocol instrument (minimum conditions and performance assessment tool). In addition, the verification will be reinforced by other technical assessment reports such as value for money audit and regular WB supervision missions. The verification tool is presented in the table below.

47

Summary Protocol for Verifying Achievement of DLIs

DLI Verification Protocol Table # DLI Definition/

Description of achievement

Scalabi-lity

Data Source Verification Entity Procedure

1

ULGs have achieved Program minimum conditions in the annual assessment

The indicator will be satisfied when: The annual performance assessment, using only the minimum conditions, has been completed and the disbursements to Program ULGs have been determined on this basis.

Yes ULG compliance with Program minimum conditions (MCs) assessed by independent performance assessment.

Independent private firm carrying out the annual performance assessment. (Note: The terms of reference of the firm must be acceptable to the World Bank) Draft verification reports are submitted for review by the verification entity (APA firm) simultaneously to the government (technical sub-committee*) and the Bank. Neither party can modify such reports except for factual errors. * TSC will have representation from MUDHCo (chair), MoFED and other agencies as appropriate

MUDHCo hires a reputable private sector consulting/audit firm (whose terms of reference will be acceptable to the Bank) to carry out the independent annual performance assessment (APA) to measure the performance of each ULG against the Program’s minimum conditions and performance indicators.

APA determines whether all minimum conditions have been met.

The APA firm calculates the allocation to each ULG as per the formula in the Bank Disbursement Table, and provides the aggregate disbursement amount (along with the full assessment report and its findings) simultaneously to government and the Bank for review.

As part of implementation support, Bank will review the assessment results. The Bank retains the right to make the final decision whether a DLI has been achieved or not.

2 ULGs have strengthened institutional performance as scored in the annual performance assessment

The indicator will be satisfied when the annual performance assessment has been completed (based on the minimum conditions and performance indicators) and the allocation based on the score of all ULGs has been determined.

Yes ULG progress against Program performance measures (performance measures) assessed by independent performance assessment.

Same as above (DLI 1) Same as in DLI 1, MUDHCo hires a reputable private sector firm to carry out the independent annual performance assessment to measure the performance of each ULG against the Program’s performance measures. APA assigns a score to each ULG. The private firm will calculate the allocation to each ULG as per the formula in the Bank Disbursement Table, and provide the aggregate disbursement amount simultaneously to the government and the Bank for review.

As part of implementation support, Bank will review the assessment results. The Bank retains

48

the right to make the final decision whether a DLI has been achieved or not.

3 ULGs have

delivered infrastructure, maintenance and supported job creation as per their annual action plans and the capital investment plans, as scored in the annual performance assessment, and ensured value for the money

Achievement under this indicator for the first two Program years will be measured on the basis of actual delivery of infrastructure against targets laid out in the plan for the former year using Program funds, maintenance performance and performance in job-creation. Starting in Program year three the achievement of the DLI will also include the outcome of the value for money audits.

Yes ULG progress against Program performance measures assessed by independent performance assessment and performance as assessed by the independent value for money audits (which will start in year 3 of the Program)

For Program years 1 and 2, same as above (DLIs 1 and 2). Starting in Program year 3, in addition to the above, a private firm, which will be contracted, will verify the value for money aspects. The private firm, which will carry out the APA will include the findings on the value for money audits to the overall data.

Similar to DLIs 1 and 2 above, in Program years 1 and 2, this DLI will also be measured through the annual assessment and therefore the same process will apply. For these two years, as in DLIs 1 and 2, MUDHCo hires a reputable private sector firm to carry out the independent annual performance assessment to measure the performance of each ULG against the Program’s performance measures. APA assigns a score to each ULG. The private firm will calculate the allocation to each ULG as per the formula in the Bank Disbursement Table, and provide the aggregate disbursement amount simultaneously to government and the Bank for review. As part of implementation support, Bank will review the assessment results. The Bank retains the right to make the final decision whether a DLI has been achieved or not. Starting in Program year 3, in addition to the above, MUDHCo hires a reputable private sector firm to carry out the value for money audits to measure the quality of infrastructure built by using Program funds. The result of this will be shared with the firm, which will carry out the APA. Then, as under DLIs 1 and 2, the private firm will calculate the allocation to each ULG as per the formula in the Bank Disbursement Table, taking into account the findings of the value for money audits, and provide the aggregate disbursement amount simultaneously to government and the Bank for review. As part of implementation support, Bank will review the assessment results. The Bank retains the right to make the final decision whether a DLI has been achieved or not.

4 Regional government

Achievement of the DLI will be determined on the

Yes (allocatio

Regional government

Same as above (DLIs 1,2 and 3)

In Program year 1, the annual performance assessment will check that the capacity

49

capacity building and support teams in place and support urban service delivery

basis of execution of capacity building activities specified in the regional government capacity building plan of the four regional support teams to be established which will have 10 staff in each team.

n per region, which is calibrated)

performance against capacity plan, assessed by independent performance assessment.

building plan and TOR for regional government teams are in place. In Program’s second disbursement year (FY 2015/16), the annual performance assessment (conducted in 2014) will verify that the

(i) regional government teams are in place and are operating, and

(ii) regional governments have adopted service delivery standards (as issued by MUDHCo*) and issued those for the cities, and provided guidance in implementation (reports).

In Program’s third disbursement (FY2016/17) onwards: The annual performance assessment will verify that the

(i) regional government has developed Capacity building plan for the ongoing FY

(ii) regional government teams are in place

(iii) capacity building plans for the previous year have been executed

(iv) regional governments have adopted service delivery standards (as issued by MUDHCo*) and issued those for the cities, and provided guidance in implementation (reports).

* This condition is only valid if MUDHCo has issued the service delivery standards to the regions.

5 Regional government audit agencies (ORAG) carry out ULG audits on time

This indicator will be fulfilled when the regional audit entities, or their delegated agencies, which includes certified private audit firms, carry out and complete the financial audits of ULGs in their jurisdictions by

Yes Annual performance assessment

Same as above (DLIs 1,2, 3 and 4)

The reputable private sector consulting/audit firm (whose terms of reference will be acceptable to the Bank) which will be hired by MUDHCo to carry out the independent annual performance assessment, will verify the results against this indicator, following the same process as in the DLIs above.

50

January 7 of each year. 6 REPAs

review of ULG safeguards compliance in a timely fashion.

This indicator will be fulfilled when the regional environmental protection agencies have carried out the safeguards reviews/audits of ULGs in their jurisdictions before the start of the annual performance assessment in each year.

Yes Annual performance assessment

Same as above (DLIs 1,2, 3, 4 and 5)

The reputable private sector consulting/audit firm (whose terms of reference will be acceptable to the Bank) which will be hired by MUDHCo to carry out the independent annual performance assessment, will verify the results against this indicator, following the same process as in the DLIs above.

7 Regional Revenue Authorities (RRAs) support ULG revenue mobilization

This indicator will be fulfilled when RRA/BOFEDs have conducted consultations with the ULGs on tax rates and bands, with review of revenue enhancement plans and have updated the tariff proclamations for the ULGs

Yes Annual performance assessment

Same as above (DLIs 1,2, 3, 4, 5 and 6)

The reputable private sector consulting/audit firm (whose terms of reference will be acceptable to the Bank) which will be hired by MUDHCo to carry out the independent annual performance assessment, will verify the results against this indicator, following the same process as in the DLIs above. The APA will review whether there have been consultations, documented with minutes, in the previous financial year. The assessments will be conducted as part of the third and the fifth APA, and regions will have to: i) complete the consultations, ii) reviewed the REPs with the ULGs, and iii) up-dated the tariff proclamations prior to each of these APAs (all 3 issues will have to be achieved in the previous financial year in order to fulfill the conditions for the DLI).

8

Completion of annual MUDHCo capacity building activities for Program ULGs, regional governments and the ministry.

Achievement of this DLI will be determined on the basis of execution of activities specified in the MUDHCo capacity building plan for the federal, regional and urban local governments.

Yes Comprehensive annual Program capacity building plan, which will include TOR of capacity building, and details of activities planned, and staffing positions.

MUDHCo provides information and documentation to the World Bank, which verifies.

MUDHCo will put in place an annual plan to build capacity of ULGs, regional governments and the ministry. Among other things, the plan will specify the activity, its objective, the resources assigned and the implementation timeline. The template for the plan will be included in the Program operations manual. 60 days prior to the beginning of the forthcoming fiscal year, MUDHCo will submit the plan to the World Bank, which will verify that the plan is in the agreed format and is satisfactory. Within 30 days of the beginning of the fiscal year, MUDHCo will submit a report of the

51

implementation of the annual capacity building plan for the previous year to the World Bank. World Bank will verify the extent to which the plan has been executed and determine the DLI amount to be disbursed. In the first Program year, the plan will include guideline/framework on municipal service delivery standards, job creation measurement, and land development and supply In the second release (FY 2015/16): The assessment will include the ECSU course delivered for 26 ULGs which will have been implemented before the end of FY 2014/15.

9 Timely completion of Program annual performance assessments (APA) and Value for the Money Audits (value for money)

Achievement of this DLI will be determined on the basis of completion of APA by June 2014 in the first Program year, and then by November with incorporation of the audit results in January of each year thereafter, by MUDHCo. Starting in year three of the Program, MUDHCo will also launch the value for money audits, by August of each year to feed into the APA cycle.

Yes Documentation showing that the APA, and later in the Program, the value for moneys have been launched and completed on time.

MUDHCo provides information and documentation to the World Bank, which verifies. The Bank will have the right to join the APA and/or value for money audits in the field, as part of its implementation support.

World Bank will review the compliance of the timeliness of the APA and later of the value for money, with the following timeline; APA For Program year one: completed by June 2014. For subsequent Program years; APA to be completed by November of the same year with incorporation of audit results in January prior to the FY for which the results will impact. Value for money Starting on August 2015 to be completed by November 2015 and the same timeline thereafter for each year.

52

Annex 2: Result Framework

Program Development Objective: Enhance institutional capacity of participating ULGs in developing and sustaining urban infrastructure and services.

PDO Level Results

Indicators

Cor

e

DL

I

Unit of Meas-

ure

Base-line

FY14

Target Values Frequency Data Source/ Method-

ology

Responsibility for Data

Collection

FY1556 FY16 FY17 FY18 FY19

1. Score in the APA for institutional performance of participating ULGs, averaged across all cities.57

2 Number 0 60 65 70 75 80 Annually

APA

APA firm collects the basic data on performance. The MUDHCo and the Bank verify the index.

2. Score in the APA for achievement of urban infrastructure targets by ULGs, averaged across all cities.

3 Number 0 60 65 70 75 80 Annually APA See above.

Intermediate Results Area 1: Institutional Performance

1. ULGs that achieve an increase of own source municipal revenue of at least 10% over the previous year under ULGDP II.58

2 Number 0 10 18 24 30 36 Annually APA Firm collects the data and the MUDHCo and the Bank review and confirm.

2. ULGs with timely audit559. 8 Number

5 18 32 38 44 44 Annually APA Same as above.

3. ULGs with clean (unqualified) audit under

2 Number 0 5 8 12 16 20 Annually APA Same as above.

56 Fiscal 2015 is taken as year zero. 57 In the areas of planning and budgeting, assets management, public financial management, procurement, own source revenue, accountability and transparency, environment and social safeguards, land management, and urban planning. The performance of ULGs ranges between 0–100. The percentage reflects the score. 58 The increase is measured in nominal figures. 59 Five of the 18 cities currently participating in the ULGDP have received audits on time (by January 7, 2014) for financial year 2012/13 ((Ethiopian fiscal year 2005).

53

PDO Level Results Indicators

Cor

e

DL

I

Unit of Meas-

ure

Base-line

FY14

Target Values Frequency Data Source/ Method-

ology

Responsibility for Data

Collection

FY1556 FY16 FY17 FY18 FY19

ULGDP II.

Intermediate Results Area 2: Infrastructure and Maintenance

1. Direct Program beneficiaries under the ULGDP II

√ na Number 0 2.85 million 3 million 4.4 million 4.4 million 4.4 million Annually Census and APA

MUDHCo

1.a. Of which female √ Percent 0 50% 50% 50% 50% 50% Annually Census and APA

MUDHCo

2. People in participating urban local governments provided with access to all-season roads within a 500 meter range provided under the ULGDP II60

√ 3 Number 0 1 million 2 million 3 million 4 million 4.2 million Annually Census and APA

MUDHCo

3. Urban cobblestone roads built or rehabilitated under ULGDP II

3 Kilo-meters

0 120 270 420 570 730 Annually APA Firm collects the data and the MUDHCo and the Bank review and confirm.

4. Urban gravel roads built or rehabilitated under ULGDP II

3 Kilo-meters

0 15 45 75 105 135 Annually APA Same as above.

5. Serviced land for industry, MSEs, and housing.

2 Hectares 0 300 680 1,060 1,440 1,820

Annually APA Same as above.

6. New controlled or sanitary landfills supported under the project under the ULGDP II

3 Number 0 0 2 5 9 13 Annually APA Same as above.

60 Numbers are indicative only, because the number of kilometers of roads to be constructed with Program funds will not be known until ULGs prepare and execute their CIPs.

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PDO Level Results Indicators

Cor

e

DL

I

Unit of Meas-

ure

Base-line

FY14

Target Values Frequency Data Source/ Method-

ology

Responsibility for Data

Collection

FY1556 FY16 FY17 FY18 FY19

7. Public parks and greenery under the ULGDP II

3 Hectares 0 5 15 25 40 55 Annually APA Same as above.

8. ULGs that execute at least 80 percent of their O&M budget under the ULGDP II.

3 Number 0 9 22 30 35 40 Annually APA Same as above.

Intermediate Results Area 3: Capacity Building

1. ULGs that implement at least 80% of the budget presented in the annual capacity building plans.

Number 0 9 22 30 35 40 Annually APA Same as above.

2. Regions that implement at least 80% of the budget presented in the annual capacity building plans.

4 Number 0 0 3 4 4 4 Annually APA Same as above.

3. MUDHCo utilizes the budget presented in the annual capacity building plans.

8 Percent 0 60% 80% 95% 95% 95% Annually APA Same as above.

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Annex 3: ULGDP Performance-Based Grant Indicative Planning Figures (IPFs) Table 1: Overview of the Performance-Based Grants for the entire period

56

Table 2: Overview of the Performance-Based Grant and Funding Sources for the entire Program Period

57

Annex 4: ULGDP – Investment Menu for the Performance-Based and CB Grants List of Eligible Investments under ULGDP II Infrastructure/Service Type Roads Expenditure group 1.

• Cobblestone, gravel and red ash roads Expenditure group 2. • Rehabilitation of roads • Bridges, fords and culverts • Pedestrian walkways • Street lighting, etc.

Roads, which require significant resettlement of people (more than 200 people), will not be eligible with funding from the ULGDP II PB grants.

Integrated multiple infrastructure and land services (residential, micro and small enterprises, industrial zones)

Expenditure group 3. • Servicing of land with utilities (water supply, electricity,

telecommunications, roads and drains (within existing right of way), solid and liquid waste collection and disposal, and other core urban infrastructure).

Sanitation (liquid waste) Expenditure group 4. • Sewer reticulation systems (no large canals (note*) • Wastewater treatment ponds • Sludge ponds • Community soak away pit and septic tanks • Community latrines: dry pit, ventilated improved pit, ecosan,

composting • Vacuum trucks, vacuum handcarts, and the like.

Solid waste management Expenditure group 5. • Collection trucks and other collection equipment, collection bins,

transfer stations, collection points • Landfills (of the size of maximum 10 hectares and minimum design

criteria as per the SWM Manual) • Biogas and composting plants • Landfill site equipment including compaction vehicles, etc.

Water supply (schemes to be financed under the program will follow the policies and principles of those of the Ministry of Water and Irrigation and Energy MWIE)

Expenditure group 6. • Spring catchments and gravity distribution system • River intake (run of river/dam), treatment works and pressure

distribution • Wells with submersible pumps, treatment works, and pressure

distribution • Rehabilitation or expansion of existing system, communal standpipes,

etc. Urban drainage Expenditure group 7.

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• Drainage systems • Flood control systems, etc.

Built facilities Expenditure group 8. • Urban markets with associated services (water supply, drainage, access

roads, and the like) • Development of production and market centers for small businesses • Slaughter houses (abattoirs), with by-products and processing facilities.

Urban parks and greenery Expenditure group 9. • Support to urban parks and greenery development projects for

beautification. Consultancy services for design and contract management

Expenditure group 10. • For studies relating to preliminary and detailed design, contract

documentation and supervision relating to the above infrastructure and services, and the like.

Capacity Building Support** (see below)

Expenditure group 11. Up to 5 % of investment grants can be utilized on CB support, see menu for CB support below.

*Note: Sewer reticulation systems canals (primary canal) shall not exceed a diameter of 1000mm and shall not exceed 10 km.

The investment menu for the CB support is as follows:

Training, seminar, and conferences • Short- term local training and related operating expenses

• Selected short- term training (up-to duration of 3 months) • Peer to peer support across ULGs • Study tours as planned by the ULGs and approved by the Ministry • (study tours will have to be approved) • Seminars/Conferences/Workshops/Meetings Expenses • Training Materials • Hire of Venue /Hotel Accommodation • Refreshments

Technical assistance and organizational development, system development etc.

• Consultancy fees and related operating expenses • Printed Material & Stationery

Equipment

Equipment related with the capacity building support (not vehicles and buildings) including:

• Server (computing) • Networking and ICT equipment and software • Computers and accessories • Printer, photocopy machine, scanner • Binding machine • Air conditioner/ fan • Filling cabinet/ shelf

Notes on CB investment menu:

1. Total costs should not to exceed 5 percent of total performance-based grant received.

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2. Compliance with the capacity building activities menu will be a minimum condition for access to the performance grant.

Current maintenance and operational costs, including salaries, should not be funded by the ULGDP grant. Other ULG sources, including OSR should be used for these expenditures. The performance system will promote planning and actual provision for this to ensure longer-term sustainability.

Investments, which according to the WB Operational Manual for Environmental Assessment (OP 4.01) are classified in Category A are explicitly excluded from the Program. These “…are projects which are likely to have significant adverse environmental impacts that are sensitive, diverse, or unprecedented. These impacts may affect and area broader than the sites or facilities subject to physical works”. Category A projects are not supported by PforR operations and ULGs cannot use the ULGDP II grants for these types investments.

The investment menu above explicitly excludes possible high-risk activities and Category “A” types of activities. The infrastructure investments that will be supported by the ULGDP II will remain at the municipal level and the procedures for preparing sub-projects projects will, as per current practice, include criteria to screen for significant negative impacts that are sensitive, diverse, or unprecedented on the environment and/or affected people.

While the scope and scale of works under the Program are not expected to cause significant adverse environment and social impacts, the current EIA procedures in Ethiopia require that all investments are screened for negative impacts that are sensitive, diverse, or unprecedented on the environment and/or affected people. In addition to screening for significant negative impacts, the following works will be ineligible for financing under the ULGDP II:

• Road works outside of existing rights-of-way; • Works involving physical relocation of more than 200 people; • New landfills that are larger than 10 hectares, or new landfill plans for ULGs, which have no

system for upstream waste collection, segregation, transportation; and treatment and disposal of leachates. ULGs, in the design of sanitary landfills, will be required to demonstrate a system of waste segregation; collection; transportation; and treatment before they can start landfill constructions;

• Activities that would significantly convert natural habitats or significantly alter potentially important biodiversity and/or cultural resource areas.

The infrastructure investments implemented by urban local governments are likely to deliver significant social benefits, provided that they are planned in an inclusive manner, and they are designed to ensure a distribution of benefits to vulnerable groups including the old, youth, women, and the poorest. Social benefits cannot be guaranteed, and there is a requirement to ensure that projects are planned, constructed and operated in a manner, which maximizes benefits. In particular, this should take cognizance of the vulnerable groups as mentioned above, and ensure their participation in ongoing consultation throughout the design and implementation of ULGDP. In some cases, there may be risks of the permanent or economic displacement of people, requiring a carefully planned and implemented RAP. The potential environmental and social benefits of urban infrastructural projects depend on the nature and location of the project, though they are likely to be limited in scale.

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An assessment of potential effects of the types of investments eligible for financing in the context of ULGDP II indicate that most adverse social impacts and risks are associated with the construction phase, as well as the possibility of land acquisition, resettlement, and livelihood impacts. Potential adverse environmental impacts include air pollution from dust and exhaust; nuisances such as noise, traffic interruptions, and blocking access paths; water and soil pollution from the accidental spillage of fuels or other materials associated with construction works, as well as solid and liquid wastes from construction sites and occupational health and safety issues at worker campsites; traffic interruptions and accidents; and accidental damage to infrastructure such as electric, wastewater, and water facilities.

These types of impacts, however, are generally site-specific and temporary. Experience from implementation of ULGDP indicates that short-term construction impacts for the most part can be prevented or mitigated with standard operational procedures and good construction management practices that could be adopted to be followed consistently by all ULGs. Technical Manuals prepared by ULGDP have been adopted by the MUDHCO, which are standard part of environmental management plans included in bidding documents for contractors.

Each ULG can use, up to 5% of its performance based grant, for capacity building activities. Point of the departure for these activities will be the results of the annual performance assessments, which will indicate areas of improvement for ULG performance. Generally, these funds can be used for technical consultant work, backstopping support, advisory support, training, minor equipment and contract staff in areas where there is need to fill in the gaps identified in the APAs. The ULGs will be required to develop a CB plan for the use of funds, applying the standard format elaborated in the Operational Manual, and will have to report on the utilization and progress in CB activities. Items such as vehicles and administration building are not part of this provision. As explicitly stated in the Operational Manual, should a ULG be in doubt about the eligibility of an investment, they will contact MUDHCO to ensure that the expenditure complies with Program expenditure framework.

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Annex 5: MUDHCO – Organizational Structure of Ministry

Minister

Audit Department

State Minister (Construction Sector)

State Minister (Urban Development Sector)

Construction Industry

Development & Regulatory

Bureau

Housing Development Capacity

Building Construction Bureau

Urban Plan, Beatification &

Sanitation Bureau

Federal Integrated Urban

Land Information Project

Office Land and Land Information

Registration Agency

Urban Good Governance &

Capacity Building Bureau

Federal Micro and Small

Enterprises Agency

Urban Land Development & Management Bureau

Minister office & Mini-Cabinet Affairs Bureau

Agency for Government

Houses

Housing Construction

Enterprises

Policy and Program Bureau

Information Technology &

Database Development Bureau

Support Services Coordinating Bureau

Capacity Building & Reform Management Bureau

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Urban Good Governance & Capacity Building Bureau Planning and Documentation

Team

የ ማመቻቸት ሥራ

Urban Good Governance and Capacity Building Bureau Organizational Structure

Project Management Department

Project Preparation Case Team

Financial Management Case

Procurement Case Team

Public Participation and Decentralization

Department

Human Resource Development and Standardization

Municipal Service Standardization

Department

Public Participation Improvement Case

Team

Emerging Regions Support Team

Decentralization Case Team

Municipal Service

Standardization Case Team

Cities” performance M

& E Case Team

Occupational standardization case

team

Human resource development

performance case

Integrated Urban Infrastructure Development

Diaspora Case Team

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Overview of Staffing in the UGCBB

No. Departments’ Name Allowed Number of Positions Actual Filled Positions �Vacant Positions

1 Human Resource Development and Standardization Department

9 9 0

2 Project Management Department 17 11 6

3 Public Participation and Decentralization Department

18 17 1

4 Municipal Service Standardization Department 10 7 3 5 Urban Local Government Development Unit 14 12 2 7 Planning and Documentation Team

- 2 -

8 Integrated Urban Infrastructure Development Department

14 3 11

9 Facilitation Team 6 3 3 Total 88 64 24

Source: Based on information received from MUDHCO, September, 2013.

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Annex 6: MUDHCO – Overview of the Main Institutional Arrangements The institutional arrangements for program implementation will be based on the experiences from the current ULGDP, with clear division of tasks and responsibilities between involved parties, as per the GoE structure and consistent with existing legal provisions, regulations and guidelines of which some will be up-dated to include the new features of the Program. At the central level, the Ministry of Urban Development, Housing and Construction (MUDHCo) will be responsible for the overall program management and operations, and budget whereby MoFED will be responsible for transfers of funds, financial management and compilation of federal fiscal reports see the figures below. Institutional Arrangement

65

Flow of Funds

MUDHCo, MoFED and the Office of the Auditor General (OFAG) shall ensure that Program resources are budgeted for and disbursed within the Expenditure Framework, and that Program accounts are audited as per statutory requirements. The offices of auditor general at the regional level will be supported through the regional CB support, and a linked DLI for timely audit. The MUHDCo will be the coordinating ministry and shall have the overall responsibility for implementation oversight and accounting for ULGDP funds to MoFED and the days to day coordination will be handled by the Urban Governance and Capacity Building Bureau (UGCBB). The division of tasks is clearly outlined in the ULGDP Operational Manual, which will be updated prior to the start of the second ULGD. MUDHCo will also be responsible for the CB support to the regions and the mobile teams supporting within this are as will as for contracting in of private companies and management of the annual performance assessments and oversight and M&E issues on Program specific matters. MUDHCo has proved in the first phase to have the capacity to manage activities expected in the coming operations, but will need support in the scaling up, and strengthening of the CB support to regions and M&E activities. As per the current ULGDP, MoFED will be responsible for handling of flow of funds to the regions and the cities included in the Program, and for preparing quarterly financial reports. The flow of funds will be simplified compared to the existing system, with fixed bi-annual tranches based on annual budget allocations and results of annual performance assessments of the ULGs.

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Annex 7: Minimum Conditions and Performance Measures

Entry-level condition – Prior to Release:

Participatory Performance Agreement (PPA) signed with MUDC

Show commitment by all parties and defines the rules of the system

Keep the existing rule. Up-date the PPAs. Should be included in the ULGDP Grant Operational Manual.

DLI 1: Minimum Conditions (minimum conditions)

No. Minimum Condition Reason Comments – phasing in etc. 1. ULG has produced and the council approved

a: • Rolling three year capital investment plan

(CIP) with • Annual action plan; • Annual budget • Annual procurement plan • The planned use of the performance-

based grants from ULGDP II is in compliance with investment menu (only from assessment in 2015 of the performance in 2014/15 (EFY 2007).

Document minimum capacity in planning and project handling. Implementation readiness.

The subject for review is the plans developed in the previous year for the year where assessments are conducted, e.g. if assessment is conducted in August 2014, it is the plans for 2014/15 /EFY 2007), which are typically developed from March – June 2014. In the assessment for 2014/15 (EFY 2007) budget allocations, which is expected conducted in March 2014, it is the plans for 2013/14 (EFY 2006), which are reviewed, hence the exact plan will depend on timing of the APA. To make this effective it is important that the APAs are conducted timely in the future, see Section on APA procedures. Transitional arrangements. For new ULGs, procurement plans will only a MC for the second year, see also below. The investment menu will only be assessed from the second assessment where there has been the first planning/budgeting on the use of the performance-based grants. From the third assessment, the actual utilization of grants in the previous year will also be assessed.

2. Submission of financial statements for the last Show evidence on minimum capacity in PFM In order for the external audits to start as early as possible

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No. Minimum Condition Reason Comments – phasing in etc. FY (closure of the FY on time). cities should close their accounts by end of September/

each year. Phasing in the first year: The new ULGs participating in the Program should have completed the financial statements before the start of the assessment.

3. Audit report from previous FY should not be adverse or with a disclaimer opinion.

To reduce fiduciary risks It should be ensured that audit quality continues, and there is need to combine with other minimum conditions to ensure sufficient safeguards on PFM. Compared to previous system, this is a strengthening of the requirements, as it is reviewing the audit report from previous FY. If the ORAG cannot conduct the audit in time, external audit firms will have to be contracted, and their results applied. (ORAG should clear the TOR and makes QA/endorsement of the results). Transitional arrangements: A waiver is provided in the first FY for the new ULGDP ULGs providing them with sufficient time to improve, but as a minimum they should have completed the financial statements from previous FY. For the first year for the “current ULGDP” ULGs, the deadline is prior to the effectiveness. Second year: All should be on time, i.e. January 7. The audit report is the last “trigger” in the assessment process, and will be checked after the field-work, but prior to the consolidation of the results.

4. Co-funding requirements (defined with various rates of co-funding depending on the type of ULG). The co-funding requirements are the following: 10 % for the new ULGs in the DRS 20 % for the new ULGs in the non-DRS regions.

Reflect sustainability of the program and ensure that the rule on counterpart funding is adhered with. The co-funding is set at a realistic level and further contributions are promoted through the performance measures. Promote improved revenue mobilization and incentives to focus on longer-term sustainable

Is combined with performance measures so that contribution above the minimum level is rewarded. Co-funding should be budgeted for prior to the start of the FY, and by the end of a FY ULGs should have contributed with the specific %, measured by actual use of funding on capital investments on areas defined in the investment menu and source of funding (IBEX coding).

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No. Minimum Condition Reason Comments – phasing in etc. 30 % for the “old” ULGs. 50 % for Dire Dawa and Harar. A higher level of co-funding is promoted in the performance measures.

urban finance. Transitional arrangements/Phasing in: ULGs can only budget for this in the second assessment, as they do not know the level for this coming FY. The assessment of actual utilization of funds can only be done in the assessment following a year of actual disbursements of ULGDP funds, i.e. from the September 2015 assessment.

5. Key positions in place/coordination team with the following positions under the coordination of the city manager: focal persons for revenue, procurement, environmental and social sustainability, M&E, PFM, and civil engineering, plus a functioning internal audit unit.

To ensure that there is minimum capacity to handle the entire program implementation process at the ULG level.

The positions should be in place at point of time for the assessments.

6. Safeguards: ULGs have demonstrated that they have established a functional system for environmental and social management as a minimum condition to access the performance based grant, including an environmental and social safeguards focal person.

To ensure that there is a mechanism and capacity to screen environmental and social risks of the CIP prior to implementation.

Defined by: Initiation of recruitment of environmental and social safeguards focal person at the city level; Endorsement of city level ESMS document that includes procedures for due diligence; institutional procedures for grievance management (see below under No. 8) and environmental, managing resettlement/land take processes and environmental social mitigation and monitoring plan. Only from second APA (September 2014)

7. Functional institutional set-up for procurement system in place according to public procurement proclamation including: 1. Procurement function and minimum core

staff in place – at least two procurement specialists;

2. Functional tender committee/tender award committee (TAC) in place;

3. Participating cities have the copies of their respective region’s procurement law, directives, manuals and standard procurement documents and staffs are

Procurement is a high-risk area, hence need to ensure that basic systems, and functioning of this is in place prior to transfer of PB grant installments. The existence and functionality of the procurement system is basic to make sure that Program systems coupled with the mitigation measures provide reasonable assurance that the financing proceeds will be used for intended purposes with due consideration of economy, efficiency, transparency and fairness.

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No. Minimum Condition Reason Comments – phasing in etc. familiar with these legal documents

8. Complaints handling system in place, including system for reporting of complaints, system for receiving and addressing complaints and reporting on corrupt practices and complaints, through the ethics unit.

Receiving, reviewing and addressing complaints within core areas such as areas related to environmental degradation of the surrounding: Environmental health impacts on people; loss of livelihood, income or assets is an important aspect of any GRM. The system will encompass a system for complaints received, registration of these, description of where to send the various types of complaints, to whom, and how?; and description of the procedures. The information about these procedures should be published.

Only from the second APA (September 2014). The POM will further define the requirements within this area.

DLI 2: Institutional Performance

Below is a presentation of the institutional performance measures.

Main changes compared to existing ULGDP I performance assessment system are:

• Division of institutional and service delivery targets in two sets of indicators under each DLI II and III; • Movement of CIP utilization rate to separate DLI (DLI 3), performance linked allocation; Similar for the utilization of maintenance budget; • Improvement and sharpening of indicators in most areas; • New indicators more focusing on the ULGs gaps and areas of importance for activities linked with achievement of targets of the program; • Reorganization of some of the performance areas, and regrouping. • Links to the government policy on Ethiopian Cities Prosperity Initiative are included.

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DLI 2: Institutional performance Improvements

Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

1 Planning and Budgeting (maximum 10 points)

1.1 Rolling three year CIP, with linkages between the annual budget, annual action plan, and annual procurement plan (Maximum 3 points)

• Consistency of figures and alignment with revenue enhancement plan and asset management plan: 2 points.

• Capturing of operational and recurrent costs of investments in the plans: 1 point.

Promote efficient planning, budgeting and procurement for efficient infrastructure development

Pillars 2, 3 and 4 Pillar 3

Existing Existing

1.2 Participation of citizens in the planning process to meet service delivery priorities identified by citizens (Maximum 4 points)

• Evidence of participatory planning process with involvement of citizens

Measured by: • Number of public consultations

(minimum two per year: 1 point) • Increase or stable level of number of

people involved in planning discussions and the % of women involvement is more than 40 %: 1 point.

• Existence of a meeting agenda and other information has been shared in advance and evidence that issues discussed have included the prioritization of projects in the up-date of the CIP/annual plan: 1 point.

• Good governance procedures on planning reflected by minutes from the

Citizens involvement and good governance

Pillars 3 and 7

Yes, but strengthened

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

consultation meetings: 1 point.

1.3 Budget appropriation (Maximum 2 points)

• Budget approved by Council and proclaimed in the budget proclamation following the standard charts of accounts: 2 points. Note that both conditions have to be complied with to achieve the points.

Promote political leadership and governance

Pillar 1 New

1.4 Budget reliability (Maximum 1 points)

• Variance in % between total budget and actual for the previous FY (related with total budget expenditures on municipal services) is less than 10 %: 1 point.

Promote proper budgeting and implementation

Pillars 3 and 5

Existing (but only partial)

2 Assets Management (10 points)

2.1 Assets management plan prepared and updated (Maximum 10 points)

• Asset inventory updated, featuring a tabular and spatial database of all infrastructure, with specification and characteristics, at least for the five categories of municipal assets (Road &Drainage, Solid and Liquid waste, Socioeconomic infrastructure &greeneries, Utilities, Public buildings including abattoirs (2 points)

• Conditions of assets reflected in asset inventories correctly (professional input) (2 points)

• Asset inventory show an asset value and deficit, which calculates the remaining asset value, maintenance and rehabilitation deficit based on annual

Strengthen management of infrastructure and assets.

Pillar 5 Existing

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

depreciation rates. (2 points) • City updated the AMP according to the

AMP 10 steps (as per the guideline for asset management preparation if exists) elaborating its implementation strategy, which details individual activities and their respective budgets over the course of the year (2 points)

• AMP clearly show related budget for asset maintenance, rehabilitation and new assets, which lists all necessary costs (2 points)

3 Public Financial Management (Maximum 15 points)

3.1 Accounting and timely reporting (Maximum 4 points)

• Use of integrated IBEX for all operations including ULGDP grants and reporting on these: 1 point

• Charts of accounts adhered with, including: On site analyses of correctness of coding – in particular of municipal revenues: 1 point.

• Timely financial reporting: 1 point

• Monthly cash count report and Bank

reconciliation submitted to region on time (within 15 days after the end of the month): 1 point

Strengthen accountability

Pillars 1 and 3

New New Existing New

3.2 External audit backlogs cleared • All audit backlogs cleared for previous Strengthen Pillars 1 and Existing

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

(3 points) years (minimum 5 years back): 3 points. accountability 3

3.3 Audit Opinion for the previous audit (3 points)

• The audit report from the previous audit has a clean audit opinion: 3 points.

Strengthen accountability

Pillars 1 and 3

New

3.4 Compliance with audit recommendations (2 points)

• Evidence that audit queries raised in the external audit report have been acted upon by the city: Minimum 80 percent of the queries have to be cleared: 2 points.

Strengthen accountability

Pillars 1 and 3

New (was monitored only)

3.5 Internal audit (3 points) • Internal audit procedures adherence with good practices reflected in: (a) quarterly reports, (b) reporting to mayor, (c), and evidence of follow up on audit findings). (3 points, one point for compliance with each of a, b, c).

Strengthen accountability

Pillars 1 and 3

New

4 Procurement 61 (Maximum 15 points)

4.1 Annual procurement plans for ULGDP II prepared and its implementation is monitored and updated as required. (Maximum 3 points)

• The procurement plan implementation is monitored and procurement process milestones are achieved: 1 point.

• Procurement plan is up-dated, as required at the point of time for assessment: 2 points.

Strengthen efficiency and competition in implementation of infrastructure (urban productivity and competiveness)

Pillar 2 Existing (modified)

61 Annual Independent procurement audit (IPA), including contracts effectiveness is to be conducted and reported along with management response of issues raised. The IPA will have an agreed terms of reference and conducted by regional public procurement agencies or an independent consultant. At the moment, since the RPPAs do not have the capacity, the first two years independent procurement audit will be conducted together with APA and the terms of reference of the APA will be modified to address the IPA need. The RPPAs capacity will be enhanced during the first two years and the RPPAs will take over the IPA responsibility from the APA consultant (Procurement audit is their legal mandate). The adequacy of the regional public procurement and asset management agencies to carry out IPA will be assessed and confirmed by joint review of Federal Public Procurement and Asset Management Agency and the World Bank.

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

4.2 Adherence to procurement procedures and effectiveness of contracts (Maximum 12 points)

Based on the review of a sample of procured contracts, the following are assessed as procurement performance indicators (the contract sampling size for review should not be less than 20 percent in each city): • Availability of adequate relevant auditable

records on the procurement process; (1 point)

• All ICB and NCB contracts award published as necessary and compliance with procurement process and decisions made in accordance with the legal requirements: (11 points) divided on: (a) Procured Goods, works and services contracts are in the approved PP (1 point); (b) proper advert is made (1 point); (c) correct SBDs are used (1 point); (d) bid floating periods are acceptable (1 point); (e) BER are conducted consistent with requirements of the issued BD (1 point); (f) Evaluation results are announced to bidders and to the general public (1 point) (g) Contracts are awarded to the lowest evaluated bidder within bid validity periods (1 point); (h) procurement complaints, if any, are properly addressed (1 point); (i)contract documents contents are complete (1 point); (j) timeliness of the procurement/contracting process and decisions are consistent with the procurement plan (1 point); (k) Contracts implemented are according to planned timing and budgets. (1 point).

• Strengthen efficiency and competition in implementation of infrastructure (urban productivity and competiveness) (the first two years, the APA will conduct this assessment, and in the following year (3) and onwards, the procurement audit will fit into the results of the APA, using the regional PPA.

Pillar 2 Existing (modified) Existing Existing (partly and modified)

5. Own source revenue enhancement (Maximum 10 points)

Note as 5.4 is only relevant

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

from year 2 and 3, other indicators are increased in the first APA proportionally.

5.1 Revenue enhancement plan updated for the most recent year (Maximum points: 2) (Maximum 3 points in the first APA)

• The up-dated revenue enhancement

plan will include: (a) city analysis of previous year’s revenue performance with detailed analyses of each main source of revenue including discussion of its revenue potential: 1 point. (2 points in the first APA)

• And (b) city strategies for revenue enhancement: 1 point.

Proper planning and analysis is a condition for effective targeting of initiatives

Pillars 1 and 3

Existing (partly) Existing (partly

5.2 Municipal Revenues increase (Maximum 3 points) (Maximum 4 points in the first APA)

Percentage increase of in total municipal revenues from business taxes, municipal rent and charges and fees over previous year: 5-10 percent increase: 1 point; 11-20 percent: 2 points; above 20 percent: 3 points (4 points in the first APA). (nominal increase)

Promote sustainability, ownership and accountability

Pillars 1 and 3

New

5.3 Revenue planning capacity (Maximum 2 points) (Maximum 3 points in the first APA)

• Percentage of municipal revenue on business taxes, municipal rent and charges and fees collected against planned target for the previous EFY. (variation less than 5 percent: 2 points (3 points in the first APA), less than 10 percent: 1 point.

Promote realism in revenue planning and efficiency in collection

Pillars 1 and 3

Existing (but now focus on municipal revenues)

5.4 Funding from ULGs

• ULG contribution level for capital investments above a certain level

Promote sustainability,

Pillars 1 and 3

New

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

(Maximum 3 points) o More than 10 % for new ULGDP cities in new (DRS) regions, calibrated with 11-20 %: 2 points and above 20%: 3 points;

o More than 20 % for new ULGs in non-DRS regions calibrated with 21-30 %: 2 points, and above 30 % 3 points.

o More than 30 % for old ULGDP cities calibrated with 30-40 %: 2 points and above 40%: 3 points.

o More than 50 % for Dire Dawa and Harar calibrated with 51-60 %: 2 points and above 60 % 3 points.

Transitional arrangement: Only from second assessment (September 2014) (budget allocated), and from the third Assessment in September 2015 (both budget and account figures are checked). In the first assessment, the other indicators (5.1-5.3) will be increased to 5.1: 3 points, 5.2: 4 points and 5.3: 3 points)

ownership and accountability

6 Accountability and transparency (Maximum 15 points)

6.1 Accountability and transparency in city’ operations and service delivery (Maximum points: 15)

• City has identified the top three basic municipal services, and prepared a standard for delivery along with citizen charter and published this ( Yes/NO ==6 points) This indicator will be used

Strengthen accountability and good governance

Pillar 3 Existing (but strengthen availability of information on service

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

only for the first year of the program.

• Is municipal service delivery as per the standard and citizen charter? ( Yes/No 6= points). This will be as of the 2nd year of the programme.

• Dissemination of summary of annual budgets, approved projects, expenditures, audited accounts and results of the procurement decisions in city offices and other public places, or web-pages, newspapers etc.: 6 points.

• Timely submission of quarterly physical progress reports: 3 points.

information) Existing

7 Environment and social Safeguards (Maximum 10 points)

7.1 Eligible investments for potential environmental and social safeguard impacts screened (Maximum points: 6 points)

• All capital projects in the previous FY screened against the set of environment and social criteria in the planning stage: 3 points.

• Environmental and social impact assessments, Environmental Management Plans (EMP) and Resettlement Action Plans (RAP) prepared and approved by the Regional Environmental Protection Agency as required (based on a sample review of projects): 3 points.

Avoid adverse environmental and social impact Promote environmental and social sustainability

Pillar 6 Existing Existing

7.2 ESMPs and Resettlement Action Plans implemented timely

• ESMPs and Resettlement action plans implemented prior to commencement of

Avoid adverse environmental and social impact

Pillar 6 Existing

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Ser. No. Performance Areas Performance measure/Indicator/score Objective Links to Ethiopian Cities Prosperity Initiative

Existing or new indicator

(Maximum points: 4 points) civil works: 4 points. Promote environmental and social sustainability

8 Land management and urban planning (Maximum 15 points)

8.1 Statutory structure plan (Maximum 5 points) • Existence of up-to-date approved

statutory city-wide (structure) plans (yes/no): If Yes =3 points.

• CIP is in accordance with the statutory plan (structure plan) (sample 5-6 investments): Yes/No. If Yes= 2 points.

Promote efficient urban planning

Pillar 4 New

8.2 Land management (Maximum 10 points)

• Land released is serviced as per standards and city plan (sample 3-4 projects) Yes/No. If Yes: 5 points (all have to be fulfilled)

• City has an up to date inventory of land use (Yes/No): Yes= 5 points.

Promote efficient land management

Pillar 4 New

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DLI 3: Achievements of Infrastructure and Maintenance Targets, planning on job creation and Value for Money in Investments

Note as some of the indicators will only kick in from the second and the third assessment, the scores of the other indicators will be adjusted pro-rate to ensure that the scoring is always between 0-100 points

Assessment of Infrastructure Investment Performance62

Ser. No. Performance Areas Performance measure/Indicator Objective Links to Ethiopian Cities Prosperity Initiative

Existing indicator

1 Job creation (35 % weight (maximum 35 points) on this in the first two assessments and from the 3rd assessment: 30 % weight (maximum 30 points) for this theme)

Promote growth and development

Pillar 7 New

1.1 Job creation (Maximum 35 points in first assessments)

Cities’ achievement of jobs created (disaggregated by gender) under the CIP against their targets (% of achievement). Note: a condition for this, and for provision of points on this, is that cities have registered/planned targets and started implementation. Score: achievement rate @ weight, e.g. 100 % achieved = 35 points, 60 percent = 21 points. As of second year, the job created will be measured (possibly person days of employment) based on standard to be developed by MUDHCo.

New

2 Achievement of Urban infrastructure targets Maximum 35 points (35 % weight) on this in the first two assessments, and from the third assessment: Max 30 point) or 30 % weight on this DLI.

Pillar 5 Existing

62 For the first assessment in 2014: reviewing all investments implemented in FY 2012/13 (EFY 2005). Note that this DLI is only applied for the current ULGDP ULGs in the first assessment. The assessment will review all investments, not only the ones funded by ULGDP PB grants.

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Ser. No. Performance Areas Performance measure/Indicator Objective Links to Ethiopian Cities Prosperity Initiative

Existing indicator

2.1 Urban infrastructure targets achieved (Maximum 35 points in the first assessments)

• Physical targets as included in the Capital Investment Plan and annual work plan implemented.

o The % of implementation against plans will be reflected directly in the score multiplied by 35 % (weight of this indicator), i.e. 100 % implemented = 35 points, 60 % = 21 points.

The score on this indicator will be between 0-35.63 Achievement under this indicator will be measured on the basis of actual delivery of infrastructure against targets laid out in the CIP and annual work plan for the previous year. The means for verification are: • Review all planned projects and the degree

to which they have been implemented by the end of the FY.

• Review annual and quarterly work plans and reports

• Check minimum sample of 5 projects from the field-work (on-the-spot of implementation rates)

• Check the contract implementation progress and contract completions through the review of bills of quantities, see the description below.

Implementation rate of each project will be

Ensure effective implementation of infrastructure and service delivery

Pillar 5 Yes (modified)

63 See means of verification below in the notes.

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Ser. No. Performance Areas Performance measure/Indicator Objective Links to Ethiopian Cities Prosperity Initiative

Existing indicator

assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects (see the table below the APA table). Assessed by the performance assessment teams. No transitional arrangements. However, DLI II will only kick in for the new ULGDP ULGs from the second assessment.

3. Maintenance Performance 30 % weight of this in the first assessment (maximum 30 points) and 20 % of the weight (maximum 20 points) on this DLI from the 3rd assessment when value for money kicks in).

Pillar 5 Existing but adjusted.

3.1 Maintenance budget and implementation rate (Maximum points: 15 points in first assessments) (10 points in the 3rd and following assessments)

• Maintenance plan derived from the assets management plan

• ULGs have developed a clear maintenance budget and actual implementation rate is minimum 80% of the planned.

Note: both conditions have to be complied with to get the 15 points.

Review Overall budget and utilization rate in final accounts. Sample of projects to review actual maintenance.

Ensure sustainability in the investments through up-keep of infrastructure

Pillar 5 Existing, but adjusted

3.2 Actual maintenance (Maximum points 15 in first assessments) (10 points in the 3rd and the following

• Maintenance is catered for (reward if all projects, which need maintenance, have actually been catered for). This will be based on a sample of 3-5

Ensure sustainability in the investments through up-keep of infrastructure

Pillar 5 New

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Ser. No. Performance Areas Performance measure/Indicator Objective Links to Ethiopian Cities Prosperity Initiative

Existing indicator

assessments) projects from the Assets management plan.

Note: All projects have to be catered for to achieve the points.

4 Quality of infrastructure (20 % weight from the 3rd assessment)

4.1 Value for the money in the infrastructure investments funded by the Program64. (Maximum points 20 from 3rd. assessment and onwards)

Percentage of projects implemented with a satisfactory level of value for the money, calibrated in the value for the money assessment tool.

The % of projects with a satisfactory level of value for the money will be reflected in the score multiplied by 0.20 (20 % which is the weight of this indicator), i.e. 80 % satisfactory projects=16 points, 60 % = 12 points. The score on this indicator will be rated between 0-20 points. The value for the money of each project (level of satisfactory value for the money) will be assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects. The input from this will be provided by the value for the money audits to the assessment teams to be included in the calibration and in the final calculation of the size of the allocations.

Ensure efficient and high quality infrastructure and service delivery

Pillars 2 and 5

New

64 The value for money will be conducted from the 3rd assessment starting in September 2015. In case they are not completed by the time needed to be incorporated in the regular assessment, the firm, which will carry out the assessment will revise the assessment results by taking the VFM audit results into account in due course.

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Ser. No. Performance Areas Performance measure/Indicator Objective Links to Ethiopian Cities Prosperity Initiative

Existing indicator

Transitional arrangement: The results of the value for money will be assessed first time at the APA in September 2015 of the performance in 2014/15.

Maximum points 1, 2,3,4 = 100

Note: The “execution rate” will be determined by a review of the bills of quantities, and verified by the physical progress against planned targets. Hence, for projects not yet fully completed, e.g. a road project, the team will review the progress on the major items in the bills of quantities, both in the regular reports from the engineer, as well as through field trip verification of the actual implementation rate. The % (rate), of completion measured by the bills of quantifies and physical progress against planned annual target will be determined for each project as the status was in the situation at the end of each Fiscal Year. The completion rate (%) of each project, when determined, will then be weighted with the relative contracted size of the projects to get an aggregate result, see the example below.

Weighting Completion Rates

Projects Contract amount

Implementation rate against planned

completion * Weighted Result

Project 1 100,000 70% 70,000

Project 2 500,000 80% 400,000 Project 3 50,000 90% 45,000 Total Plan 650,000 100% 515,000 Weighted implementation rate for this City 0.79 79% *Progress of projects monitored through bills of quantities and field verification.

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Annex 8: ULG staffing positions

Analysis of the current staffing positions - based on a review of: 1) Collected data on staffing positions and filled positions for the ULGDP-II, IFA exercise65, which the Ethiopian LG Revenue Enhancement Study (ELGRS) team has summarized and reviewed, 2) a review of the general situation in the 12 sample ULGs under the ELGRS and 3) review of previous studies, e.g. supported by GTZ on the baseline for the coming ULGDP CB/Technical Assistance support and the Worda and City Benchmarking studies, show that there are substantially filled positions in the ULGs in most of core areas of importance for the operations of the ULGDP, although also some gaps to be addressed66.

The recently collected data on the staffing in the OFED covering core positions of relevance for the coming ULGDP-II operations shows that the average staffing requirements in the OFED offices is about 50 staff (sample based on 27 ULGs) where the lowest number is 26 staff in Motta City and the highest number in Dire Dawa with 140 staff and that the average filled positions (simple average figures across the 27 ULGs) is 82 % filled positions with Areka City with the lowest number: 19 filled staff positions and Dira Dawa with the highest number 97 filled. The 27 ULGs have on average 39 filled staff positions in the OFEDs.

In the core procurement and finance positions, the percentage filled positions is on average 84% (average figure is 22 filled staff positions). The data shows that 21 of the 27 ULGs have 75% or more of the staffing positions filled, with the lowest level in Jijiga on 37 % (15 positions filled out of 41 required positions). There are larger gaps in planning and budgeting (average: 64 % filled in the ULGs where data is available, and with an average staffing number of 4 positions, lowest number is 2 staff in the ULGs where data is available). On audit and inspection the share of filled positions is higher: 85 % on average (the average number of staff in filled positions is 5 staff, with the lowest number in Gambella with only one position filled).

In the OFED, ULGs on average have 15 filled staffing positions with BA/Bsc education level or above that level (e.g. master), (the variation is between Motta with 3 positions and Hawassa with 44 staff), and on average 11 filled staff positions with colleague diploma education. For the 19 ULGs where data is available, the average number of engineers or staff with similar educational background is 7 staff with the lowest number in Sebata city: 2 staff.

A comparison between ULGDP cities and the non-covered cities shows some variation with the ULGDP ULGs in a relative stronger position, e.g. the total average staffing positions filled in the non-ULGDP

65 Raw data provided by SuDCA based on collection of data from ULGs in August – November 2013. Based on these data files, a table covering 27 ULGs have been constructed by the Technical Assistance (TA) showing the overview staffing positions required versus filled positions, education skills, etc. 66 The ELGRS, Component 2a, did not collect quantitative data on staffing positions, but the interviews and meetings with the 12 ULGs confirmed the situation, reflected in the quantitative figures presented here and the challenges with staff turn over and shortage of engineers/technical staff. Second, prior to the start of the TA under ULGDP for the preparation of cities for ULGDP II, a review was undertaken of the strengths and weaknesses of the cities in areas of PFM, procurement, environmental safeguards, internal audit, etc. (GIZ supported, un-dated documents), which has benefitted the assessment as well). Finally, the Woreda Benchmarking Study WCBS V 2013: Results of the supply-side evaluation of local government in Ethiopia Draft report as of June, 1st 2013 Alexander Wegener : https://dl.dropboxusercontent.com/u/7492328/WCBS V Supply Side Report.pdf provides important information about the staffing situation and challenges at the city and woreda levels.

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cities is only 77 % against 86 % in the ULGDP covered cities, and the number of engineers is on average 5 staff in the non-ULGDP against 8 staff in the ULGDP cities, and similar variations is noted in terms of the education level.

In general cities and municipalities are better staffed than the rural local governments (woredas). Thus the recent Woreda City Benchmarking Survey67 noted that:

• The average number of local government employees per 1,000 inhabitants is 16.2 for cities compared to 8.6 for woreda,

• Staff turnover is generally very high in local governments with an average turnover of 15% for cities compared to 26% in woredas,

• Within city governments the turnover is highest in Amhara (35%) and lowest in SNNP (7%) • Vacancies as share of total workforce is much more significant for state functions than municipal

functions in all regions – e.g. 2.8% vacant municipal post in Amhara compared to 40.0% vacancies for state functions

Retention and recruitment of staff is in particular a problem for staff categories such as engineers who have opportunities for employment in the private sector. In the recent WCB V (op.cit page 39) 41.7% of the city governments reports to face “recruitment problems” for engineers (whereas only 2% of cities report “problems” with regards to recruitment of planners and accounting staff). The recent Implementation Completion Report for PSCAP noted68: “Despite intermittent salary hikes, the public sector pay structure for skilled staffs and professionals has always remained non-competitive and non-incentivized. Also GoE’s Five Year Action Plan for public sector capacity building did not include any provision for medium term remuneration policy. As a result PSCAP has suffered from high staff turn over, wastage of training investments and loss of skills and experience required for improved service delivery”.

The reviews and studies of the staffing structure and patterns in the ULGs proved the importance of: (i) having a minimum staffing positions as core screening minimum conditions for grant access in the APAs and allocation of funds against the ULG capacity to absorb and efficiently handling of funds, (ii) having a continued CB support from the program (supply and demand driven), (iii) having a continued focus on ensuring improved organization and staffing at local levels, with strong incentives (iv) improvement of OSR to ensure that staff can be hired for the beef up of the organizations.

67 WCBS V 2013: Results of the supply-side evaluation of local government in Ethiopia Draft report as of June, 1st 2013 Alexander Wegener – the report can be downloaded from this site: https://dl.dropboxusercontent.com/u/7492328/WCBS V Supply Side Report.pdf 68 Federal Democratic Republic of Ethiopia, Ministry of Civil Service – Implementation Completion and Result Based Report 2013 section 5.4.

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Annex 9: ULGDP II- Capacity Building Support –Design

BACKGROUND

1. The Urban Local Government Development Project (ULGDP) (2008-2014) mainly relied on the legacies of capacity building (CB) support from past projects. Under an earlier project - which preceded ULGDP - the Capacity Building for Decentralized Service Delivery Project (2003-2008) (CBDSD), 1869 of the 19 ULGs (Addis Ababa is the 19th) in ULGDP were given CB support for good urban governance and reforms. In addition, another project- the Public Sector Capacity Building Program Support Project (2004-2009) (PSCAP), focused on capacity building support for the federal level and the nine regions. During ULGDP, the CB activities of the 19 ULGs comprised mainly backstopping support from the Ministry of Urban Development, Housing and Construction (MUDHCO) through a federal mobile team of specialists.

2. Three years into the ULGDP, it became apparent that continuous and strengthened CB support for urban management and good governance is still required. With the opportunity of Additional Financing for ULGDP in 2011, 18 new ULGs70 were selected to start receiving CB support for urban management and governance, to prepare them for participation in the follow-on ULGDP II. Two technical multi-disciplinary consultant teams (with 20 and 25 experts 71 respectively) were deployed for this purpose, as well as to further enhance the capacity of the original 18 ULGs. A further 8 cities72 and some regional support are provided by a parallel running Urban Governance and Decentralization Program (funded by GIZ), on good urban governance subjects such as planning participation, finance and urban poverty. Both the consultant teams’ work and the GIZ program will end in December 2014.

ULGDP II CAPACITY BUILDING ARCHITECTURE

3. Under ULGDP II a more structured and systematic approach will be adopted for CB activities and focuses on all three government levels – federal, regional and local. Firstly, CB activities for all levels throughout the program period will be supported by dedicated federal and regional mobile teams. In addition, CB support will be tailored to the needs of federal, regional and local levels: (i) for ULGs, both supply and demand side interventions will be provided to raise their general capacity and enable them to respond to the performance incentive mechanism; (ii) regions will be supported to strengthen their urban governance and management roles and in turn, provide CB support to ULGs under their charge; and (iii) for the federal level, CB support will aim to strengthen their capacity building coordination, oversight and backstopping functions in serving the regional and local governments.

69 Bahir Dar, Dessie, Gondar, Kombolcha, Dire Dawa, Harar, Adama, Bishoftu, Jimma, Shashemene, Arba minch, Dilla, Hawassa, Sodo, Adigrat, Axum, Mekele, Shire Enidailase, 70 Debre Brehan, Debre Tabor, Finote Selam, Mota, Woldiya, Ambo, Asela, Burayu, Robe, Sebeta, Zeway/Batu, Areka, Butajira, Hosaena, Mizan, Alamata, Humera, Wukro. 71 The teams include specialists in urban planning, municipal finance, financial management, land management, procurement, environmental management, social development, local economic development, infrastructure/asset management, participation and service standards. 72 Adwa, Asosa, Debere Markos, Gambella, Jijiga, Nekemte, Samera, Yirga Alem.

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4. The main focus of the CB is on enhancing urban governance and management to achieve

better service delivery. Due to the cross-cutting nature of the subject, CB will aim to strengthen the governments’ capacity in a variety of subject matters, such as participatory planning, budgeting, revenue mobilization, financial management, procurement, infrastructure asset management, contract management and execution, urban planning, environmental and social safeguards, audit, ethics, fraud & corruption, monitoring & evaluation among others. The intention is both to strengthen the human capital capabilities as well as systems improvements in these related areas (such as IT system, accounting system etc.). The Annual Performance Assessment (APA) integral to the ULGDP II will provide a comprehensive, regular check on the capacity improvement and achievement or identify gaps and weaknesses to be improved upon in these areas for each ULG.

Phasing

5. To ensure effective transition from ULGDP to ULGDP II, capacity building activities are conceived in two phases. Phase 1, from November 2013 till December 2014, will be a transition period and Phase 2, from August 2014 till December 2019, will be when ULGDP II is fully effective in the area of CB support. In Phase 1, current CB arrangements under ULGDP and GIZ support will continue, and the former will start gearing towards ULGDP II requirements. Concurrently, preparations for Phase 2 CB activities will commence and be in place before ULGDP II program effectiveness. Phase 2 will overlap with Phase 1 to allow time for proper handing-over. Table: Main Capacity Building Activities in Each Phase Phase 1 (Nov 2013 – Dec 2014) Phase 2 (Aug 2014 – Dec 2019) 1. Federal mobile team 2. Two technical consultant teams with CB

support for ULGs (phased out by end of period)

3. CB support to ULGs under program funded by GIZ (phased out by end of period)

4. Expanded federal mobile team and functions

5. Four new regional mobile teams 6. New urban management course for

ULGs 7. Demand-driven CB for ULGs

Federal and Regional CB Mobile Teams

6. The federal and regional CB mobile teams will strengthen the CB provided to all three levels of government throughout ULGDP II. These teams will deliver on-the-job issue-specific guidance. With the expanded scope of ULGDP II to include a total of 44 ULGs, the current MUDHCO multi-disciplinary team comprising 12 specialists, which provides backstopping support to the 19 ULGs 73 under ULGDP, will be further strengthened to approximately 34 specialists. These specialists will be procured directly by the MUDHCO. This will first boost the capacity within the MUDHCO to tackle the greater demands of the program and also afford greater CB support to the regions and ULGs. The Federal Mobile Team (FMT)

73 Including Addis Ababa.

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will be stationed within MUDHCO but deployed regularly to the field, to both Regions and ULGs. The main functions of the FMT are:

a. focused support for – i. the four new ULGDP II Developing Regional States (DRS),

ii. DRS constituent four ULGs, and iii. the two single-city Regions of Dire Dawa and Harar;

b. general backstopping support for all other regions; c. mentoring the four regional mobile teams; d. capacity building for MUDHCO; and e. overall coordination and oversight of CB activities under ULGDP II including the ECSU

urban management course (described in later sections).

7. Four new Regional Mobile Teams will be formed under ULGDP II. Each Regional Mobile Team (RMT) will consist of approximately ten multi-disciplinary specialists. The four RMTs will each be based in the four regions with a large number of participating ULGs: Amhara (10 ULGs), Tigray (8 ULGs), Oromia (11 ULGs) and SNNPR (9 ULGs), and hosted by the respective Regional Urban Development Bureaus (or its equivalent). They will spend one out of four weeks per month with the regional government, and the rest of the time with the ULGs. While in the field, they will work closely with the relevant technical staff to provide mentorship and issue-specific support. The main functions of these RMTs are: (i) provide CB support to the host region; and (ii) provide CB support to the participating ULGs in the respective regions, totaling 38 ULGs.

8. The RMTs will be procured by the respective regions with technical support from MUDHCO during procurement. Ministry’s support will include facilitating nation-wide advertisements to identify optimal candidates. As part of the region’s backstopping functions, this process of procuring and managing the RMTs further instill ownership, confer greater responsibility and strengthen the capacity of regional governments.

9. The capacity of the Regional Governments to procure and manage these teams is assessed to be adequate. Under past and current operations such as PSCAP, Protection of Basic Services (PBS) and Productive Safety Net Project (PSNP), the regional governments have procured and are presently managing similar teams. For example, under ULGDP, the Regional Bureaus of Urban Development have procured 3 full-time specialists each to staff the program. In addition, under the Urban Management Capacity Building Sub-Program of PSCAP, the Regional Bureaus of Urban Development are responsible for all regional level activities74. Almost all regions have been engaged in providing training for mainly city administration staff and specialists on various urban related issues, ranging from urban development policies and good governance to specific knowledge on project planning and implementation, management skills and technical skills. As a result, more than 18,000 people were trained in all regions, excluding SNNP, and SNNP alone trained more than 160,000 people. Similarly, under PBS, 54 teams of five specialists each were procured and managed by the regional governments to provide support and training to woredas.

74 Specifically, for the major activities of training, consultancy and procurement, the Urban Development Bureaus provide specification and purchase orders to purchasing experts in the Civil Service Bureau to effect the purchases.

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Table: Federal and Regional CB Mobile Teams Proposed Functions and Composition Function Composition Additional Notes

Federal Mobile Team (FMT)

- Focused support for the four new Developing Regional States (DRS) and their constituent four ULGs, and Dire Dawa and Harar;

- General backstopping support for all other regions;

- Mentor the four regional mobile teams;

- Overall coordination and oversight of CB activities in ULGDP II (including the ECSU urban management course)

34 specialists and 1 Long Term Advisor; Proposed composition: i. Program coordinator

ii. Deputy coordinator iii. Procurement Specialist iv. Environmental Specialist v. Social Development

Specialist vi. Engineers

vii. M&E Specialist viii. Infrastructure Asset

Management Specialist ix. Financial Management

Specialist x. Municipal Finance Specialist

xi. Urban Planner xii. Land Management Specialist

xiii. Budget Planning & Participation Specialist

Current 1 - 3 1 1 5 1 - - - - - -

Proposed - +1 +2 +2 +2 +2 +1 +2 +2 +2 +2 +2 +2

- Spends approximately 3 out of 4 weeks in the field

- To be procured directly by the MUDHCO

- Specialists to be recruited and in place by August 2014.

Regional Mobile Team (RMT)

- Provide CB support to the four host Regions: Amhara, Tigray, Oromia and SNNPR

- Provide CB support to participating ULGs in the respective regions, totaling 38 ULGs.

4 teams of 10 specialists; Proposed team composition: i. Budget planning and participation specialist

ii. Procurement specialist iii. Financial Management specialist/ Internal Auditor iv. Infrastructure asset management specialist v. Environmental management specialist

vi. Social development specialist vii. Project engineer

viii. M&E specialist ix. Municipal finance specialist (with focus on

municipal revenue) Ethics officer

- One team to be based in each of the four regions: Amhara, Tigray, Oromia and SNNPR

- Spends 3 out of 4 weeks in ULGs, and 1 week in region

- To be procured by the respective Region, with support from MUDHCO (eg. nation-wide advertising)

- Teams to be recruited and in place by August 2014.

Capacity Building for ULGs

New urban management course

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10. Under ULGDP II, capacity building will comprise both the supply and demand side interventions. The supply side intervention will mainly constitute of an ULGDP II Implementation course to be provided by the Ethiopian Civil Service University (ECSU). The course content will be based on those key areas of ULGDP II implementation with a strong emphasis on the practitioners at the ULG level. The target group for the capacity building will be the key individuals responsible for ULGDP II implementation in the 26 ULGs participating fully for the first time in the ULGDP. The proposed design of this course comprises eight modules: (a) procurement and contract management (2 weeks), (b) participatory planning, capital investment planning, budgeting and financial management (2 weeks), (c) monitoring and evaluation, reporting, performance assessment systems, records keeping and IT (2 weeks), (d) environmental and social safeguards including fraud and anti-corruption (1 week), (e) asset management including O&M (1 week), (f) revenue enhancement including land leasing (1 week), (g) job creation, micro and small enterprise development (1 week), and (h) urban planning and land management (1 week). Note: in the case of modules (g) and (h) above awareness-raising as to the application of ULGDP II investment and capacity building funds will be given due attention. The eight modules will be delivered through resident training at the ECSU of 1 or 2 weeks in duration as indicated above. The eight packages will be offered over a period of four or five months during the first 6 months of ULGDP II implementation – 1 August to 31 December 2014 – and are separated so as not to impose too great an administrative burden on the cities.

11. This course will be provided for the new 26 ULGs that joined the ULGDP II to ensure a basic level of capacity for these new ULGs. MUDHCO will sponsor the costs for these 26 ULGs to attend this one-time course, to bring the 26 ULGs up-to-speed especially to meet ULGDP II performance assessment requirements. After the first run, if refresher courses are needed, the 26 ULGs can send officials for further training at their own cost (or from the funding for demand-based CB). As for the original 18 ULGs under ULGDP, considering that they have undergone CB activities since the early 2000s, the course will be optional for them but can serve as a refresher or for new staff in the ULGs. For these 18 ULGs, it is suggested for them to utilize their own resources to attend any or all of the modules.

12. It is envisioned that the MUDHCo will be the main facilitator to put the course in place. This will involve inviting ECSU to submit a proposal, based on a course outline provided by MUDHCo. The course outline will: a) describe the eight modules and their duration indicated above, b) emphasis the importance of course design and delivery that is strongly practical; founded on GoE policies, programs and procedures and the ULGDP II Manual of Procedures and delivered by individuals with knowledge and experience of the subject matter at the level of ULG implementation. MUDHCo will fund the participants from the 26 new ULGs for which the course is mandatory and ECSU will arrange to recover costs of course delivery from those ULGs for which the course is optional. MUDHCo will work with ULGs to identify course participants. ECSU will be responsible for submitting a proposal to MUDHCo that describes the course design (including approach to delivery), course materials, system for certifying participants who successfully complete the course, individuals responsible for delivery of the eight modules (ECSU may, to ensure practicality of the course, recruit trainers with practical experience of program delivery in ULGs) and costs of delivery. Based on ECSU’s proposal, amended by

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mutual agreement between MUDHCo and ECSU, MUDHCo will enter into an agreement with ECSU for delivery of the course. To enable broader outreach, administration of this urban management course could also be undertaken by other appropriate institutions in the future, in addition to ECSU, upon proper evaluation and accreditation to determine the qualification of these institutions.

Demand-driven CB for ULGs

13. In addition to the supply side interventions described above, each ULG will be able to spend up to 5% of Program funds on specific CB activities. This will allow ULGs to tailor their specific CB needs, especially in response to key areas of weaknesses identified in the Annual Performance Assessment. This demand-based approach will allow flexibility and cater to the varying needs of each ULG, especially given their different capacity levels, having received differing CB support over the years and their specific geographic and infrastructure characteristics. Each ULG will procure its own training and other services in line with GoE procurement guidelines and using providers from the pre-qualified list(s) of relevant Ministries and trainers/institutes that have been certified or accredited by the GoE. In terms of the availability of private sector presence to respond to the demand-side capacity building needs of ULGs, Ethiopia has a robust private sector market to offer technical assistance and consultancy services to the ULGs on various urban infrastructure and services areas such as water supply, drainage and flood control, roads, building, urban planning, waste collection and disposal, urban transport management etc.

14. The ULGs will be required to develop a CB plan (as part of the generally planning) for the use of funds, formulated on the same timing cycle as their physical plans. The CB plan, reporting and feedback will apply the standard format elaborated in the Operational Manual, and ULGs will have to report twice a year on basis the utilization and progress of CB activities. The respective Regional Urban Development Bureaus and RMTs will oversee the preparation and execution of these annual capacity building plans, and the execution of the CB plans will be verified through the APA.

15. The CB activities to be funded should adhere to the prescribed CB Activities Menu (as detailed in table below). Generally, these funds can be used for technical consultant work, backstopping support, advisory support, training, minor equipment and contract staff. Items such as vehicles and administration building are not part of this provision. As explicitly stated in the Operational Manual, should a ULG be in doubt about the eligibility of a CB activity, they will contact MUDHCO to ensure that the expenditure complies with the ULGDP II expenditure framework.

Menu for the Capacity Building Activities (total costs not to exceed 5% of total performance-based grant received)

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Training, Seminar and Conference

- Short- term local training and related operating expenses - Selected short- term training (up-to duration of 3 months) - Peer to peer support across ULGs - Study tours as planned by the ULGs and approved by the Ministry

(study tours will have to be approved) - Seminars/Conferences/Workshops/Meetings Expenses - Training Materials - Hire of Venue /Hotel Accommodation - Refreshments

Technical assistance and organizational development, system development etc.

- Consultancy fees and related operating expenses - Printed Material & Stationery

Equipment

Equipment related with the CB support (not vehicles and buildings) including: - Server (computing) - Networking & ICT equipment and software - Computers ad Accessories - Printer, Photocopy Machine, Scanner - Binding Machine - Air Condition/ Fan - Filling Cabinet/ Shelf

Note: Compliance with the investment menu, including the CB Activities Menu will be a minimum condition for access to the performance grant.

CB for Regions

16. Under ULGDP II, regions will begin assuming expanded roles in supporting ULGs within their jurisdictions to improve urban governance performance. The various Regional Urban Development Bureaus (or its equivalent) will be the main coordinating as well as recipient agencies of CB activities. The FMT and RMTs will provide support to the Regions to build up their general capacity for urban governance and management, in the range of relevant subjects. In turn, the Regions will have greater capacity to provide guidance for the ULGs. In particular, Regions will receive additional financial support to achieve results in three focus areas: (i) audit, (ii) environmental and social safeguards, and (iii) revenue enhancement and mobilization. The achievement and performance in these areas will be measured in the APA. (Additional trainings focused on regional procurement specialists will be provided under PBS to equip the regional governments with the capacity to conduct independent procurement audits from Year 3 of the Program.)

17. The four established Regions – Amhara, Oromiya, SNNP and Tigray - with multiple participating ULGs will have greater responsibilities - to host and provide logistical support to the Regional Mobile Teams. As mentioned earlier, the four regions will procure and be responsible for coordinating and overseeing one RMT each, which in turn mentors the constituent ULGs within the Region. These RMTs will be based in the Region, and deployed to ULGs frequently (as described earlier). In the process, the RMTs will directly assist the Regions themselves to enhance their capacity, in addition to supporting the ULGs.

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CB for Federal Entities

18. Capacity building activities for MUDHCo under ULGDP II will focus on (i) systems development for urban management and development (such as M&E, IT and database systems, procurement, revenue enhancement system and database); (ii) equipment related with the enhanced capacity building; and (iii) expansion of the federal mobile team and training of the core MUDHCO officials. In addition, it is proposed to have at least one international senior urban development advisor to be attached to MUDHCO to provide guidance and oversee the management of CB activities throughout the Program.

19. Besides MUDHCO, other federal entities will have supporting roles in ULGDP II. As the overall coordinator and implementing agency of the Program, MUDHCO will inform these relevant federal agencies (e.g. Ministry of Finance and Economic Development (MoFED) and Federal Ethics and Anti-Corruption Commission (FEAC)) of the Program, and liaise with them to determine specific CB needs that could be covered within ULGDP II to ensure that these agencies have adequate capacity to facilitate the Program.

Sustainability

20. From the onset, the capacity building functions within the MUDCo will be handled by the Urban Governance and Capacity Building Bureau (UGCBB). The MUDCo is in the process of setting up a “Centre of Excellence for Urban Governance and Capacity Building” which will undertake the functions of (i) capacity building, (ii) research and analysis on urban governance, and (iii) performance and benchmarking to support the Ethiopian Cities Resilient, Green Growth and Governance Programs Package. It is envisioned that CB support to all three levels of government will be consolidated under this Center of Excellence. The ULGDP II should therefore consider mainstreaming CB activities into the GoE system under this Center of Excellence, at an appropriate time during the course of the Program. This can be re-evaluated during the Mid-term review.

21. At the regional and local levels, ULGDP II would have built upon previous projects and programs to continue strengthening their capacity. Especially for the Regions where less CB efforts have been focused on previously, ULGDP II is embarking on the initial steps of empowering them to effectively function in their role to guide the ULGs. While ULGDP II will provide CB to the 44 participating ULGs, in the long run beyond ULGDP II, GoE’s intention is to scale up CB efforts to cover all 85 ULGs in Ethiopia. The CB systems and activities, such as the urban management course and demand-driven CB activities, being put in place under ULGDP II, could be scaled up and easily applied to other ULGs in the future.

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Summary of CB Support for Regions and ULGs CB Support for Regions

Regions Phase 1 Phase 2 1 Afar GIZ Partial FMT 2 Amhara GIZ Partial FMT RMT 3 Benishangul Gumz GIZ Partial FMT 4 Dira Dawa FMT 5 Gambella GIZ Partial FMT 6 Harar FMT 7 Oromiya GIZ Partial FMT RMT 8 S.N.N.P GIZ Partial FMT RMT 9 Somali GIZ Partial FMT

10 Tigray GIZ Partial FMT RMT CB Support for ULGs

ULGs Phase 1 Phase 2 1 Adama 1 3 4 5 6 2 Adigrat 1 3 4 5 6 3 Arba Minch 1 3 4 5 6 4 Axum 1 3 4 5 6 5 Bahir Dar 1 3 4 5 6 6 Bishoftu 1 3 4 5 6 7 Dessie 1 3 4 5 6 8 Dila 1 3 4 5 6 9 Dire Dawa 1 3 3 5 6

10 Gondar 1 3 4 5 6 11 Harar 1 3 3 5 6 12 Hawassa 1 3 4 5 6 13 Jimma 1 3 4 5 6 14 Kombolcha 1 3 4 5 6 15 Mekele 1 3 4 5 6 16 Shashemene 1 3 4 5 6 17 Shire Enidasilase 1 3 4 5 6 18 Sodo 1 3 4 5 6 19 Adwa 2 4 5 6 20 Asosa 2 3 5 6 21 Debere Markos 2 4 5 6 22 Gambella 2 3 5 6 23 Jijiga 2 3 5 6

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24 Nekemte 2 4 5 6 25 Samera** 2 3 5 6 26 Yirga Alem 2 4 5 6 27 Alamata 1 4 5 6 28 Ambo 1 4 5 6 29 Areka 1 4 5 6 30 Asela 1 4 5 6 31 Burayu 1 4 5 6 32 Butajira 1 4 5 6 33 Debre Brehan 1 4 5 6 34 DebreTabor 1 4 5 6 35 Finote Selam 1 4 5 6 36 Hosaena 1 4 5 6 37 Humera 1 4 5 6 38 Mizan 1 4 5 6 39 Mota 1 4 5 6 40 Robe 1 4 5 6 41 Sebeta 1 4 5 6 42 Woldiya 1 4 5 6 43 Wukro 1 4 5 6 44 Zeway / Batu 1 4 5 6

** Samera has been joined with Logiya to form one ULG.

Legend ULGs in ULGDP CB Delivery Instruments

1 Existing Teams (SUDCA/Safage) Phase 1

2 GIZ Phase 1 3 Federal Mobile Team Phase 1 & 2 4 Regional Mobile Team Phase 2 5 ECSU (Urban Mngmt)* Phase 2 6 Dd Driven CB Phase 2

Note: Phase 1 - Nov 2013 until Dec 2014; Phase 2 - from Aug 2014 - Dec 2019 (Program end) * For the 26 new ULGs the costs to attend the course will be borne by the MUDHCO, while the original 18 ULGs from ULGDP will bear their own costs to attend the course.

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