Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 43036-SD

INTERNATIONAL DEVELOPMENT ASSOCIATION

INTERIM STRATEGY NOTE

FOR

THE REPUBLIC OF THE SUDAN

March 20,2008

Sudan Country Management Unit Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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AfDB AU CAS CBP CDD CEM CIFA

CPA CRN DDR

D-JAM DPA ESPA ESW FDI FFAMC

FIAS

FPP GDP GoNU GoS GoSS HIPC ICA IDA

IDPs IFC

Date o f Last Country Strategy: June 24,2003

Currency Equivalents Currency Unit = Sudanese Pound

US $1 .OO = 2.04 Sudanese Pounds (as o f March 4,2008)

Weights and Measures Metric System

Fiscal Year January 1 - December 3 1

Abbreviations and Acronvms

African Development Bank African Union Country Assistance Strategy Capacity Building Program Community Driven Development Country Economic Memorandum Country Integrated Fiduciary Assessment Comprehensive Peace Agreement Country Re-engagement Note Disarmament, Demobilization and Reintegration Darfur Joint Assessment Mission Darfur Peace Agreement Eastern Sudan Peace Agreement Economic Sector Work Foreign Direct Investment Fiscal and Financial Allocation and Monitoring Commission Foreign Investment Advisory Service Final Project Proposal Gross Domestic Product Government o f National Unity Government of Sudan Government o f Southern Sudan Heavily Indebted Poor Countries Investment Climate Assessment International Development Association Internally Displaced Persons International Finance Corporation

JAM JDO LICUS

LRA M&E MDGs MDRI MDTFs MIGA

NBI NGOs OECD

ORSA PER PMUs PRSP PSD RIEP SETIDP

SHHS SPLM

SPLA SSRDF

TAF WBI WUA

Joint Assessment Mission Joint Donor Office Low-Income Countries under Stress Lord’s Resistance Army Monitoring and Evaluation Millennium Development Goals Multilateral Debt Relief Initiative Multi-Donor Trust Funds Multilateral Investment Guarantee Agency N i l e Basin Initiative Non-Governmental Organizations Organization for Economic Cooperation and Development Oil Revenue Stabilization Account Public Expenditure Review Project Management Units Poverty Reduction Strategy Paper Private Sector Development Rapid Impact Emergency Project Sudan Emergency Transport and Infrastructure Development Project Sudan Household Health Survey Sudan People’s Liberation Movement Sudan People’s Liberation Army South Sudan Reconstruction and Development Fund Technical Assistance Facility World Bank Institute Water Users’ Association

Vice President: Obiageli Ezekwesili Country Director: Kenichi Ohashi Task Team Leader: John Van Dyck

FOR OFFICIAL USE ONLY

INTERIM STRATEGY NOTE FOR

THE REPUBLIC OF THE SUDAN

TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................................. i I . INTRODUCTION ...................................................................................................... 1

I1 . COUNTRY CONTEXT ............................................................................................. 1

A . B . C .

Political Context ...................................................................................................... 2 Economic Context ................................................................................................... 3 Poverty Context ....................................................................................................... 4

I11 . MOVING FROM CONFLICT TO DEVELOPMENT .............................................. 7 Key Challenges ........................................................................................................ 7 Sudan’s Emerging Development Strategy ............................................................. 12

A . B .

IV . BANK RELATIONS WITH SUDAN ..................................................................... 14

Progress in Implementation o f the Country Re-Engagement Note (CRN) ........... 14

Lessons Learned .................................................................................................... 19

WORLD BANK SUPPORT PROGRAM ................................................................ 19

A . Key Themes for World Bank Support ................................................................... 20 B. Instruments ............................................................................................................ 29 C . IFC, MIGA, and WBI ............................................................................................ 32 D . Partnerships and Donor Coordination ................................................................... 33 E . Monitoring Performance ....................................................................................... -35 F . Country Financing Parameters .............................................................................. 35 G . Process for IDA Reengagement ............................................................................ 36

V I . CRITICAL RISKS ................................................................................................... 37

A . B . C .

Progress in Implementation o f MDTFs ................................................................. 16

V .

LIST OF TABLES

. Table 1: Status on Selected MDG Indicators ..................................................................... 5 Table 2: Challenges and Bank Support ............................................................................ 21

LIST OF BOXES

Box 1 : UN Implementation o f MDTF Activities ............................................................. 16 Box 2: The N i l e Basin Initiative ....................................................................................... 27 Box 3: Consultations on the Interim Strategy .................................................................. 33

has a restricted distribution and may be used by recipients only in the performance of their official duties . I t s contents may not be otherwise disclosed without World Bank authorization .

LIST OF ANNEXES

Annex 1 : Interim Strategy Results Framework ................................................................ 39 Annex 2: Country Financing Parameters .......................................................................... 48 Annex 3: Country at a Glance .......................................................................................... 49 Annex 4: Signed MDTF Projects ..................................................................................... 52 Annex 5: MDTF-National Sudan Portfolio ...................................................................... 56 Annex 6: MDTF-Southern Sudan Portfolio ..................................................................... 57 Annex 7: MDTF Sources and Uses of Funds ................................................................... 58 Annex 8: Summary o f Non-Lending Support .................................................................. 59

EXECUTIVE SUMMARY

1. The Comprehensive Peace Agreement (CPA) has provided an historic window of opportunity to create apeaceful andprosperous Sudan. The CPA provided for a cessation o f hostilities between the Government o f Sudan (GoS) and the Sudan People’s Liberation Movement/ Sudan People’s Liberation Army (SPLM/A). It also contains a framework o f wealth and power sharing to address the root cause o f conflict in Sudan- the country’s legacy o f inequality between center and periphery. The CPA’s vision o f a Sudan that responds to the needs o f i t s diverse people i s now the key goal for the country, and i s shared by a broad majority o f actors.

.. 11. peace to take hold in the South, the transitional Three Areas, and the East, peace in Darfur remains elusive. The core causes o f the conflict in Darfur are closely related to the region’s isolation, environmental degradation, and lack o f development, particularly in terms o f livelihoods, economic and social infrastructure, governance, and human development outcomes. The crisis not only affects Darfur, but also threatens peace, stability, and development in al l o f Sudan and some o f Sudan’s neighboring countries.

While the CPA and the Eastern Sudan Peace Agreement (ESPA) have allowed

iii. Africa, but as an oil-rich economy Sudan now faces a number of new challenges in economic management. While exploitation o f o i l resources has facilitated an increase in national wealth, i t has also complicated macroeconomic management with significant pressures toward internal and external imbalances, as well as a heightened concern for balanced growth in the non-oil sectors which are key for sustainable growth and poverty reduction efforts. Unrealized o i l revenue projections and continued fiscal expansion, including new spending related to the CPA, have resulted in the highest fiscal deficits since stabilization (4 percent o f GDP in 2006 and an estimated 3.5 percent o f GDP in 2007) after budget surpluses as recently as 2004. O n the external side, the current account has deteriorated sharply and the real exchange rate has appreciated rapidly. The latter has raised significant competitiveness concerns for non-oil exports, on top o f existing supply-side constraints to production. Sudan’s external debt remains large and arrears constrain access to longer-term development finance.

Real economic growth estimated at 10 percent in 2007 is among the highest in

iv. deep, and the level of inequality is high. Recent growth has not been broad-based, and in fact, i t appears that inequality has risen, Large urban-rural and regional disparities, as reflected in public spending patterns, are closely related to conflict, isolation, deprivation, displacement, and chronic poverty. At the same time, the need to address poverty and inequality to promote peace and stability has been recognized by policymakers, and comprehensive provisions for more equal sharing o f resources characterize the CPA as well as the ESPA and the Darfur Peace Agreement (DPA).

New household survey data shows that poverty in Sudan is widespread and

v. Sudan will need to address the interrelated challenges of improving governance, increasing access to basic services, and promoting pro-poor growth to mitigate some of the main causes of conflict and ensure development progress.

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Improved capability, responsiveness, and accountability o f both the Government o f National Unity (GoNU) and the Government o f Southern Sudan (GoSS) are essential for development interventions to be effective and responsive to the needs o f the poor and marginalized populations. Increasing pro-poor public spending-historically l o w even by Sub-Saharan African standards-is critical to extending basic services and maintaining peace, especially in war-affected and marginalized areas. While a more pro- poor allocation o f expenditures i s vital, this will need to be accompanied by equitable economic growth to ensure sustained reductions in poverty and inequality.

vi. The Bank began to reengage in Sudan in the early 2000s after being largely absent for about a decade. However, IDA financial support i s s t i l l not possible due to Sudan’s outstanding arrears. Since 2005, the Bank has administered two large Multi- Donor Trust Funds (MDTFs) that support the CPA. In addition, the Bank has provided direct financial assistance through various facilities: the Fund for Low-Income Countries Under Stress (LICUS), the Post-Conflict Fund (PCF), and a $10 mi l l ion contribution to the two MDTFs from the IBRD’s operational surplus. MDTF-supported projects have experienced major implementation challenges, as have all development and recovery programs in Sudan, but performance has steadily improved. Significant results are being seen on the ground, though daunting challenges remain-most notably l o w capacity, especially at the state level and in the South.

vii. sustain peace and help reduce conflict by meeting the commitments contained in the CPA, DPA, and ESPA particularly in the areas of governance, basic services, andpro- poor economic growth--especially in war-affected and marginalized areas. Between now and December 2009-a period roughly corresponding to the f i rs t portion o f the Five Year Strategic Plans o f GoNU and GoSS-the ISN i s expected to help Sudan take important steps toward the achievement o f the longer-term strategic vision enshrined in the CPA: promoting peace in Sudan by making it attractive through development, shared prosperity, and a reformed system o f governance which serves al l Sudanese.

The main objective of this Interim Strategy is to support GoNU and GoSS to

viii. non-lending activities-vary according to the diverse conditions facing different regions of Sudan. At the National level, a focus on stabilizing peace entails a major role for analytical work and policy dialogue on implementing key provisions o f the CPA (pro- poor growth, good governance and decentralization, empowerment), and-in the Three Areas and the East-on pro-peace development projects and building capacity for community-driven development and local service delivery. In Darfur, the Bank will work with partners, as security allows, to assess development and recovery needs and to make ready rehabilitation and development programs to be implemented in the event o f peace. In the South, the main focus i s on helping to build a competent, responsive and stable government based on good governance, rule o f law, and transparency, while promoting efforts to empower and decentralize service delivery to the states, counties, and communities. Another key objective i s to help Southern Sudan develop a long-term strategy to transform i t s e l f into a well-integrated, se l f reliant, and viable economic unit that begins to harness i t s vast and r ich natural resources for the welfare o f i t s people.

The entry points for Bank support-through management of the MDTFs and

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Substantial financial support through the MDTFs as well as the Bank’s analytical and advisory services wil l be mobilized to meet these objectives.

ix. arrears. The clearance o f these arrears can only be undertaken once a firm and comprehensive agreement among preferred creditors i s in place. Such an agreement would also include significant reductions in bilateral debts, so as to make the total debt service obligations sustainable. Following the eventual clearance o f IDA arrears, which currently stand at $480 million, an exceptional IDA allocation for Sudan as a post- conflict country would be sought, and the Bank would prepare another strategy document which would include, inter alia, a pipeline o f projects.

IDA ’sfinancial reengagement requires clearance of Sudan’s outstanding

x. operating environment. In the scenario o f a significant deterioration in the operating environment in Sudan, the Bank would consult the Board and fol low the lead o f the MDTF donors and the international community in reassessing i t s level o f support. Major risks that could result in such a deterioration include: a lack o f resolution or worsening o f the Darfur crisis, continued delays in implementation o f the CPA, governance risks, slow progress in building capacity, lack o f availability o f future financing for the MDTFs, and lack o f availability o f Government counterpart funds. On the other hand, in the scenario o f a significant improvement in the environment for Bank support during the time period covered by this strategy, the Bank would consult with international partners, GoNU, GoSS, and the Board on the appropriate steps toward possible arrears clearance and an increased level o f financial and analytical support to Sudan.

This interim strategy assumes the continuation of the status quo in the Bank’s

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INTERIM STRATEGY NOTE FOR

THE REPUBLIC OF THE SUDAN

I. INTRODUCTION

1. development has been held back by the conflicts that have afflicted the country for most o f the period since i t s independence a half-century ago. The Comprehensive Peace Agreement (CPA), signed on January 9,2005 by the Government o f Sudan (GoS) and the Sudan People’s Liberation Movement/ Sudan People’s Liberation Army (SPLM/A), created a historic window o f opportunity for a peaceful and prosperous Sudan. The CPA not only provided for a cessation o f hostilities between GoS and the SPLM/A, but also contains a framework o f wealth and power sharing to address the inequality between center and periphery that has been a root cause o f conflict in Sudan. The CPA has served as a beacon o f hope for peace in Sudan, but the continuing conflict in Darfur has also diverted attention and resources from CPA implementation. N o t only i s it a tragedy in i t s own right, the Darfur crisis also threatens peace, stability, and development in al l o f Sudan and in some o f Sudan’s neighboring countries.

The largest country in Afr ica by land area, Sudan has r ich natural resources, but i t s

2. The World Bank was largely absent from Sudan for about a decade after i t s disbursements were suspended in April 1993. As part o f the L o w Income Countries under Stress (LICUS) initiative in the early 2000s and with improving prospects for peace in Sudan, the Bank prepared a Country Re-engagement Note (CRN) in 2003. The CRN outlined the Bank’s strategy and programs in support o f the consolidation o f peace and the post-conflict transition to recovery and development in Sudan. In 2004-05, the Bank and the United Nations (UN) co-led a Joint Assessment Mission (JAM) o f Sudan’s recovery, reconstruction, and development needs, culminating in the Oslo Donor Conference in March 2005. Since 2005, the Bank has administered two large Multi-Donor Trust Funds (MDTFs) that support the CPA, and has scaled up i t s program o f analytical and policy assistance. To help prepare for an eventual return to peace in Darfur, the Bank has collaborated with the African Development Bank and the UN in the conduct o f the Darfur JAM, which i s currently suspended on account o f security concerns. Normal IDA financial support i s s t i l l not possible due to Sudan’s outstanding arrears.

3 , With the level o f Bank involvement in Sudan having risen significantly since the CRN was prepared, this Interim Strategy lays out the Bank’s plans to assist Sudan between now and December 2009, primarily through the MDTFs and analytical work. I t also describes the process for eventual IDA financial reengagement once conditions are appropriate.

11. COUNTRY CONTEXT

4. with hundreds o f ethnic and linguistic backgrounds, and i t s geography ranges from

Sudan i s a highly diverse country that faces unique challenges. I t s people identify

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equatorial mountains in the south, through swamp (the Sudd) and savannah, to desert in the north. It borders nine countries, and i t s stability and economic health have profound implications for its neighbors. It i s home to some o f the most educated and wealthy people in Africa, and some o f the most destitute and disadvantaged. Sudan’s recent history o f conflict has been the subject o f much international attention; first with the conflict in Southern Sudan, and now with the Darfur crisis. These conflicts can be seen in terms o f a historical struggle between the center (Khartoum and adjoining states straddling the N i l e River) and the periphery (the South, Darfur, the Three Areas’, and the East) driven by ethnic, social, and economic r i f ts. The tol l o f these conflicts has l e f t many parts o f the country with a daunting legacy o f low human development, very limited capacity, inadequate and decaying physical infrastructure, displaced populations, and shattered social structures that the country needs to address, and with which development partners can help.

A. Political Context

5. The signing o f the CPA marked the end o f decades o f c iv i l war in Southern Sudan. The signing was rapidly followed by the formation o f the Government o f National Unity (GoNU) and the establishment o f the Government o f Southern Sudan (GoSS), which has extensive and unprecedented autonomy. A key element o f the CPA i s the equal sharing o f revenues generated by o i l in Southern Sudan. The CPA also includes special provisions for the Three Areas, for improved decentralization within the Northern States, and for national elections in 2009. Following a six-year interim period, Southern Sudan will vote in 201 1 on whether to remain within the Republic o f Sudan.

6. i s now the key goal for the country, and i s shared by a diverse majority o f stakeholders. Despite the broad support for this vision, CPA implementation has been uneven after initial progress in setting up GoNU, GoSS, and the two MDTFs administered by the World Bank. On the positive side, GoNU has rapidly increased transfers to states to fund decentralized responsibilities as foreseen in the CPA. Certain elements o f the CPA have progressed well, notably the rollout o f the new national currency, which i s already completed. However, in many other areas, progress has lagged behind expectations. The SPLM suspended i t s participation in GoNU in October 2007 in protest over what it perceived to be slow progress in implementing the CPA, in particular the demarcation o f the border between north and south (particularly in the disputed region o f Abyei) and the withdrawal o f Sudanese Armed Forces troops from Southern Sudan. The SPLM has since rejoined government after reaching agreements with the National Congress Party (NCP), i t s partner in GoNU, on many points o f contention-though no consensus was reached on the future status o f Abyei.

The CPA’s vision o f a peaceful Sudan that responds to the needs o f i t s diverse people

7. The signing o f the Darfur Peace Agreement (DPA) by the GoNU and some rebel elements in May 2006 held out the promise o f the initiation o f recovery, reconstruction and development efforts in Darfur to sustain and consolidate peace. But continued violence and increasing lawlessness in the region has prevented the D P A from having i t s intended

The Three Areas comprise Abyei region as well as South Kordofan and Blue N i l e states. 1

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effect. International concern has remained high as the casualty and displacement to l l in the region has continued to mount. Fragmentation o f rebel groups has contributed to the difficulty in reining in violence. GoNU, the UN, and the African Union (AU) agreed last year on the replacement o f the AU peacekeeping force in Darfur with a hybrid UN-AU Mission in Darfur (UNAMID) peacekeeping force comprising about 26,000 troops and police officers; about 9,000 UNAMID peacekeepers are currently deployed. Despite some progress in forging a common negotiating position among a number o f Darfur rebel leaders, the most recent peace talks in Sirte, L ibya in October, 2007 yielded l i t t le progress. The Eastern Sudan Peace Agreement (ESPA) was signed between GoNU and the Eastern Sudan Front on October 14,2006 based on principles similar to the CPA and DPA.

8. Relations with neighboring countries are complex, and somewhat unpredictable. Sudan played a mediating role inathe Somalia conflict and GoSS hosted peace negotiations in Juba between the Ugandan government and the Lord’s Resistance Army (LRA). Sudan i s strengthening relations with Ethiopia on trade, energy, and transport. Likewise, commercial relations have improved with Eritrea after the signing o f the ESPA. The historical ties between Egypt and Sudan remain strong at al l levels-political, commercial, and cultural. Egypt, the only Arab country with a consular office in Juba, recently became a donor to the MDTF for Southern Sudan.

B. Economic Context

9. However, performance under the 2006 IMF Staff Monitored Program was mixed, reflecting a number o f new challenges in economic management. Following the onset o f significant o i l exports in 1999, economic growth averaged roughly 7 percent per annum between 2000 and 2006, and at an estimated 10 percent in 2007, i s among the highest on the continent. Agriculture commands the largest share o f GDP (roughly one-third), though down from 42 percent o f GDP in 2000. Foreign investment and rising domestic demand have spurred growth in the construction and services sectors. While exploitation o f o i l resources has facilitated an increase in national wealth, i t has also led to an increased risk o f internal and external macroeconomic imbalances, as wel l as a heightened concern for balanced growth in the non-oil sectors which are key for poverty reduction efforts.

Sudan has maintained a sustained record o f macroeconomic stability since 1997.

10. highlight the inherent fiscal challenges o f an economy with high dependence on oil. Unrealized o i l revenue projections during this period, combined with new spending related to the CPA (e.g., transfers to GoSS and to Northern states, new commissions and institutional arrangements from the peace agreements), resulted in the highest fiscal deficits since stabilization (4 percent o f GDP in 2006) after budget surpluses as recently as 2004. Improvements in o i l production and prices in the second hal f o f 2007 provided partial relief to fiscal pressures, with the deficit estimated at 3.5 percent o f GDP for 2007.

O i l production and price volatilities experienced in late 2006 and early 2007

The fiscal expansion and rapid credit growth for public sector financing significantly weakened the financial sector and required several injections o f liquidity by the Central Bank o f Sudan totaling 1.5 percent o f GDP between September 2006 and January 2007. addition, the O i l Revenue Stabilization Account (ORSA) was exhausted in 2006 to help cover the fiscal deficit, and withdrawals have continued through 2007 depleting roughly

In

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three-quarters o f deposits through September 2007. Thus the ORSA i s currently unable to provide relief from future revenue shortfalls without significant replenishment. To ensure stability in a volatile revenue environment, prudent expenditure management i s essential.

1 1. rapid appreciation in the real exchange rate. The latter has contributed to competitiveness concerns for non-oil exports, in addition to existing supply-side constraints to production. The infusion o f foreign exchange from o i l exports and large inflows o f foreign direct investment have driven a roughly 40 percent appreciation o f the real exchange rate since January 2005. Exports o f key rural products such as livestock, gum arabic, and sesame have fallen in large part due to reduced competitiveness. This has hurt the rural producers o f these goods, leading in some regions to the paradoxical phenomenon o f impoverishing growth. The ongoing Diagnostic Trade Integration Study i s looking at competitiveness concerns for non-oil exports, including the l i n k s to the exchange rate and supply bottlenecks.

Recent external imbalances include deterioration in the current account as well as

12. expenditures have deviated significantly from budget plans, with much higher than planned expenditures and large differences between sectoral spending plans and outturns. Payroll costs have swollen, and fiscal discipline has been an issue. The budget i s almost entirely dependent on o i l revenues, and the GoSS’s cash reserves that could have provided a cushion are no longer available, having been run down in 2006. In case o f a revenue shortfall, the required fiscal adjustment would have to include painful cuts in planned investments and/or in the burgeoning payroll.

The fiscal pressures in Southern Sudan are even more acute. GoSS’s actual

13. Sudan’s debt overhang constrains access to concessional finance. Outstanding external debt stands at about $27 bi l l ion in net present value terms, with about $24 bi l l ion in arrearsa2 A joint World Bank-IMF Debt Sustainability Analysis (DSA) was recently prepared and discussed with the authorities. The results o f the analysis forecast continued debt distress, even assuming prudent macroeconomic policies and further increases in o i l revenues. Moreover, Sudan i s highly vulnerable to both o i l production and price shocks. Sudan i s potentially eligible for debt re l ie f under the HIPC initiative after clearing i t s outstanding arrears. Debt relief under the Multilateral Debt Relief Initiative (MDRI) could also be available in the event that Sudan reaches i t s HIPC Completion Point.

C. Poverty Context

14. Despite the scarcity o f recent and reliable data on poverty across Sudan, it i s generally accepted that poverty i s widespread and deep. Data from the 2006 Sudan Household Health Survey (SHHS), the first nationally representative survey in two decades, provide new insights about current levels o f human development, though assessing progress over time remains difficult due to comparability problems. The survey shows the disparities among regions and the enormity o f the challenge o f reaching the MDGs. For example, net primary school attendance i s 53 percent overall, with the ratio

’ Of Sudan’s total outstanding debt, IDA arrears amount to about $480 million. IMF arrears stood at SDR 1,021 million (US$ 1,629 million) as o f January 3 1,2008.

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ranging from above 90 percent in River N i l e State to 4 percent in Unity State. In the South, attendance i s less than 10 percent in half the states. Health indicators reveal a similar picture with respect to high variation by state and much poorer conditions in the South. Table 1 shows the SHHS results for several key MDG indicators.

Table I. Status on Selected MDG Indicators

Indicator Average of Average of Average Highest 5 Lowest 5 of all

States States States MDG 2 Net primary school attendance rate 84 7 53 MDG 3 Ratio of girls to boys attending primary 0.99 0.61 0.93

MDG 4 Measles immunization coverage 82 31 65 education

MDG 5 Proportion of births attended by skilled 91 24 57

MDG 6 Comprehensive knowledge about HIV 19 2 9 . health personnel

prevention MDG 6 Contraceptive prevalence 16 1 8 MDG 6 Proportion of population using effective 50 10 28

malaria prevention measures MDG 7 Use of improved drinking water sources 80 35 59 MDG 7 Use of improved sanitation facilities 66 5 31

Source: Sudan Household Health Survey (2006)

15. The outcomes on key measures o f human development in Sudan’s disadvantaged regions (including Darfur, the South, the Three Areas, and the East) rank among the lowest in the world, though Khartoum and some Northern states along the N i l e show performance well above the sub-Saharan Afr ica average. The large urban-rural and regional disparities are closely related to conflict, isolation, public spending patterns, displacement, and chronic poverty. Expanding access to basic services, especially in the parts o f the country where human development indicators are the lowest, i s a key element o f delivering to the people o f Sudan a peace dividend that can show the benefits o f unity and help prevent future conflict.

16. While a more pro-poor allocation o f public expenditures will help over time to reduce poverty and inequality, this will need to be accompanied by broad-based economic growth in order to ensure sustained poverty reduction and improvements in the lives o f most Sudanese. Growth has been strong in recent years, but this growth has not been broad- based, and appears to have been accompanied by rising inequality between regions and between rural and urban dwellers. Recent growth has been concentrated around Khartoum and neighboring central states and in major urban centers (e.g., Port Sudan, Gedaref, El Obeid, and Nyala). This has generated employment and boosted tax revenues in these areas, allowing them to spend much more on service delivery than less rapidly growing states and rural areas. A more balanced pattern o f growth-with particular emphasis on traditional rain-fed agriculture and small business sectors-will be vital for enabling poverty reduction, lowering inequality, and mitigating conflict.

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17. distribution patterns o f public resources. The IMF estimates that per capita GDP for 2007 i s about $1,160 per year, putting Sudan at the lower threshold o f the middle-income country classification. Per capita GoNU spending i s about $280-but relatively little o f this reaches the poor and the remote marginalized regions. Development strategies adopted since independence have had a centrist bias, and traditional rain-fed agriculture, practiced by the rural poor, has seen neither significant levels o f investments nor increases in productivity. Poverty-reducing expenditures have been limited, partly on account o f the many years o f North-South conflict, deepening the cycle o f poverty. Recognition o f the need to address inequality to promote peace and stability has risen since the holding o f peace talks for the conflicts in the South, Darfur, and the East, and comprehensive provisions to address inequality run through the respective peace agreements. Addressing these inequalities i s also a central part o f GoNU’s five year plan (2007-201 1). If implementation o f these provisions accelerates, there can be a reasonable expectation o f alleviation o f poverty, reduction in inequality, and reduced conflict.

A root cause o f continuing poverty and inequality i s weak governance and skewed

18. Poverty and Development in Darfur. The core causes o f the conflict in Darfur are closely related to the region’s isolation and lack o f development, particularly in terms o f livelihoods, governance, physical infrastructure, and i t s lagging human development status. Environmental degradation (deforestation, desertification, and water scarcity) and poor management o f available natural resources has placed enormous pressure on the natural resource base critical to rural livelihoods and has contributed to the increase in conflict between pastoralists and sedentary farmers. Even before the current conflict started in 2003, Darfur was lagging behind in terms o f human development. Overall estimated primary gross enrolment in 2000 was only 50 percent, compared to a Northern state average o f about 70 percent. Access to public health services in Darfur was also below the average for the Northern states.

19. Although some significant development projects have been undertaken in Darf~r,~ the level o f public investment in Darfur over the last several decades has remained significantly lower than the average for Northern Sudan. The limited provision o f basic infrastructure-roads, water and energy-has exacerbated Darfur’s remoteness, and limited i t s growth prospects. Furthermore, a quintupling o f the population in Darfur over the past 50 years has increased pressure on traditional livelihood systems, with widespread environmental degradation and deterioration o f rangeland and water resources. Ineffective local governments and weakened traditional dispute resolution mechanisms have proven unable to contain conflicts over land rights and natural resources. An unforeseen outcome o f internal displacement has been the rapid urbanization o f Darfur. As much as 55-60% o f Darfur’s population now lives in urban centers or in sprawling I D P camps in close proximity to urban centers. This rapid urbanization has put additional stress on environmental resources while making provision o f basic infrastructure services-water, sanitation, electricity, and roads-both capital intensive and expensive.

Well-known projects include, for instance, the Jebel Marra Rural Development Project and Nyala-Zalingei Road (part o f the east-west Salvation Highway ) .

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111. MOVING FROM CONFLICT TO DEVELOPMENT

A. Key Challenges

20. diversity o f peoples, languages, and cultures. At the same time, there i s an increasing recognition-shared by GoNU, GoSS, and others-that al l regions o f the country have much more to lose than to gain by a division o f the country. A partition o f Sudan could entail increased conflict and dislocation, loss o f revenue from oil, reduced trade and access to key markets, and macroeconomic instability. With the CPA-mandated referendum on the political future o f Southern Sudan looming on the horizon in 201 1, building support for unity among the people o f Southern Sudan will be critical. Addressing the root causes o f conflict in marginalized areas o f the North-including Darfur-also depends to a significant degree on demonstrating the value and viability o f the vision promised under the CPA. Moreover, Sudan i s emerging from a protracted period o f conflict and international isolation that has contributed to a widespread decline o f institutions, technological regression, and a general erosion o f human capital. CPA provides Sudan the opening to re-engage with the international community and regain access to the knowledge, skills, and technology that it desperately needs to modernize. To make the case for a united, peaceful, and modern Sudan, three interrelated challenges will need to be addressed: (i) improving governance; (ii) increasing access to basic services; and (iii) ensuring sustainable, diversified, and pro-poor growth, with primary attention to war- affected and marginalized areas.

Sudan’s current borders, inherited from the colonial era, bring together a broad

Good Governance

21. Bank Institute-are below the averages for sub-Saharan Afr ica (see figure 1). The provisions o f the CPA, DPA, and ESPA al l inherently recognize the necessity o f improving governance, since each seeks to reconfigure governance arrangements to better promote peace and development. If Sudan i s to make progress in moving from conflict to development, accelerated implementation o f commitments to improve capability and accountability and transparency o f government institutions will be needed.

Sudan’s rankings on governance indicators-such as those produced by the World

22. Building a more capable state. While GoNU i s based on the foundations o f the former Government o f Sudan (GoS), which had been in place since Sudan’s independence, it i s s t i l l confronted by many institutional weaknesses. The government does not perform well on the WBI indicator that measures government effectiveness-ranking well below the sub-Saharan Afr ica average. Cognizant o f the need to strengthen institutions and develop the competence o f government officials at all levels, the J A M set out an agenda o f establishing and strengthening o f the systems and processes o f good governance; developing national capacity, skills, knowledge and aptitude; reviewing laws and simplifying legal and administrative procedures; rehabilitating universities and research centers; and reviewing pay and grading policies and systems. This agenda requires openness to new ideas and concepts including the adoption and application o f information and communications technology (ICT) to a wide array o f public services and functions, especially in education and public administration.

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Figure 1 : WBI Governance Indicators4 Sudan (upper bar) and Sub-Saharan Africa (lower bar), 2006

Voice and Rccountabi l i ty

P o l i t i c a l S t a b i l i t y I Governnent Effectiveness

Regulatory Qual i ty

Rule o f Lau

Control o f Corruption

0 25 50 Country’s Percent i le Rank (e-160)

1 100

Source: KauCmenn 0.. A . Kraay, and M. Mastruzzi 2007: Governance Matters V I : Governance Ind ica tors f o r 1996-2006

23. GoSS’s institutional capacity constraints are much greater, and the size o f the challenge i s multiplied by the ongoing process o f establishing a functioning government from scratch in a war-devastated region. GoSS was established in October 2005, and i t s constitution was adopted in December 2005. I t s physical infrastructure i s being rehabilitated, and i t s institutional structures are s t i l l being developed. Salaries currently make up 45 % o f GoSS spending-of which security consumes 72% and the c iv i l service, which incorporates members o f the SPLM, Southern Sudanese who were working with the erstwhile Coordination Council for Southern Sudan, and fresh appointees, the remainder. GoSS i s s t i l l in the process o f evolving an organized structure, defining the processes and systems for governance, and recruiting and training the c iv i l service to deliver results, while at the same time there i s a severe shortage o f qualified, professional staff, especially for the delivery o f basic services. Employment in the public service r isks becoming an expensive and inefficient substitute for social security schemes to reintegrate the war- affected, widows, orphans, the disabled and the disadvantaged. The crowding out o f basic service delivery funding needs by salary costs i s even greater at the state level.

24. service in Southern Sudan, and are being supported under the MDTF. These include an extensive training plan to build civ i l service ethos, common skill standards within a gradeljob type and common operating standards and procedures, and development o f a medium-term framework for the c iv i l service. The latter would define goals and objectives, operational standards, optimal organizational structures, job descriptions, minimum qualifications, workforce requirements for different functions, structure o f

A number o f medium-term actions are needed to improve the quality o f the c iv i l

The WBI Worldwide Governance Indicators aggregate the views on the quality o f governance o f a large number o f enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number o f survey institutes, think tanks, non-governmental organizations, and international organizations. Limitations o f a perception-based index notwithstanding, large differences from the average are seen to be good indicators o f governance issues and problems.

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regulations and incentives. Such programs, however, are equally needed at state and local levels in al l parts o f Sudan, especially in the Three Areas, the East, and Darfur.

25. o f government i s required to ensure resources are shared equitably and used for their intended purpose. Sudan, however, scores poorly on WBI’s indicators o f voice and accountability, rule o f law, and control o f corruption. While there i s l i t t le hard data to corroborate these perceptions-based rankings, the lack o f transparency in public and private transactions may contribute to such perceptions. GoNU’s five-year strategic plan acknowledges the need to improve accountability and transparency. It notes the poor communication o f government decisions, weak performance monitoring systems, inadequate grass-roots consultation and participation in political and governance processes, and the need to strengthen the public’s right o f access to information.

Developing a more accountable and transparent state. Accountability at all levels

26. notably in regard to the o i l sector-are o f particular importance. For overall public expenditure planning and management, reforms are needed to enable tracking o f expenditures according to their function and purpose and to consolidate federal and sub- national spending. GoNU’s FY08 budget represents a f i rst step in this direction. For the oi l sector, the Government has taken initial steps in the context o f the CPA towards greater transparency, including posting oi l data on the internet. A National Petroleum Commission has been established to monitor progress and direct the state’s o i l policy. Planned actions to increase transparency include a commitment to publish the audits o f Sudapet, the state-owned o i l company, and transfer Sudapet’s net operating income to the Treasury. Authorities (both GoNU and GoSS) have expressed interest in joining the Extractive Industries Transparency Initiative (EITI). In conjunction with these ‘supply- side’ reforms, more attention i s needed to the ‘demand-side’ o f accountability where civ i l society and the media have an important role to play in promoting good governance.

Commitments under the CPA to improve transparency o f Sudan’s public finances-

27. In Southern Sudan, GoSS places accountability and transparency very high on its agenda, but the lack o f institutional safeguards and capacity are a continuing challenge. There are signs o f action. For example, on June 27,2006, GoSS Presidential Decree Number 56/2006 established a number o f commissions including the Southern Sudan Audit Chamber, Southern Sudan Anti Corruption Commission, and Southern Sudan Public Grievance Chamber. GoSS acted swiftly to address recent allegations o f corruption in the Ministry o f Finance, suspending implicated staff, removing the incumbent Minister o f Finance, and launching an internal investigation. A review o f all GoSS contracts has been carried out under the leadership o f the Anti-Corruption Commission to assess the appropriateness o f procurement procedures followed under public funds use.

Access to Basic Services

28. Fostering a more pro-poor state. Sudan’s boom in o i l revenues has been accompanied by a large fiscal expansion, with public sector spending increasing from 7 percent o f GDP in 1997 to 22 percent in 2007. There i s evidence that pro-poor spending i s gaining priority, though from a very low base. Between 2000 and 2004, per capita pro- poor expenditure averaged roughly $16. After 2004, GoNU’s poverty-reducing spending

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increased significantly, rising to $70 per capita in 2006.5 Pro-poor expenditure i s slated to rise more rapidly than overall expenditures again in the 2007 budget. The continued trend toward an increased share o f the budget devoted towards development expenditure i s important, especially since pro-poor expenditures in 2006 equated to 5.1 percent of GDP, well below the average o f 9.2 percent o f GDP for 23 countries that have reached HIPC decision pointe6 In fact, even with the recent increases, pro-poor spending in Sudan remains among the lowest in Africa as a percentage o f GDP.

29. peace state. With much o f Sudan’s history o f conflict attributable to economic inequalities among peoples and regions, the openness by GoNU to increasing pro-poor public spending i s a positive sign. Increased pro-poor spending promises not only to help directly improve the quality and quantity o f basic services for the poor, but also to help over time to address root causes o f conflict by diminishing inequality. The next step i s to ensure that budget plans translate into actual pro-poor spending increases on the ground, since execution o f budget plans has been uneven.

Making Sudan more o f a pro-poor state will contribute to making it more of a pro-

30. Making fiscal decentralization work. Increasing public resources devoted to pro- poor spending will not have the desired impact unless the institutional arrangements are in place to utilize such funds. Since most o f the public sector activities that directly benefit the poor - health, education, water - are the responsibility o f sub-national governments, this means that effective fiscal decentralization i s critical for translating increased public wealth into effective poverty reduction efforts. While the ability to absorb funds and deliver basic services in most states i s low, there i s strong ownership in Sudan for enhancing fiscal decentralization and building local-level capacity, and these objectives figure prominently in the country’s Interim National Constitution, the CPA, and GoNU’s Five-Year Plan.

3 1. Despite the strong ownership and GoNU’s commitment to increasing sub-national transfers, case studies o f several Northern states prepared as part o f the ongoing PER underline the challenges Sudan faces in making fiscal decentralization work. Successful fiscal decentralization depends on sufficiently autonomous and accountable sub-national governments with credible budgets and sound fiscal management practices. The state case studies show that by these criteria, fiscal decentralization remains a work in progress and requires additional reform and capacity building efforts. States and localities have limited fiscal and decision-making autonomy, budget predictability i s low, there i s a wide variation between budgeted amounts and actual outturns, transfers are not predictable and transparent, and financial management capacity i s low.

Estimates o f pro-poor spending are from the Public Expenditure Review (PER) recently completed by the Bank, GoNU, and donor partners. The PER working definition o f pro-poor spending includes: locally financed federal development spending on pro-poor projects, federal social subsidies, three-quarters the current transfers to Northern states, locally financed development spending in the Northern states, and al l transfers to the Three Areas. Discussions between the Bank and GoNU on this definition are ongoing.

Poor Countries (HIPC) Initiative. (See HIPC Initiative - Status oflmplementation, IMF and World Bank, 2006, Appendix Table 3).

Data on pro-poor spending i s monitored by the World Bank and IMF in the context o f the Heavily Indebted 6

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32. Established under the CPA, the Fiscal and Financial Allocation and Monitoring Commission (FFAMC) i s charged with ensuring transparency and fairness in allocation o f funds to the sub-national level and to GoSS. The commission became operational in late 2006 with support from a grant under the World Bank LICUS trust fund. F F A M C recommendations on transfers are incorporated in the FY08 budget, including formula- based sub-national transfers.

33. Addressing short and long-term sectoral priorities concurrently. The urgency o f showing a peace dividend, and the capacity constraints to delivering quality basic services, means that increasing access to service delivery will require addressing both immediate and long-term challenges in parallel. In the short term, to make headway against the critical need to boost access to services for war-affected, displaced, and marginalized populations, rapid impact interventions must begin to rehabilitate service delivery infrastructure and provide drugs, textbooks, and other urgently needed inputs. However, the needed capacity improvements, as international experience shows, will require significant time to achieve results. Therefore, over the longer term, a parallel focus must be on the development o f key systems and capacities on a sector-wide basis, with the goal o f sustainably expanding the public sector’s ability to provide quality services to the population.

Sustainable and Diversified Pro-Poor Growth

34. small entrepreneurs provide two-thirds o f household needs for the majority o f households. I t i s clear that the growth o f such small-scale enterprises i s crucial for increasing incomes, particularly among rural dwellers and poor people. However, government policy has traditionally been focused more towards large-scale manufacturing in Khartoum and nearby states along the N i l e River. Improving the business climate for small and medium enterprises (SMEs)-by increasing access to finance, improving tax administration, strengthening opportunities for capacity building, and addressing non-competitive practices-will be important to stimulating increased growth o f such f i rms.

Small-scale industries account for over 90 percent o f manufacturing in Sudan, and

35. To enhance the livelihoods o f the poor, reforms in both irrigated and traditional rain-fed agriculture need to be pursued. The agricultural sector will be a major source o f sustained growth for the economy, particularly in light o f the major macroeconomic and sectoral policy changes introduced to improve production incentives in the sector since 1992. There remain substantial inefficiencies in agricultural production and marketing in each o f the major crop and livestock producing subsectors, in some cases because o f the intrusion o f government. These inefficiencies should be addressed through improved support services, technical and institutional change, further deregulation o f some specific markets, land reform, strategic infrastructure development, and close attention by the government to control and mitigate environmental degradation. The emphasis o f strategies for improved efficiency should be toward the traditional rain-fed areas in order to achieve rapid reduction in rural poverty.

36. o i l exports has suffered from the recent strong appreciation o f the currency, which i s

In addition to existing supply-side constraints, the competitiveness o f Sudan’s non-

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currently around 2.04 Sudanese pounds per US dollar, compared to 2.58 Sudanese pounds equivalent in early 2005, largely due to inflows o f foreign exchange from o i l exports and FDI. Non-oi l exports have declined sharply in local currency terms and as a percentage o f GDP, though they have remained essentially flat in dollar terms. Evidence from the ongoing Diagnostic Trade Integration Study suggests prof i t margins for farmers are particularly squeezed by the appreciation, in addition to the adverse effects o f supply-side bottlenecks. Given that the agricultural sector employs 67 percent o f the population, mainly in the form o f small scale subsistence farmers, the declining competitiveness o f the sector i s a major concern for prospects for sustainable growth.

37. Inadequate infrastructure i s a serious growth bottleneck. The vast size o f the country and i t s fragile ecological systems place special demands o n transport facilities, communications, and other infrastructure services. Although infrastructure has been one o f the main development problems in Sudan for a long time, services have deteriorated as a result o f the long c iv i l war and limited access to international finance. Roads, bridges, railways, river transport, and-to a lesser extent-sea ports are al l in need o f substantial repairs and rehabilitation. Lack o f adequate transport infrastructure particularly hurts more remote areas by limiting access to markets and services. Other central public infrastructure such as power plants also needs substantial rehabilitation and new investment given that less than a fifth o f the population has access to electricity, and power generation in Southern Sudan i s virtually al l by diesel fuel. The most formidable infrastructure challenge i s the husbandry o f the country’s surface and ground water resources for urban and rural water supply, irrigation, power, and navigation. With an infusion o f FDI and dismantling o f the state monopoly, the provision o f telecom and IT services has accelerated, but the South s t i l l lags far behind the rest o f the country.

B. Sudan’s Emerging Development Strategy

38. inclusive national long-term vision, although the CPA, the JAM, and the Poverty Eradication Strategy concept note contain elements o f such a vision. GoNU has developed a Five Year Strategic Plan consistent with these frameworks. GoSS i s contributing to this Five Year Plan in the context o f the preparations for the next Sudan Consortium, and also envisions preparing i t s own five year plan linked to that o f GoNU.

Persistent c iv i l wars have prevented successive governments f rom creating an

39. Working joint ly with the Government o f Sudan and the SPLM, the Bank and UN co- led a Joint Assessment Mission (JAM) o f Sudan’s recovery, reconstruction and development needs in 2004 and 2005. The JAM’S work was organized around eight cluster groupsY7 each o f which conducted relevant research and designed prioritized interventions. Underlying the Framework was an explicit acknowledgement o f the need to consolidate the peace and resolve governance and resource distribution issues that could generate conflict in the future. The first transitional phase, ‘Consolidating the Peace’

Institutional development and capacity building; governance and the r u l e o f law; economic policy and management; productive sectors; basic social services; infrastructure; livelihoods and social protection; and information. The Framework, at both the regional and national level, encompasses a variety o f cross-cutting issues, including gender integration, institutional development, environmental protection, decentralization, HIVIAIDS and conflict prevention.

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(2005-2007) focused mainly on issues such as security, reconciliation, peace building, food security, return o f displaced persons, provision o f basic services, governance, including the implementation o f institutions and processes under the CPA, and more equitable resource distribution among the different regions. This phase was to prepare the ground for the second phase, ‘Accelerating Progress toward the MDGs’ (2008-20 1 l), where development interventions would be scaled up.

40. team into a Framework for Sustained Peace, Development and Poverty Eradication, which was presented at a Donor’s Conference in Oslo in April 2005. The Framework focused on key themes that were agreed to be integral to consolidating the peace and facilitating broad-based human and economic development. Providing basic security and human rights protections, and ensuring the safe return and reintegration o f the world’s largest displaced population, were seen as fundamental preconditions to rebuilding social capital and putting the country on a solid footing for development. In parallel, implementation o f the CPA required sweeping reforms to governance, the creation o f new institutions, and significant capacity building at all levels o f government to allow for effective decentralization and equitable resource allocation. With the f i rst phase o f implementation o f the J A M drawing to a close, i t was agreed in the March 2007 Sudan Consortium that a detailed review o f performance, and an elaboration o f plans and needs for the period from 2008 to 201 1 should be prepared soon. While the Bank and UN were heavily involved in the first phase o f the J A M exercise, GoNU and GoSS are expected to take the primary role in driving this process, and integrating it with their own development planning.

The JAM’S findings were synthesized by a joint Government, donor, UN and Bank

41. The Five Year Strategic Plan, 2007-2011. G o N U has developed a Five Year Strategic Plan, to which GoSS i s contributing, in the context o f the preparations for the next Sudan Consortium-GoSS also envisions preparing i t s own five year plan linked to that o f GoNU. The GoNU planning process entailed a bottom-up approach beginning in the North with preparation o f 5-year plans and programs by the states and 30 federal ministries, and the Transitional Darfur Regional Authority (TDRA). The plan provides a framework for focusing and coordinating peace and development efforts over the next five years, building o n the JAM. Offering a vision o f “a unified, secure and peaceful Sudan based on the principle o f pluralism, a democratic multi-party system, equitable distribution o f wealth and the Rule o f Law,” the plan represents a positive step towards a national poverty reduction strategy. The plan i s centered on eight key result areas: promoting sustainable economic development, sustaining peace and stability, reducing poverty and meeting the MDGs, strengthening good governance and ru le o f law, building capacity o f public institutions and c iv i l society, strengthening public information and media, fostering scientific research, and promoting citizenship and national identity. Among the various quantitative and qualitative goals, the plan aspires to achieve the following MDGs:

0 Reducing poverty rate to 30% Basic education accessible to 80% ( no gender discrimination); secondary education also to 80% and enabling 70% access to higher education

0 Reducing child mortality by 50% Reducing maternal mortality by 50%

0 Reducing malaria and tuberculosis by 80%

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0

Increasing access to information (IT) sources to 50% o f population Providing potable water to 80% o f population Raising rate o f participation in coming elections to 80%

42. Moving towards a National PRSP. During the JAM, national and southern authorities agreed on a Poverty Eradication Strategy (PES) concept note, laying the framework for how a poverty reduction strategy could be prepared for the country as a whole. The next step i s the development o f a fully national, participatory post-JAM poverty reduction strategy that would build on the building blocks o f the CPA, the J A M Framework, the PES concept note, the 2004 I-PRSP, and both Governments’ Five-Year Strategic Plans.

IV. BANK RELATIONS WITH SUDAN

A. Progress in Implementation o f the Country Re-Engagement Note (CRN)

43. The CRN, discussed by the Board on June 24,2003, outlined a four-pronged approach focusing on: (i) knowledge generation and sharing to foster national dialogue; (ii) capacity building to support pol icy reform; (iii) demonstration projects to help improve delivery o f basic social services; and (iv) resolution o f the debt overhang. The C R N also foresaw the need to establish and staff country offices, and raised the possibility of the Bank administering a reconstruction trust fund. This materialized after the CPA when the Bank was asked to manage the two Multi-Donor Trust Funds (MDTFs) for Sudan.

44. though factors such as l o w capacity and the Darfur crisis have prevented a higher level of progress from being achieved, and there has been difficulty in quickly locating and deploying the needed staff and sk i l ls to handle the growing work program.

Progress in implementing the C R N has been generally good, as shown below,

Knowledge Generation and Sharing. From a relatively l o w level prior to the CRN, the Bank has scaled up i t s analytical program to support the transition to a more development-oriented national agenda (see Annex 8). Key completed analytical and advisory activities have included a Public Expenditure Review, a Country Economic Memorandum, Health and Education reports, the Sudan JAM, a jo int IMF-Bank Financial Sector Assessment, a joint IMF-Bank debt sustainability assessment, a Diagnostic Trade and Integration Study (DTIS), a volume on the development challenges in Darfur, and studies on Livestock Marketing and Gum Arabic (with joint MDTF support).

At the authorities’ request, the Bank has also prepared just-in-time policy notes on: environmental and social safeguards for the Merowe Dam; protecting the poor from the rise in domestic price o f oil; possible options for cash transfers to returnees in Darfur once peace i s realized; and a diagnostic o f the growth prospects and institutions in South Kordofan state. In addition, the Bank provided technical resource persons for the wealth sharing deliberations at the NortWSouth and Darfur peace talks. In response to the financial and budgetary crisis faced by GoSS in the

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first half o f 2006, the Bank mobilized a fiscal mission in association with key donor partners (JDO, DFID, USAID and the UN) to assist GoSS in formulating prudent fiscal management policies and programs. IFC i s providing technical assistance to help GoSS draft key legislation for private sector development. Under the Technical Assistance Facility (TAF), supported by the National MDTF, a variety o f studies have been initiated to fill the knowledge gap (see para. 53).

0 Capacity Building. The Bank has been supporting efforts to strengthen capacity through the JAM, analytical work done jointly with government, and through the Low-Income Countries under Stress (LICUS) trust-fund and the MDTFs. Building capacity for basic service delivery, reconstruction o f infrastructure, public expenditure management, and financial management is a central focus o f the projects supported by the MDTFs. The $4.5 mi l l ion LICUS trust fund grant for Sudan, approved in December 2004, also focuses on capacity building and institutional development o f fiduciary and aid-management systems, particularly in the South. Another L ICUS grant ($0.23 million) for the African Union supports the Darfur- Darfur Dialogue and Consultations, as well as other peace-building activities, and provides for possible technical assistance for the Darfur peace negotiations. A Post- Conflict Fund (PCF) grant ($ 0.42 million) supports research and knowledge dissemination on institutions and key aspects o f the socio-economy o f Darfur. The grant i s also intended to build the capacity o f local partners in Darfur, particularly NGOs and CBOs, to prepare development programs. The Bank’s Financial Market Integrity Unit has provided technical assistance to help the authorities combat money laundering.

0 Demonstration Projects. The PCF-supported Community Empowerment Project in the Nuba Mountains in South Kordofan State has made good progress in piloting funding mechanisms for small-scale community driven investments in a war-affected and marginalized area, and it i s planned to replicate this mechanism in other areas. Results from Bank-managed Dutch trust fund support for reforms in the administration o f the massive Gezira irrigation scheme have been impressive: a new Gezira Act was adopted in July 2005, following which the Gezira Board has been overhauled and a new chairman appointed, mandatory crop rotations have been abandoned, and ‘payment upon delivery’ for cotton has been adopted. Even though capacities are s t i l l weak, 1,572 Water Users’ Associations (WUAs) have been established which seek to empower local communities.

0 Debt. Litt le progress has been achieved to date in resolving Sudan’s debt situation, as donors are awaiting resolution o f the Darfur crisis and continued progress in implementing the CPA. Sudan remains eligible for HIPC debt relief.

0 Scaling up the Bank’s Presence. As foreseen in the CRN, the Bank opened a country office in Khartoum in 2005, where a Country Manager i s based. A World Bank sub-office was established in Juba in 2006 to support GoSS and facilitate the implementation o f MDTF-South. Staffing levels in both locations have risen rapidly to accommodate the added work o f administering the MDTFs, and additional hiring will be considered in l ine with the evolution o f the work program.

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B. Progress in Implementation o f MDTFs

45. (MDTFs) - one for the National Government and one for GoSS -be established to facilitate the coordination o f external donor financing o f Sudan’s reconstruction and development needs as laid out in the JAM. The MDTF for the National Government

The Comprehensive Peace Agreement specified that two Multi-Donor Trust Funds

(MDTF-N) was proposed to focus on consolidating peace-by supporting key CPA commitments on the currency, the census, and the national transport network- and supporting recovery and development in war-affected and marginalized areas in the Northern states. The MDTF for the South (MDTF-S) aimed to support the nascent GoSS in building institutions working across all sectors, balancing both short- and long-term needs. Donors and the authorities requested the World Bank to administer the MDTFs, particularly because o f the high degree o f fiduciary compliance (financial management and procurement) that the Bank’s procedures would bring. O f the $2 bi l l ion pledged for development at the April 2005 Donors’ Conference in Oslo, one quarter ($508 mi l l ion total) was pledged for the two MDTFs. Post-Oslo pledges have

Box 1: UN Implementation of MDTF Activities

MDTF-National $38.7 m (28 %) of MDTF-N funds are implemented by UN agencies, including:

UNFPA-$12.0 m UNOPS - $7.1 m UNICEF - $5.3 m

UNIDO-$1.1 m UNDP - $13.0 m WHO - $0.16 m

M DTF-Sout hern Sudan $78.3 m (42 %) of MDTF-S funds* are implemented by UN agencies, including:

UNFPA - $10.0 m UNOPS-$20.1 m ILO-$0.5m UNICEF- $2.7 rn UNDP - $14.1 m

WFP - $30.1 m

IAPSO - $0.7 m

* An additional $35.9m in GoSS counterpart funds is also implemented by UN agencies

raised the total to $585 millibn, o f which $492 mi l l ion has been paid-in by 14 MDTF partners.

46. reconciling the need for rapid delivery o f results with the l o w capacity on the ground, particularly in the South, and the need to ensure adequate fiduciary controls and government ownership. Implementation by UN agencies was foreseen as one o f the key channels to deliver MDTF results. However, the Bank experienced difficulties in reaching consensus with UN agencies on legal agreements, particularly relating to fraud and corruption, until a unique Sudan-wide agreement on legal templates was reached on November 10,2006. As o f October 3 1 , 2007, more than one-third o f MDTF grant commitments was being managed or implemented by UN agencies.

MDTF-supported projects experienced initial implementation challenges in

47. training activities targeted at key counterparts, and given the Sudan country team priority access to World Bank senior decision-makers and top operational pol icy experts. This

In the past year, the Bank has sharply increased its field presence, arranged a series o f

* Partners having paid in funds to the MDTFs are: Netherlands, Norway, the United Kingdom, the European Commission, Canada, Sweden, Germany, Finland, Denmark, Italy, Egypt, Iceland, Greece, and the World Bank. The Bank contribution (from IBRD surplus) comprises $5 million to each o f the MDTFs.

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effort included a Southern Sudan Implementation Support Mission in M a y 2007, with legal, procurement, financial management, and disbursement specialists with experience working in fragile states. The Support Mission helped Bank staff in Juba to address a number o f key bottlenecks affecting the pace o f implementation o f MDTF projects.

48. from existing ones-is steadily improving. In terms o f the preparation o f projects, MDTF projects have been prepared with an average lead time that compares favorably with the World Bank average for emergency operations o f six months, and the Bank average for all projects o f 15 months. For the two MDTFs, 22 grant agreements for projects have been signed, o f which 20 projects are effective, for a total commitment o f $336 mi l l ion through November 30,2007. GoSS and GoNU have committed $554 mi l l ion in parallel to MDTF programs. Governance and management structures for the MDTFs are working well, and the large proportion o f GoNU and GoSS’s own resources that are cofinancing the MDTF framework i s an important sign o f government ownership. For the GoSS cofinancing, the creation o f pooled funds allows government resources to fol low Bank fiduciary practices (especially procurement and financial management).

The performance o f the MDTFs-from preparing new projects to delivering results

49. Unlike other donor-funded programs in Sudan, the MDTFs are fully embedded in the budgets o f the GoNU and GoSS and they help leverage sizeable Government resources (as much as 2/3 o f total project cost) for pro-peace, pro-poor programs. These attributes, however, are also responsible for some o f the implementation delays as projects are prepared and implemented by Government agencies and project funding i s subject to Government budget allocation, release procedures, and internal decision-making. Thus, MDTF-supported projects suffer from the same implementation constraints and difficulties as the Government’s own public investment programs. Conversely, however, engagement through the MDTF helps to improve the Government capacity for implementation itself.

50. mi l l ion as o f November 30, 2007, the real acceleration in the pace o f MDTF implementation needs to be measured by the results achieved on the ground. One example o f successful delivery o f MDTF results i s the Rapid Impact Emergency Project (RIEP). The project has provided pharmaceuticals and medical supplies to over 500 local health facilities, and medical kits to over 1000 health facilities. RIEP has also financed the delivery o f 40,000 school kits to 2,600 primary schools. Governor’s offices in 10 Southern states have been renovated and equipped, including the installation o f IT/communications equipment, generators, vehicles, office equipment, and furniture. The RIEP model is now being replicated for the Three Areas Program targeting the transitional states o f South Kordofan and Blue N i le .

While the pace o f disbursements has accelerated, with disbursements o f about $164

5 1. international procurement agent has been contracted to establish a Procurement Division in GoSS, review and revise GoSS procurement policies, and to carry out the day to day procurement activities o f GoSS for a period o f two years. Among other notable results in MDTF-S projects, a new secondary school syllabus has been developed, the third phase of fast-track teacher training for 1,200 teachers has started, good progress has been made in the rehabilitation o f water systems, the hospital, and government ministries in Juba, and

An interim Project Accounting Agent i s in place in Southern Sudan, and an

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850 kilometers o f roads are being repaired and maintained. Contracting i s underway for delivery o f health services by NGOs and private entities. A summary description o f the MDTF-S project portfolio i s provided in Annex 4.

52. At the National level, the new national currency mandated by the CPA has been successfully introduced with support from both MDTFs, and the old currency has been completely phased out in al l o f Sudan, including the South and Darfur. The two MDTFs have also fully disbursed the funds supporting the preparatory work for the CPA-mandated National Census, which i s a key precursor to the upcoming national elections. In conflict- affected northern states, the Community Development Fund (CDF), supported by a $15 mi l l ion MDTF-N grant, has made exemplary progress in supporting community-led development in the conflict-affected Three Areas on the basis o f sub-projects submitted by local communities and developed through a consultative, participatory planning process. The CDF has supported over 200 fast track sub-projects in education, health, and water- o f which over ha l f are already completed. In addition, 392 solar-powered lighting systems have been installed in schools, health facilities, and other public places in 10 remote rural settlements. It i s now intended to scale up the CDF to cover a majority o f conflict-affected areas in North Sudan and a similar program i s envisaged for Southern Sudan with support from MDTF-S.

53. areas. Demining o f the Babanousa-Wau railway has been completed with counterpart funds from GoNU under a MDTF-supported transport rehabilitation project, opening the way for MDTF-funded rehabilitation o f the railway. Contracting for the railway rehabilitation i s underway, as i s the contracting for rehabilitation o f three major roads linking formerly GoS and SPLM-controlled localities in the Three Areas and the East. The Technical Assistance Facility has funded training in procurement, financial management, and environmental safeguards for officials implementing CPA-related programs. To fill critical knowledge gaps, TAF i s financing a National Transport Master Plan and an Environmental Safeguards Assessment Framework. Other TAF studies support the preparation o f investment programs in Health, Education, and Agriculture. The TAF i s housed in the Ministry o f Finance and National Economy (MOFNE), and i s managed entirely by Sudanese professionals with no expatriate support. Three jo int MDTF/World Bank-funded policy studies have also been completed (on gum arabic, livestock marketing, and development needs in South Kordofan state) as part o f the advisory and analytical assistance provided by the MDTF technical secretariat. Summary description o f other projects supported by MDTF-N i s given in Annex 4.

MDTF-N i s also helping to rebuild critical transport infrastructure in war-affected

54. Despite recent progress, daunting challenges remain. Capacity i s a main constraint throughout the country, but especially given the near infancy o f government structures in the South. L o w capacity leads to forced trade-offs between ownership, building capacity, good governance and sustainability on the one hand , and speed o f delivery and visibility on the other but these trade-offs must be carefully balanced to ensure value for money. Capacity shortages are especially severe at the state levels, both in the Nor th (with a few exceptions) and in the South-precisely where basic services are critically needed.

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C. Lessons Learned

55. Managing the trade-off between delivering short-term results and long-term needs. Following the signing o f the CPA, there were high expectations for a quick peace dividend to reverse the social and economic to l l from decades o f conflict and neglect in Sudan. At the same time, donors and Government requested the World Bank to administer the MDTFs due to the Bank’s greater reliance on Government’s own systems to implement projects, which has the advantage o f promoting capacity building through learning by doing-but also required a great deal o f work initially to help authorities, especially in the South, take on new responsibilities. When initial results f rom MDTF projects-many o f which focus on longer-term institutional building and reconstruction-did not immediately meet these expectations, the Bank faced criticism for its procedures and project design. There i s now a better recognition o f the need for projects to strike a better balance between the short-term objectives o f delivering visible results on the ground and the longer-term concerns with ownership, capacity building, and sustainability.

56. Working with implementing partners. Though now largely resolved, contractual disagreements with UN agencies set back the start o f many MDTF-supported activities. Since the MDTFs were designed to rely in the beginning on the ability o f UN agencies to implement recovery activities in post-conflict countries such as Sudan, i t i s vital to ensure that inter-agency agreements can be concluded rapidly with involvement at the highest levels o f management earlier in the process.

57. Adapting project design to deliver rapid results in a low capacity environment. One o f the conclusions o f the May 2007 Support Mission was that different project design models could have helped deliver results more rapidly. For example, more projects that mobilize communities, build physical infrastructure, and create jobs-such as community driven development (CDD) and public works proj ects-could have helped to deliver results more rapidly. While GoSS initially favored other approaches over CDD-type programs, the Bank i s engaging GoSS in rethinking the value o f this approach in producing rapid outcomes.

58. Managing expectations and need for effective communications. Despite significant achievements and results on the ground, there is a strong perception among MDTF stakeholders that post-conflict recovery and development in Sudan i s falling short o f expected results. At the heart o f these perceptions are unrealistic expectations. This experience has highlighted the need to create more realistic expectations through a strengthened communications strategy with appropriate staffing and resources.

V. WORLD BANK SUPPORT PROGRAM

59. aims to contribute to the achievement o f the longer-term strategic vision enshrined in the CPA: promoting peace in Sudan by making it attractive through development, shared prosperity, and a reformed system o f governance which serves al l Sudanese. Voluntary support for unity o f Sudan can emerge from sustained peace, a critical long-term goal

Long-term strategic vision. Whi le this interim strategy covers a short period, it

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given that no economic, social, or political progress will be possible in the face o f continued domestic conflicts in Sudan.

60. meet the commitments contained in the CPA (as reflected by the JAM), DPA, and ESPA and particularly to help the authorities to begin to address the three interrelated challenges described in Section III-improving governance; increasing access to basic services; and ensuring sustainable and diversified pro-poor growth-especial ly in war-affected and marginalized areas. The Bank will seek to accomplish this objective in close partnership with Sudan’s other international partners, and taking into account i t s comparative advantage relative to them.

Strategic objective. The Bank’s main objective i s to support GoNU and GoSS to

61. diverse conditions facing different areas o f Sudan. At the National level (excluding Darfur), the focus i s on stabilizing peace by helping to reduce disparities between the center and marginalized and war-affected areas. This entails a significant investment in analytical work and policy dialogue to backstop the implementation o f the key provisions o f the CPA (pro-poor growth, decentralization, good governance, and empowerment), and-in the Three Areas, the East and other marginalized areas-to support demonstration projects and capacity building programs for local service delivery. In Dar fur , the Bank will work with partners, as security allows, to assess development and recovery needs and to make ready rehabilitation and development programs to be implemented in the event o f peace. In the South, the main focus i s on helping to build a competent, responsive, and stable government in Southern Sudan based on good governance, rule o f law, and transparency while promoting efforts to empower and decentralize service delivery to the states, counties, and communities. Another key objective i s to help Southern Sudan develop a long-term strategy to transform i t se l f into a well-integrated, se l f reliant, and viable economic unit that begins to harness i t s vast and r ich natural resources for the welfare o f i t s people.

Spatial differentiation. The entry points for Bank support vary according to the

62. Duration. The 2 1 -month timeframe o f the support program roughly corresponds to the f i rst period o f the Five Year Strategic Plans o f GoNU and GoSS, both aimed at sustained peace, economic growth and poverty reduction. This duration reflects the many uncertainties facing Sudan in the near-term. These uncertainties include the Darfur conflict and the 2009 elections, among others. Positive resolutions o f these risks-and progress toward clearance o f arrears-could allow for a full Country Assistance Strategy (CAS).

A. K e y Themes for W o r l d Bank Support

63. massive recovery and development requirements faced by Sudan at this juncture make selectivity difficult, and argue for a broader rather than narrower focus. To address the challenges identified in Section 111, the Bank program will concentrate on a set o f key themes. The relationship between the identified challenges and such themes i s shown in Table 2. Most o f the specific interventions planned or already underway under each theme span the Interim Period (2005-20 1 1) mandated in the CPA, and thus have an

While there i s a need to be selective in choosing areas for Bank/MDTF support, the

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implementation l i f e that extends beyond the time period covered by the ISN. Given the special circumstances surrounding Darfur, the Bank’s strategy for supporting recovery and development in this region in the event o f a resolution o f the conflict i s described separately at the end o f this section.

Table 2. Challenges (as identified in Section 111) and Bank Support

Challenges Key Themes for Bank Support

Building public sector capacity,(including the Population Census and new National Currency)

Improving governance Capacity

Supporting decentralization Accountability

Empowering civil society Strengthening fiduciary systems

Increasing access to basic services water and sanitation

Expanding access to health, education, and

Combating HIVIAIDS Supporting community-led recovery in marginalized / war-affected areas

Ensuring sustainable, Supporting infrastructure development, diversified, and pro-poor especially transport growth Fostering private sector growth particularly in

non-oil sectors Supporting rural development, livelihoods, and the environment

Imrwoving Governance

64. Building public sector capacity. Capacity building i s a major focus o f Bank analytical support and MDTF projects-including dedicated capacity-building projects, and other projects in which capacity building efforts are mainstreamed. In view o f the massive needs, however, capacity building programs need to be further scaled up and accelerated. In the South, the ‘learning by doing’ model (through interaction with individuals and firms contracted for the purpose) together with targeted training appears to be working, but needs to be supplemented with more attention to institution building at all government levels and sector wide technical training programs. A study o f governance and capacity building in the South i s expected to eventually lead to a government-owned plan for capacity building. WBI i s a key partner working with G o N U to help develop and implement capacity building programs at national, regional, and state levels. In addition to MDTF-supported programs, the Bank i s expected to provide targeted technical assistance to GoSS and GoNU on information technology and o i l sector management.

65. MDTF assistance i s also being used to support implementation o f key elements o f the CPA to promote and consolidate peace. The GoNU and GoSS have sought MDTF support for the Fifth Sudan Population Census (the f i rst one since 1993) and for the New National Currency Production and Exchange Program. The Central Bank o f Sudan, with support

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from the IMF and the MDTFs, has successfully completed the introduction o f the new currency as a symbol o f peace and unity to enhance national economic integration and development. The Census, supported by GoNU, the MDTFs, UNFPA, EC, and other donors, i s scheduled for early 2008, and i s expected to produce reliable and accurate demographic, economic, and social data for development planning, while underpinning the forthcoming elections in 2009.

66. Another element o f building capacity to promote peace and development will be to help Southern Sudan develop a long-term development strategy that will apply regardless o f the outcome o f the 201 1 referendum. This would likely include a plan to transform Southern Sudan into an integrated and viable economic unit, with primary emphasis on investments in infrastructure (primarily transport, power, and telecommunications to help to reduce physical isolation and to improve access to economic opportunity) and human development, supported by a policy and incentives framework to encourage and attract private investment in areas o f non-oil growth (commercial agriculture and agro-industry- e.g., sugar, palm oil, timber (teak), livestock, fish, fruits and vegetables; cement and building materials; tourism; light manufacturing; and handicrafts), and the institutional capacity to manage al l this. N o t only will such a plan support development in the South, it should also support heightened stability in the region through increased integration and development o f a more common identity among Southerners.

67. Decentralization. The focus o f the Bank’s support i s to assist GoNU in making decentralization work, as this i s central to the CPA, the ESPA, the D P A and the Interim National Constitution. The Bank i s providing technical assistance to the Fiscal and Financial Allocation and Monitoring Commission (FFAMC), which makes recommendations on the formula used to make transfers to decentralized levels o f government and monitors the transfers, through the LICUS project. Further support to GoNU and states i s envisaged for establishing a robust and efficient intergovernmental fiscal framework and developing national and state level capacity in Public Financial Management (PFM), which i s critical for effective decentralization. In the South, support to the Southern Sudan FFAMC, strengthening state capacity for PFM, and identifying options for increasing own source revenues o f states are planned. An ESW study on decentralization i s underway to present options to GOS S for structuring inter- governmental relations.

68. open and peaceful society, including in holding the government accountable to i t s CPA pledge to decentralize and improve the quality and accessibility o f services. In the South, NGOs have been active in seeking MDTF contracts for service delivery and rural development. The Bank i s supporting the development o f pi lot accountability mechanisms in the North (connected with the MDTF-supported Community Development Fund) and the South. The Sudan Development Marketplace 2007, held in Khartoum in August 2007, was used to introduce the concept and techniques o f accountability mechanisms to a cross- section o f CSOs, and to encourage development innovation at the grassroots level using small grants to stimulate innovative approaches to address local livelihoods and service delivery issues. A N G O Strategy Note was also prepared in consultation with relevant M D T F stakeholders to help enhance NGO/CBO participation in MDTF-supported

Empowering civil society. Civ i l society has an important role to play in a more

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operations. Additional Bank resources have been mobilized from the Bank’s Small Grants Program to support CSOs in the area o f empowerment and participation.

69. Strengthening fiduciary systems. The low capacity o f both governments, but particularly the nascent Southern government, in procurement and financial management entails significant fiduciary risks. These r isks not only have the potential to affect Bank- administered funds, but also threaten to reduce the development effectiveness o f government’s own expenditures. The Bank i s undertaking a Country Integrated Fiduciary Assessment (CIFA) in collaboration with other donors, and at the request o f the authorities. The CIFA i s using Public Expenditure and Financial Accountability (PEFA) indicators as a framework to assess the country’s fiduciary status and provide baseline ratings. Similar fiduciary assessments are being carried out for GoNU and GoSS, and will lead to action plans that could be implemented with Bank/MDTF and other donor support to improve procurement and FM performance.

70. helped the Southern authorities build capacity in core public financial management functions (budgeting, accounting, procurement and audit) through technical assistance, training, drafting new legislation, and investment support. Until this capacity i s sufficiently developed, the M D T F i s supporting the contracting out o f procurement, accounting and auditing functions to the private sector.

As GoSS fiduciary systems have needed to be developed from scratch, the Bank has

Increasing: Access to Basic Services

71. programs implemented by international NGOs account for a large proportion o f resources applied to basic service delivery, especially for short-term assistance to displaced and conflict-affected populations. These services, however, are fragmented, reach only limited subsets o f the population, and depend on external actors’ continued presence for sustainability. The Bank’s strategy aims to address both the short- and long-term challenges for delivery o f basic services. In the short-term, the Rapid Impact Emergency Project (RIEP) has quickly provided key inputs (Le., textbooks, pharmaceuticals) needed for health and education. The Sudan Emergency Transport and Infrastructure Development Project (SETIDP) i s supporting rehabilitation o f water supply in Juba. To expand health service delivery promptly, the GoSS/MDTF Health Umbrella Program i s contracting with the private sector and NGOs to support the delivery o f services to the population o f the South. Among the objectives o f the Education Rehabilitation Project i s rapid teacher training and recruitment and scaling up o f alternative education for demobilized soldiers, returning refugees, and other adults. In addition, there i s likely to be a large role for parent-teacher associations in the financing and provision o f basic education particularly in poorer states and rural areas. Over the longer term, the MDTF i s helping GoSS to develop key systems and institutional capacities at the sector-wide level, with the goal o f expanding the public sector’s ability to provide sustainable quality health and education services to the population. Implementation o f the Southern Sudan Rural Water Supply and Sanitation Project i s expected to accelerate as key contracts for drilling new boreholes are signed.

Expanding access to health, education, and water. In the South, humanitarian

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72. At the National level, in addition to the CDF which supports community-driven delivery o f basic services (education, health, water and public lighting), the MDTF i s supporting increased access to basic health services for conflict-affected and underserved populations in four target states: Southern Kordofan, Blue Ni le , Kassala, and Red Sea- covering a population o f approximately 5 . l million. At the same time, the Bank i s supporting policy reform in a context o f increased dialogue between the Government and international partners, in particular with the intention o f leveraging growing Government fiscal resources towards pro-poor spending. In this context, the support aims to improve knowledge and capacity to lay the groundwork for sustainable financing, reform and development o f the decentralized health care system.

73. Despite the foregoing initiatives, pro-poor spending for basic services needs to increase in the context o f dramatically growing central government revenues through more efficient allocation o f fiscal transfers to the states and more effective decentralized service delivery. The current situation can be characterized as one where progress i s being made at central and local levels but the missing middle i s the state. State governments have a crucial role in service delivery given their constitutional responsibility and increasing ability to finance services. There i s strong latent demand from state-level policymakers and stakeholders for dialogue and building capacity for service delivery. Planned engagement i s likely to be multi-sectoral and focused on several target states in a limited number o f priority areas.

74. prevalence o f HIV in Sudan i s lower than in neighboring countries. Sti l l , the end o f the two-decade-long civ i l war-which restricted labor migration, trade and travel thereby containing HIV transmission-carries the risk o f a large expansion o f the epidemic in Sudan, especially the South, which could affect poverty reduction and economic growth. Given the very real potential for increased HIV/AIDS incidence, preventing the further transmission o f HIV infection i s one o f the greatest challenges o f post-war Southern Sudan. A MDTF Southern Sudan HIV/AIDS project will aim to support GoSS in mounting an effective national response to the HIV/AIDS epidemic through a multisectoral approach which includes c iv i l society.

Combating HIV/AIDS. Although data are few, it i s believed that the incidence and

75. Addressing gender imbalances in recovery and development programs. Gender specific interventions are embedded in al l MDTF projects aimed at improving basic service delivery-health, education, water and sanitation-while infrastructure projects al l have a gender focus in specific components. The Capacity Building, Institutional and Human Resource Development Project supports the renovation o f regional vocational training centers in Southern Sudan where a key focus i s on training o f women. The Bank will also undertake an analysis o f the gender provisions under the CPA and help government implement these through projects and technical assistance. The CDF encourages the participation o f women and children in project design and implementation through social mobilization programs.

76. Supporting recovery in marginalized/war-affected areas. Demonstrating progress in reconstruction and development in war-affected and marginalized regions i s crucial to the success o f the CPA and Sudanese unity. Stil l , in many such areas (which include most

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o f Sudan outside o f Khartoum and a few more advanced Northern states), progress has been uneven in terms o f delivering on the promises o f a peace dividend. All Bank activities in the South aim to promote recovery and the shift from conflict to development. The Community Development Fund (MDTF-N), currently active in the war affected Three Areas, has proven to be a successful model for delivering services in marginalized areas that will be scaled up to include more such areas over the I S N period. The Bank and authorities are exploring whether the next phase o f the project could support capacity development o f local governments for resource management and service delivery. Start Up/Emergency Projects in South Kordofan and Blue N i l e State aim to address a number o f emergency needs in basic services and capacity building in the short te rm and a follow-on, longer-term (Reconstruction and Development Phase) project will feature a more comprehensive and integrated approach addressing the need for lean, efficient, effective and transparent government institutions.

Ensuring Sustainable and Diversified Pro-Poor Growth

77. Sustainable and pro-poor growth begins with a stable macroeconomic and fiscal environment. Sudan has posted a good record in both o f these areas in recent years, but continuing this strong performance i s an increasing challenge due to the recent large fiscal expansion, lower than expected o i l revenues, and the implications o f the economy’s increased reliance on oil-notably the reduced competitiveness o f non-oil exports. While Sudan i s newly experiencing the complications o f o i l wealth, international experience can help suggest measures that can overcome the problems Sudan currently faces. To help in this regard, the Bank i s starting work with GoNU and GoSS on a Country Economic Memorandum (CEM) focusing on pro-poor growth and governance in an o i l economy. Diversification o f sources o f growth to lessen dependency on o i l will be important over the longer term, and will require an increased role for the private sector, the rural sector, and addressing infrastructure gaps.

78. Fostering private sector growth. While much o f Sudan’s recent economic growth has been due to increasing o i l production, sustained growth over the longer term requires that other sources o f growth can take the lead - particularly the private sector. In the South, growth o f the infant private sector i s contingent on an improving and more stable investment climate, and increased capacity o f the private sector i tsel f . A Private Sector Development project i s helping GoSS to develop the enabling environment for private sector growth in Southern Sudan, and sustainably increase formal employment.

79. At the National level, where the regulatory environment i s more settled, the formal private sector i s stronger; however, the fmits o f recent rapid economic growth have not been shared widely. A Microfinance project, expected to begin implementation early in the ISN period, seeks to enable the financing o f tens o f thousands o f small entrepreneurs, and establish a conducive pol icy and regulatory environment for the microfinance sector, which i s currently highly undeveloped in Sudan relative to neighboring countries and demand. The C E M would examine the possible engines o f pro-poor growth in Sudan, especially in the marginalized regions and the South, and what types o f policies would foster this potential. Under the NETREP, government i s being assisted to deepen private sector participation in the transport sector. The Bank i s also finalizing an Investment

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Climate Assessment (ICA) which focuses on private sector development (PSD) and the constraints faced by micro and small businesses.

80. representing the mainstay for the livelihoods o f the large majority o f Sudanese, the development o f this sector i s central to ensuring food security, equitable wealth distribution, and restoration o f peace. Key challenges in the sector include overcoming a legacy o f public bias toward large-scale public irrigation rather than the rain-fed agriculture practiced by the poor, improving access to more reliable domestic water through rainwater harvesting, improving resilience in the face o f shocks, addressing environmental degradation, improving marketing efficiency, and strengthening capacity for agricultural support services and technology adoption.

Supporting rural development. With agriculture, forestry and natural resources

8 1. At the National level, an MDTF Livestock Production and Marketing Pilot project w i l l seek to identify promising interventions that can enhance livelihoods and improve productivity, particularly in isolated and conflict affected areas. The Bank i s engaging with authorities on key pro-poor growth policy areas such as improving the competitiveness o f rain-fed agriculture and livestock; improving the management efficiency and profitability o f irrigated schemes (such as in the large Gezira scheme), thereby creating new jobs without massive public subsidies; supporting small-scale and low-cost water harvesting technologies to improve access to water; and exploring how to liberalize gum arabic markets so that the poor can get a larger share o f export income from this sector. In the South, a Livestock and Fisheries project has recently become effective, and an Agriculture and Forestry Support Services project at the National level will aim to improve productivity o f agricultural and forestry producers through facilitating adoption of improved technologies, and strengthening GoSS institutional capacity in the area. These projects aim to combat environmental degradation while promoting environmental sustainability to help reduce the sources o f conflict. In addition, Bank ESW i s envisaged in collaboration with UN and DfID to assess key environmental challenges (degradation and depletion o f natural resources, loss o f natural habitats, desertification, loss o f biodiversity, water and urban pollution, and destruction o f cultural heritage sites) and to investigate the potential application o f carbon finance.

82. Supporting infrastructure development. At the national level, transport infrastructure i s poor and damaged, particularly in marginalized and war-affected areas. The Sudan National Emergency Transport Project (NETREP) i s rehabilitating critical rai l and river transport infrastructure in war-affected areas, and helping to improve the operational capability o f National Highway Authority, Sudan Railway Corporation and other transport agencies. Under the Technical Assistance Facility, a comprehensive Transport Master Plan i s to be undertaken. The recommendations o f this study wil l help to establish the policy reform and investment agenda for the country. Other infrastructure programs (rural roads, energy, water supply and irrigation) are envisaged under the state- led Three Areas Program and could be expanded to include urban slum upgrading and renewal projects. The N i l e Basin Initiative (NBI), which involves al l N i l e riparian countries, also has important implications for Sudan as explained in Box 2.

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83. few roads that do exist have been degraded by decades o f conflict. Through the three- phase Sudan Emergency Transport and Infrastructure Development Project (SETIDP), MDTF-S supports the repair, maintenance and construction o f roads in the South, as well as rebuilding critical physical infrastructure in Juba. As progress is being made with the implementation o f on-going contracts, focus under the project i s shifting to the preparation o f the next phase o f the project and improving capacity building and project implementation. However, the overall needs in the transport sector remains huge, and the financing needs for key priority interventions over the next few years exceeds all budget allocations.

Southern Sudan has one o f the least developed road networks in the world, and the

Supporting Recovery and Development in Darfur in the Event o f Peace

84. saving thousands o f lives. These efforts constitute the main way o f supporting the displaced people currently living in camps in and around Darfur. In the event o f a resolution o f the Darfur conflict, the international effort would have to turn to the rehabilitation o f the region, and to investing in i t s development. Progress on both fronts would be required to ensure that peace could be sustained in the region.

The ongoing humanitarian efforts o f the UN and international NGOs in Darfur are

Box 2: The Nile Basin Initiative The Nile Basin Initiative (NBI) aims to foster cooperation among the riparian countries sharing the Nile, and find win-win opportunities to optimize the productive use of water through integrated investments in infrastructure (including irrigation and power), reversal of land degradation, improved environmental management, and creation of policies to facilitate regional integration. The World Bank, on request of the Council of Ministers of Water Affairs of the Nile Basin, has been involved in the Nile Basin Initiative process as a facilitator as well as financier since 1998; furthermore, it has served as a convener for the donor community and is the administrator of the multi-donor Nile Basin Trust Fund (NBTF). For Sudan, the success of the NBI so far in building cooperation among Nile countries has opened the possibility for it to draw on the waters of the Nile in new ways reaping benefits beyond those provided directly by the river alone.

For example, GoNU is planning to finance the connection of Sudan's power grid to that of Ethiopia, opening the way for Ethiopia to export surplus power generated from its bountiful hydroelectric resources while Sudan provides complimentary thermal power. IDA is planning to provide financial support for the connection on the Ethiopia side. An NBTF-financed Eastern Nile flood preparedness project under implementation, involving Egypt, Ethiopia, and Sudan, will aid Sudanese communities in preparation, prevention and mitigation of flood impacts. The Eastern Nile watershed project, under preparation, will address sustainable land management issues during the first phase and is seeking support through the GEF as well as bilateral donors. Sudan also hosts a regional unit for a Nile transboundary environmental project (funded by GEF and NBTF resources), which addresses environmental awareness, transboundary water quality, and wetlands protection issues; supports community micro- grants; and, fosters dialogue on the environmental function within a future permanent Nile Basin institution. Systematic analytical and sector work is planned to explore options for major, joint multipurpose development in the Eastern Nile and to guide the Bank's medium- term role, comparative advantage, and strategic partnerships for investment support in the basin.

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85. To prepare for an eventual return to peace, the Bank, UN, and African Development Bank had begun work o n a Darfur Joint Assessment Mission (D-JAM). The D - J A M was initiated promptly following the signing o f the Darfur Peace Agreement in May 2006, but the deteriorating security situation in Darfur forced the suspension o f the mission last fall before i t s work was complete. At the direction o f the Core Coordinating Group (CCG) o f donors which provides oversight for the D - J A M work, the mission i s expected to be resumed as soon as security on the ground i s sufficient for broad-based consultations with the stakeholders in Darfur on the emerging findings. In the interim, LICUS and Development Grant Facility (DGF) funds have been provided to support intra-Darfur dialogue, institution and confidence building activities, and research and knowledge dissemination. These grants have shown l i t t le progress due to G o N U travel permit restrictions on the N G O implementing the DGF, and the fact that the Darfur-Darfur Dialogue and Consultations (DDDC) and the Transitional Darfur Regional Authority (TDRA) have only recently become operational.

86. Lessons from recent experience in Sudan illustrate that delivery mechanisms must be found to fully mobilize the UN system and the multilaterals in ways that fit their comparative advantages, to maximize impact and speed. The UN will likely move rapidly with a broad based r e l i e f and recovery agenda to be delivered by the large NGO presence in Darfur. The primary focus will be on restoring livelihoods and provision o f minimal basic services. The financing mechanisms for this effort are being defined. Simultaneously, development and reconstruction work can begin using several modalities. The current DPA outlines possible delivery mechanisms through the new institutions mandated by that peace agreement. These mechanisms could include:

0 Extending ongoing MDTF- National programs to Darfur . This could include at least four ongoing MDTF-National programs that can be scaled up rapidly: (i) Community Driven Development (which could include priority basic services such as health clinics, primary schools, markets, community centers, and solar power applications); (ii) Infrastructure (primary focus on primary paved roads, railway rehabilitation, and repaidupgrading o f airstrips); (iii) Capacity Building and Training; and (iv) Microenterprise/Small Business Development. Darfur specific sector-wide programs could be phased in after 18-24 months o f careful planning and project preparation work covering agriculture, livestock, health, education, water resources, and urban infrastructure and services (including water and sanitation), based on the findings o f the D-JAM. With the large increase in staffing by the Bank in Sudan in the last two years, the Bank’s presence could be scaled up rapidly to accommodate the needs o f a program in Darfur. IDA funds could supplement these efforts after IDA arrears are cleared.

The Government o f National Unity’s own efforts. Darfur should benefit from many o f the commitments that the national government has made in the context o f the CPA, the DPA, and the ESPA including increased decentralization and larger fiscal transfers to states, and increased federal support for infrastructure development.

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Scaling up of the current ongoing bilateral development programs in Darfur. Many bilaterals may wish to expand their existing assistance in Darfur to meet the region’s post-conflict recovery and reconstruction needs. I t will also be important to work with new development partners and donors (e.g., China, India, Egypt, Malaysia, and the Arab/Islamic Funds and Development Banks) with a view to harmonizing their ongoing and planned interventions in Darfur with the results o f the D J A M so as to reduce transaction costs as much as possible.

B. Instruments

87. Within the I S N period, the MDTFs are expected to remain the main financial instruments for the World Bank’s engagement with Sudan. Nevertheless, there i s likely to be a growing role for World Bank non-lending services in support o f policy dialogue and institutional strengthening. IDA lending will remain inactive until clearance o f Sudan’s outstanding arrears.

Multi-Donor Trust Funds

88. The sectoral mix o f MDTF projects in the first phase (2005-07) was guided largely by the priorities established by the JAM, with projects approved by the respective Oversight Committee for each MDTF, whose membership includes representatives o f the Government, donors, UN, and the Bank. The 22 signed MDTF projects (see Annexes 4’5, and 6) under implementation show a generally good thematic and sectoral balance when compared to the priority expenditure areas set forth in the JAM. MDTF projects cover most main J A M sectors, including health, education, water, transport, public sector capacity building, ru le o f law, decentralization, and good governance, and support under MDTF-N and MDTF-S is differentiated based on the particular needs and priorities o f GoNU and GoSS. At the margin, there i s more emphasis on infrastructure (in monetary terms) than estimated under JAM.

89. The second phase o f the MDTFs, from 2008 to 201 1, i s linked to the second phase o f the interim period leading up to the referendum. I t will be informed by the objectives o f the GoNU and GoSS Five Year Strategic Plans. Donor commitments for this second phase are expected to be discussed in the next Sudan Consortium, currently scheduled for April 2008.

90. Strengthening MDTF Performance. Based on the lessons o f experience in administering the MDTFs to date, and the challenges that s t i l l remain, efforts to improve MDTF implementation performance will focus both on the role o f the Bank and o f the Government, as wel l as the linkages to other donor programs. These efforts, many o f which are already ongoing, include:

Improving the capacity for program and project implementation. The l o w levels o f capacity encountered by many projects argue for a stronger than normal implementation support on the part o f the Bank. Increased World Bank staffing levels and better tailoring o f supervision activities to the country context are expected

29

to assist significantly in improving implementation performance. The Bank has rapidly scaled up i t s staffing complement in both Khartoum and Juba, but it will likely be necessary to continue to place additional staff in coming years. The Bank will step up efforts to assist in building GoSS capacity, particularly in public financial management, for critical posts and critical core spending agencies. Planned programs include training 2,500 GoSS senior and mid career officers in basics o f policy making, administration, law and social responsiveness, and I C T for effective communications (Institutions and HR Development Project). The Bank wil l also continue to provide regular training in project management, PFM, and public procurement, while at the technical level the existing ‘learning by doing’ model wil l be intensified. While capacity i s in many cases higher within GoNU, increased efforts at the statehocality levels are expected to result in better implementation outcomes. The planned support o f the World Bank Institute (WBI) will be important in this regard.

Taking advantage o f recent, more flexible W o r l d Bank operational policies. The World Bank Board approved a revamped set o f procedures (OP 8.0) to enable accelerated implementation o f emergency operations on February 27,2007. Under these new procedures, a high-level Rapid Response Committee, chaired by a Managing Director in the Bank, allows timely access to senior World Bank management to address roadblocks to rapid project implementation. Given the positive impact o f the implementation support mission o f procurement, legal, financial, and disbursement specialists to Juba in May 2007, more such high-level problem solving missions are envisioned under these procedures. In more routine cases, increasing decision-making authority i s being devolved to staff in Sudan. The new Country Financing Parameters detailed in section F below are also expected to simplify Bank support in many cases. Robust public procurement procedures designed to preclude any perception o f corruption demand a certain unavoidable amount o f time. However, there remains room within which to shorten the amounts o f procurement processing time currently typical o f MDTF-N and MDTF-S projects. Part o f this improvement can be realized by more flexible Bank policies, and faster clearances from the Bank. The Bank i s also continuing to bring more o f i t s own human resources to bear in assisting the client to build public procurement skil ls. Recent developments such as the newly installed Procurement Agent in Southern Sudan, and new GoSS procurement rules should expedite matters. The focus should now shift to include state and local levels.

Balancing short and long-term results. Projects must ensure the proper mix between achieving tangible short-term outputs, and the longer-term objectives o f ownership and capacity building to ensure sustainability. Obtaining the right balance will require careful calibration, close consultations, and active management. In administering the second-phase o f the MDTFs, the Bank will explore with donors ways to consolidate donor interventions in sectors with large recurrent and operating cost requirements (e.g. social sectors with a direct bearing on MDGs) into sector- wide programs (similar to SWAps) with unified plans, operating rules and budgets. If this approach can be implemented, it will allow a longer time horizon for sustainable outcomes and results while unified capital and recurrent budgeting will

30

lead to rationalization o f public expenditures and allow the possibility o f systematic MDTF financing o f critical recurrent and operating costs. Sti l l , the importance o f rapid results will also need to be kept in mind given the massive immediate needs.

Improving communications. A MDTF communications strategy i s in place and the MDTF technical secretariats have attempted in recent months to adopt a more proactive communications strategy not only to improve the understanding o f the purpose o f the MDTFs, but also to help keep expectations realistic about what the MDTFs can deliver. Realism will be the core value o f a cohesive communications effort through a two-way process which emphasizes listening as well as informing and learning. Communications officers are now in place in Juba and Khartoum, and efforts to further strengthen communications staffing and programs are underway. The need for an active outreach and dissemination effort i s recognized clearly from the experience o f MDTFs so far. The Bank will continue to support sponsor workshops, “Project Managers’ Clubs,” and actively disseminate emerging best practices in order to foster adoption o f successful modes o f operation and sharing o f innovation. In this regard, a successful workshop was held in November 2006 in Addis Ababa, bringing together senior GoNU/GoSS officials and project managers as well as representatives from the donor and N G O community.

0 Strengthening the synergies between MDTF projects and sector dialogue and ESW. Using ESW to build knowledge on which future projects can be based will improve project quality and improve preparation speed. Similarly, improved policy dialogue based on lessons learned from MDTF projects can create more conducive environments for current and future projects to achieve their objectives. Accordingly, the Bank will seek to enhance i t s capacity for pol icy advice and dialogue, especially on public sector reform, decentralization, macroeconomic management, and sectoral strategies.

Non-lending Services

9 1. Following a long period o f international isolation, the reengagement by donors, including the Bank, in a wide range o f development activities has created opportunities for dialogue with the country partners and brought opportunities for a number o f stakeholder groups in Sudan to absorb new ideas related to development. The importance o f this engagement should not be underestimated. The lessening o f ‘knowledge isolation’ and the growing networks to exchange ideas, such as the Sudan Consortium, are themselves important elements to mitigate the most fundamental o f the risks, that o f stifling the social energies needed to realize the CPA vision.

92. ESW products planned to be completed and delivered in the I S N period include a new Country Economic Memorandum (CEM) on pro-poor growth in an o i l economy, an Investment Climate Assessment (ICA) focusing on the needs o f small f i rms, the Darfur JAM, phase two o f the Public Expenditure Review (PER), a Southern Sudan capacity Building Study to identify priority needs and formulate recommendations to address them, an Environment and Natural Resources study, and a Country Integrated Fiduciary

31

Assessment (CIFA). The C IFA i s particularly important in the context o f harmonizing donor practices regarding public procurement and financial management.

93. To enrich this menu o f policy and analytical support, the Bank will seek to deepen dialogue-and open up space for c iv i l society participation in such dialogue-in areas such as: developing a Darfur reconstruction and development strategy; making decentralization work; transforming Southern Sudan into an integrated and viable economic unit; and local area development. The Bank's Financial Market Integrity Unit will continue i t s technical support to build capacity to combat money laundering through a proposed multi-phase program.

C. IFC, MIGA, and WBI

94. IFC i s providing assistance to Sudan consistent with the pro-poor and pro-peace focuses o f the ISN. IFC's Foreign Investment Advisory Service (FIAS) completed a rapid diagnostic assessment in Southern Sudan in spring 2006, which i s now being followed up by assistance to harmonize the conflicting legal regimes governing key aspects o f private investment, including property rights, facilitate access to land with appropriate freehold and leasehold provisions, and establish a public-private dialogue mechanism. At the request o f GoNU, FIAS completed an assessment o f administrative barriers to investment in September 2006. Endorsing the findings o f this assessment, G o N U has requested additional assistance in implementation, which IFC expects to provide.

95. MIGA involvement in Sudan through i t s guarantee program will depend on a resolution o f the Sudan's non-accrual status with IDA. Assuming a resolution to the arrears issue, MIGA intends to identify and respond favorably to requests for political risk insurance, especially for projects that are in conformity with the country's CPA and are more national in character (e.g., telecommunications, railroads, river transport). In the South, MIGA's guarantees could play a strong catalytic role in promoting South-South investment, including support for foreign direct investments coming from the sub-region, e.g., from Uganda, Kenya, and South Africa. With respect to technical assistance, MIGA i s working closely with FIAS to support the Government in i t s efforts to create a one-stop shop for foreign investors.

96. Governance Capacity Building Program (EGCBP) for Post-conflict Sudan." The program i s tailored to meet the transitional needs o f a post-conflict environment while strengthening capacity for policy formulation to complement longer term institutional reforms. The overall goal i s to develop human resources for good economic governance and strengthen execution o f the Ministry o f Finance and National Economy's functions in Development, Revenue and Treasury Management for sustained peace, economic growth and poverty eradication. Within this context, the specific objectives are to develop and enhance the capacity o f appropriate authorities at al l levels o f government including the national and southern Ministries o f Finance, the 25 Ministries o f Finance at the State level, Darfur Reconstruction and Development Fund (DRDF) o f the Transitional Darfur Regional Authority (TDRA) and Eastern Sudan Reconstruction and Development Fund (ESRDF). Additionally, the program will seek to strengthen the capacities o f local universities and

WBI has been involved in supporting GoNU in the development o f i t s "Economic

32

training institutions in curriculum development and content delivery in key thematic areas o f economic policy analysis and management.

Box 3: Consultations on the Interim Strategy

A range of consultations were held to build broad support for the interim strategy program. These consultations included meetings in May 2007 with members of civil society, the UN, and donors. Consultations with GoNU and GoSS were held in August and September 2007, respectively, followed by a final discussion of the ISN with GoNU and GoSS in December 2007.

Among the key conclusions of the consultations and briefings was the general feeling that a one-year to 18-month time period for the ISN was short, and only viable if set within a longer term strategic framework including the key milestones in CPA implementation, such as the 2007 Census, 2009 elections, and the 201 1 referendum on political future of the South. Leading up to the referendum, many stakeholders recommended that the Bank’s should focus on fiscal decentralization, wealth-sharing, and other aspects of the implementation of the CPA, which are crucial to making the case for Sudan to remain peacefully unified. Stakeholders suggested that a priority should be for the Bank to expand its analytical work, particularly on sources of economic growth and how to achieve a sustainable oil economy within Sudan.

Stakeholders underlined that the new ISN should reflect the lessons learned from past work, both in relation to the MDTFs and the Bank’s broader involvement. Stakeholders expressed the need for an assessment of progress made under the first phase of the JAM, and also emphasized that the Bank should be mindful of transferring more ownership to the Sudanese as the MDTFs mature and evolve. Another message that emerged from the consultations was that stakeholders value the Bank’s role as a co-coordinator and facilitator. The Bank’s ability to fulfill this role should continue to be developed, and within this role, the Bank should expand its interaction with civil society.

At the National level, the authorities argued that debt relief should be a main component of the Bank’s ISN, in order to restart IDA lending. The Bank agreed to describe in the strategy the necessary steps toward reaching this goal.

In the South, a number of key challenges in the near future were highlighted, most notably the risk of fiscal difficulties and the issue of government payroll. The general consensus was that the main focus in the South should be on capacity building within GoSS. However it was felt that for capacity building to be truly effective it would have to be formulated within a long term framework. There were also calls for the Bank to continue building up its work on fostering private sector growth.

D. Partnerships and Donor Coordination

97. Large volumes o f humanitarian and development aid from numerous NGOs, bilaterals, and multilateral agencies have clearly stretched the ability o f GoNU and GoSS to coordinate and manage this assistance. Transactions costs are increasing for authorities as they face a proliferation o f projects. For example, GoSS i s already working with donors on over 100 ongoing projects. Increased harmonization is vital to ensure manageable transaction costs for authorities, to take advantage o f synergies and economies o f scale, and to avoid redundancies in various partners’ support.

33

98. development assistance. The MDTFs, for which 15 donor partners have paid in funds, are one vehicle for harmonized donor support in Sudan-the two MDTFs represent about a quarter o f international support for development in Sudan. Sudan is also one o f the pilot countries in a recent OECD initiative to harmonize international engagement in fragile states. Italy and Norway are leading an initiative to develop a Memorandum o f Understanding with GoNU and GoSS on development assistance modalities, with the goal o f avoiding the current duplication o f delivery mechanisms in the North and South o f the country. In addition, GoSS i s now in the process o f developing i t s aid management strategy with assistance from UNDP for effective coordination and better use o f donor funding. The Ministry o f International Cooperation o f GoNU has undertaken a review o f aid effectiveness in Sudan and the adherence o f i t s development partners to the principles o f the Paris Declaration.

External partners are moving toward common arrangements for providing

99. Joint missions have been conducted during MDTF project preparation and supervision, and partners are undertaking some joint analytical work, o f which the national and Darfur JAMS are prime examples. Denmark, the Netherlands, United Kingdom, Norway, Sweden, and Canada have formed a Joint Donor Office (JDO) to provide assistance to GoSS through a single policy framework under unified administrative arrangements and shared costs. The JDO’s areas o f activity cover pol icy dialogue, donor coordination, technical support to the MDTF-S Secretariat, monitoring, reporting and program management.

100. Sudan Consortium. To report on progress by authorities on pol icy commitments and to renew donor financial pledges, authorities and international partners have agreed on regular Sudan Consortium meetings. The first meeting o f the Consortium took place in Paris on March 9 and 10, 2006, with particular attention being paid to the need for improved public expenditure and revenue management at al l levels o f government as well as good governance. The second Sudan Consortium, held in Khartoum and Juba from March 19 to 2 1,2007, concluded with a call for accelerated action to implement fully the Comprehensive Peace Agreement (CPA), with donors highlighting concerns over the Darfur crisis. The authorities’ progress reports showed that the pace o f implementing the provisions o f the CPA has been slow in some important areas, and that pro-poor policies and spending-while improving-have been below expectations. It was agreed that prior to the next consortium, a review o f performance in the first J A M period, and plans for the remainder of the Interim Period should be prepared. Constraints on aid delivery would also be reviewed. Preparations for the next Consortium-to be organized joint ly by the Bank and the UN-are currently underway, with the timing and location to be agreed soon by the authorities and international partners.

101. New development partners and donors. The global trend o f increasing volumes o f development assistance from non-traditional bilateral donors (i.e. non-OECD Development Assistance Committee members) i s evident in Sudan, both within and outside the MDTF framework. Egypt, a new donor, has become the latest contributor to the Sudan MDTFs. Outside the MDTFs, notable bilateral partners now include China, India, Malaysia, and several Middle Eastern countries. In the future, the Bank expects to take an increasing role

34

in strengthening l ines o f communication and sharing information on development activities with the new development partners

E. Monitoring Performance

102. Socio-economic data and statistics are limited in scope and reliability. The prolonged conflict has worsened the quality o f data available and weakened the capacity o f the national statistical system to generate useful statistics. This limits to a large degree the ability to track progress o n key development outcomes over time.

103. A national results monitoring framework i s included in the Framework for Sustained Peace, Development and Poverty Eradication that was prepared following the JAM. This framework was designed around the eight clusters o f the JAM, and within each cluster key indicators were identified relating to progress on reconstruction, development and poverty eradication through 2007. These indicators are periodically updated and reported at the Sudan Consortia. GoNU’s Five Year Strategic Plan has identified eight results areas which would provide the framework for monitoring progress and evaluating results.

104. Due to the need for rapid start-up, project documentation for MDTF projects has often contained limited M&E frameworks. A key task during the I S N period will be to strengthen the M&E frameworks o f existing MDTF projects to solidify results monitoring systems. M&E frameworks in project documentation for new MDTF projects will be expected to meet the same standard as normal Bank investment projects.

105. A results framework that aims to help measure the Bank’s performance against this strategy in working with GoSS and other partners i s presented in Annex 1. Given the short time period covered by the ISN, the lack o f timely and reliable data, and the lack o f a nationally-owned PRSP, the results framework i s necessarily less ambitious than a typical results-based CAS framework. While the ISN framework aims to track performance at the outcome level where possible, in many cases tracking the outputs o f Bank/MDTF support i s the only feasible option. With continuing support in MDTF projects and Bank and donor TA to strengthen statistical capacity and develop an inclusive national poverty reduction strategy, a more standard results framework could be expected to be prepared for the Bank’s next country strategy for Sudan.

F. Country Financing Parameters

106. On June 15,2007, the Bank established new country financing parameters for Sudan that provide the overall framework for cost sharing arrangements, and the financing o f recurrent and local costs, and taxes and duties, for al l projects (see Annex 2). In l ine with the policy framework approved by Executive Directors on April 13,2004 governing the eligibility o f expenditures in World Bank financing, the financing parameters for Sudan make development objectives the primary determinant o f Bank (or Bank-administered) financing, while making sure that risks, such as those to fiscal sustainability and the use o f Bank or Bank-administered funds, are appropriately addressed. As such, the parameters- depending on specific project circumstances-potentially allow the Bank to finance up to 100 percent o f the cost o f a project; set no limit on the level o f recurrent costs the Bank

35

may finance (subject to sustainability criteria); allow financing o f local costs in any proportions required by individual projects; and permit the Bank to finance taxes and duties as long as they do not constitute a significant share o f project costs. The parameters are consistent with the recent policy revisions o f OP 8.00 to allow greater flexibility in responding rapidly to emergency situations.

G. Process for I D A Reengagement

107. Normalizing IDA relations with Sudan can be divided into three phases, with important inter-relations among them: arrears clearance; reactivation o f Bank financial instruments (IDA lending and grants); and access to HIPC debt relief.

108. Arrears clearance. The Sudanese authorities have taken steps towards normalizing relations with the Bank and have been making small, intermittent debt service payments since mid- 1999. This, however, has not been sufficient to prevent a continued accumulation o f IDA arrears, which have risen to $480 million. The clearance o f these arrears could only be undertaken within a framework o f a firm and comprehensive agreement among preferred creditors, including significant reductions in bilateral debts, so as to make the total debt service obligations sustainable. Once such an agreement i s in place, arrears clearance would likely necessitate an IDA Development Policy Operation (DPO); hence, deepening the World Bank-GoNU dialogue on key pol icy reforms will help to facilitate the eventual clearance process. The World Bank i s working with the IMF and other multilateral creditors to maintain timely debt information in anticipation o f preparing a comprehensive arrears clearance plan.

109. In August 2007, the Bank and Fund joint ly prepared a Debt Sustainability Analysis (DSA) for Sudan. Under the baseline scenariog, the analysis suggests most debt ratios will remain above their indicative thresholds over the medium- to long-term, even assuming prudent macroeconomic policies and further increases in o i l revenues. The N P V o f debt- to-GDP ratio i s expected to decline from 47 percent in 2007 to 34 percent in 2017, which i s s t i l l 4 percentage points higher than the indicative threshold. The N P V o f debt-to- exports i s expected to fa l l from 284 percent in 2007 to 203 percent in 2009, but to increase thereafter to 429 percent in 20 17, which i s substantially higher than the indicative threshold o f 200 percent; this largely reflects projections for o i l export revenues that show a steady decline after 2009. The N P V o f debt-to-revenue i s projected to decline from an average o f about 240 percent a year in 2007 and 2008 to remain below i t s threshold o f 200 percent through much o f the forecast period through 20 12, but i s expected to breach the threshold by 7 percentage points in 2017. The two debt service indicators (debt service-to- exports ratio and debt service-to-revenue ratio) are expected to remain below their indicative thresholds throughout the forecast period 2007-2027.

The macroeconomic framework for the baseline assumes servicing o f only new obligations falling due, and 9

no servicing of the more than US$24 billion in arrears.

36

VI. CRITICAL R I S K S

110. The Bank faces a highly uncertain environment for provision o f development assistance in Sudan. This Interim Strategy assumes the continuation o f status quo. In the scenario o f a significant deterioration in the operating environment in Sudan, the Bank would consult i t s Executive Board and fol low the lead o f the MDTF donors and the international community in determining the scope and content o f i t s level o f support. O n the other hand, in the scenario o f a significant improvement in the environment for Bank support during the time period covered by this strategy, the Bank would also consult with donors, the authorities, and the Board on the appropriate steps to take toward possible arrears clearance and an increased level o f financial and analytical support to Sudan.

1 1 1. Some o f the key r isks that may prevent the full realization o f the objectives o f this Interim Strategy include:

Lack of resolution or worsening of the Darfur crisis. While the Darfur Peace Agreement (DPA) held out the promise o f a resolution to the crisis, peace and stability in the region have not yet been realized. Continuation o f the conflict will threaten peace, stability, and development in al l o f Sudan and some o f Sudan’s neighboring countries.

Continued delays in implementation of the Comprehensive Peace Agreement (CPA). Progress in the implementation o f the CPA has been slow in some key areas, which has in turn contributed to increased tensions between the parties to the agreement. Continued delays may have negative consequences broadly for the prospects for peace, growth, and poverty reduction, as wel l as more narrowly for the implementation o f the Bank’s proposed strategy.

Governance. Improved governance i s crucial for delivering on the promise o f the CPA. The quality o f governance will also be a key determinant o f the success o f support from the Bank and other partners. L o w financial management and procurement capacity, and weak control systems, carry major r i sks -even as government, the Bank, and other partners work to strengthen them in parallel with the implementation o f development activities. The 2009 elections, mandated by the CPA, hold the promise o f major progress on the CPA agenda o f peace, development, and democracy, but also bring risks o f conflict and reversal o f progress if the process i s contested or perceived to be flawed.

Slow progress in building capacity. Especially in the South, rapid progress in capacity building is essential to effective and sustainable implementation o f development programs. Without increased capacity, the speed and effectiveness o f Bank and MDTF support, too, will be limited.

MDTF future financing. Current MDTF pledges and commitments cover the period from 2005 to 2007. Given the immense development needs, the MDTFs will soon reach the limits o f their commitment authority. New commitments for the post-

37

2007 period are needed. Delays in raising new resources would negatively affect the financing o f pipeline projects and subsequent phases o f existing projects.

Availability of Government counterpart funds. The fiscal pressures currently affecting both GoNU and GoSS put the availability o f counterpart funds for MDTF projects at risk. Reduced availability o f counterpart funds may have the effect o f delaying project implementation, and removing a key mechanism for ensuring Government ownership o f projects.

MDTF Implementation Challenges. The Bank has worked closely with GoNU, GoSS, UN agencies, donors, and NGOs to overcome initial hurdles to rapid implementation o f projects funded by the MDTFs. However, implementation challenges remain, and will put a premium on the al l parties’ ability to deliver rapidly on their commitments. A critical challenge will remain govt. decision making, and the resulting bottlenecks to implementation.

1 12. Mitigation o f certain o f these risks i s largely beyond the reach o f the Bank, particularly the Darfur crisis where a resolution depends on local and national stakeholders, with assistance from UN, AU and bilaterals. For other risks, the Bank can partially mitigate the possibility o f negative outcomes though: supporting the implementation o f the provisions o f the CPA, helping to build institutional capacity, supporting improved financial management and procurement systems, demonstrating tangible results from MDTF implementation to donor partners, strengthening working partnerships with UN, AU, and AfDB, information sharing and existing collaboration to new donors and development, assisting authorities in managing r isks o f revenue volatility, and applying Bank procedures in a flexible manner to ensure the expeditious implementation o f recovery and development programs.

38

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m .

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ciil

Annex 3: Country at a Glance

Sudan a t a glance 9/25/07

Key Development Indicators

(2006)

Population. mid-year (miiiions) Surface area (thousand sq km) Population growth (%) Urban population (% of total population)

GNI (Atlas method, US$ billions) GNi per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recent esf/mate, 200&2006)

Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (% of ages 15 and older) Adult literacy, female ( % of ages 15 and older) Grass primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Sudan

36 2

2 5 41

30 5 840

2,160

11 8 9 1

59 64 41

71 52 66 56

69

Sub- Saharan

Africa

770 24,265

2.3 36

648 842

2,032

5.6 3.2

41 72 47 96 29

69 50 96 86

56 37

LOW income

2,403 29,215

1 6 30

1,562 650

2.698

8 0 6 1

59 75

72 50

f 06 96

75 38

Net Ald Flows

(US$ millions) Net ODA and ofricial aid Top 3 donors (in 2005):

United States United Kingdom Netherlands

A d (Oh of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Sermces

Household final consumption expenditure General go t t final consumption expenditure Gross capital formation

Exports of goods and sewces Imports of goods and serwces Gross sawngs

Manufacturing

1980

615

60 50 46

8 2 32

25 5 22 0

0 1

19 4 7,617

32 9 14 1 7 5

81 9 16 0 14 7

10 6 23 1 4 0

1990 2000

813 220

143 5 37 6 62 15

3.7 1.9 33 7

69 0 8 0 3 0 9 4

0 4 257 1 135 100

24.9 31.1 24.000 12,365

(36 of GDP) 32.8 41.7 16.3 21.5 8.8 8.6

36.6

86.1 76.5 7.4 7.6 7.4 18.3

4.6 15.3 5 6 17.7 0.9 12.9

2006

1,629

771 196 155

6.9 52

8.0 6.9

217.2 90

36.2 37,442

32.3 26.5

6 2 39.2

69.7 16.3 24.6

16.1 28.7 11.6

Age distribution, 2006

Male Female

751

6 0 4 4

45-49

30 34

15 19

0 4

0 i o 20 20 i o percent

Under-6 mortality rat& (per 1,000) 1

1 1990 1996 2000 2005 1 I? Sudan Q Sub-Saharan Africa

I IGrowth of GDP and GDP percaplta (Oh)

95 00 I -GDP -GDP oercaolia

1980-90 1990-2000 2000-06 (average annual growth %)

2.5 2.2 2.5 93.3 4.9 7.4

2 3 1 7 1 7 14 2 5 9 1 8 4 3 8 0

17 7 73 4 4 5 13 8 72 7 26 6 - 1 9 66 5 13 8

7 6 84 8 11 7 3 2 83 7 15 0

Note Figures In italics are for years other than those specified 2006 data are preliminary a Aid data are for 2005

Development Economics, Development Data Group (DECDG)

indicates data are not available

Note: data presented m this standard table may differ from data cited In elsewhere in the ISN due to differences in the definition of indicators used.

49

Sudan

Balance of Paymen ts and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cifl Net trade in goods and sewces

2000

1,664 1,634 -297

-1,840 -14.9

641

84

2006

5,813 7,105

-3,981

-5,490 -14.7

1,016

1,384

Governance indicators, 2000 and 2006

Voice and accountability 1

Political stability Current account balance

as a Oh of GDP $

, Rule of law Workers' remittances and

compensation of employees (receipts)

Resews, including gold

Central Governmen t F inance

(% of GDPj Current revenue (including grants)

Current expenditure

Overall surplus/deficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

Ex te rna l D e b t a n d Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

0 2006 a2000

Country's percentile rank (0-100) hlphsr Y ~ I Y I S lmpiy be#errabngs

10.3 19.4 5.0 6.3 8.7 19.5

-0.7 -3.9 Techno logy and I n f r a s t r u c t u r e

Paved roads (Oh of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

E n v i r o n m e n t

2000

36 3

3.6

56

124 4

0.17

3.6

419

2005

0.0

57

828

0 26

3 5

497

16,411 17,447 Agricultural land (% of land area) 239 369 Forest area (%of land area)

- - Nationally protected areas (% of land area)

132.7 46.6 Freshwater resources per capita (cu. meters) 12.6 6.4 Freshwater withdrawal (96 of internal resources)

392 0 CO2 emissions per capita (mt) 0 0

GDP per unit of energy use (2000 PPP 5 per kg of oil equivalent)

Energy use per capita (kg of oil equivalent) Composition of total external debt, 2005

IQA 1 2 3 4

ShoTt-lerm 6 225

PIIYP~. 2 689

US0 millions

IUS$ m/llionsj

iBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt sewce

iFC (fiscal year) Total disbursed and outstanding portfolio

Disbursements for iFC own account Portfolio sales, prepayments and

repayments for IFC own account

of which iFC own account

MiGA Gross exposure

1 0 0 0 2 0 1 0

1,167 1,196 0 0 4 45 P r i va te Sec to r D e v e l o p m e n t 2000 2006

Time required to start a business (days) - 39

Time required to register property (days) - 9 Cost to start a business (% of GNI per capita) - 58.6

Ranked as a major constraint to business (Oh of managers surveyed who agreed)

n.a. ma.

4 0 0 0 0 0

0 1

Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

Note: Figures in italics are for years other than those specified. 2006 data are preliminary .. indicates data are not available. -indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

9/25/07

Note: data presented in this standard table may differ from data cited in elsewhere in the ISN due to differences in the definition of indicators used.

50

Sudan Millennium Development Goals

W~th selected targets to achieve between 7990 and 2015 (estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for S I a day poverty and malnutrltlon 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5) 33.9 11.0

Goal 2: ensure that chlldren are able to complete primary schooling Primary school enrollment (net, %) 53’ Primarycompietion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacyrate (% of people ages 15-24)

30 39 50 41 21 26 34

Goal 3: ellmlnate gender dlsparlty In educatlon and empower women Ratio of girls to boys in primary and secondary education (%) 932 Women employed In the nonagricultural sector (% of nonagricultural employment) Proportion of seats held bywomen in national parliament (%)

Goal 4: reduce under-5 mortality by two-thlrds Under-5 mortality rate (per 1,000) 120 106 97 104 Infant mortality rate (per 1,000 live births) 74 69 65 Measles immunization (proportion of one-year olds immunized, %) 65

Goal 5: reduce maternal mortallty by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total) 56.g3

Goal 6 : halt and begln to reverse the spread of HIV/AIDS and other major dlseases Prevalence of HIV (% of population ages 15-49) 1.6 Contraceptive prevalence (% of women ages 15-49) Incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOTS (%)

7.63

Goal 7: halve the proportlon of people without sustainable access to bask needs Access to an improved water source (% of population) 67 75 5g3 Access to improved sanitation facilities (% of population) Forest area (% of total land area) Nationally protected areas (% of total land area) C02 emissions (metric tons per capita) GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent)

31.23

0.2 0.1 0.2 0.3 2.7 3.1 3.6 3.5

Goal 8: develop a global partnership for development Fixed line and mobile ohone subscribers (Der 1.000 oeoole) . I ,

Internet users (per I.OOO people) Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24)

0 0 1 77

iducatlon indicators (%)

2000 2002 2005

&Primary net enmiiment ratio (. )

--Ratio of girls to boys in primary L secondary education (..)

(Measles lmmunlzatlon (%of I-yearolds)

1990 1995 2000 2005

0 Sudan ( ) 0 Sub-Saharan Afnca

CT lndlcators (per 1,000 people)

90 80 70 60 50 40 30 20 10 0

2000 2002 2005

o Fixed + mobile subscribers (. ) Internet users

Note: Figures In italics are for years other than those specified. .. indicates data are not available Development Economics, Development Data Group (DECDG). Note: 1/ Net primary school attendance rate from 2005 Sudan Household Health Survey

2/ Ratio of girls to boys in primary education only, SHHS Survey 3/ Indicators taken from Sudan Household Health Survey

11/9/07

51

Annex 4: Signed MDTF Projects

MDTF National

Technical Assistance Facility ($5 million MDTF): A technical assistance facility to support studies, training and advisory assistance for the post-conflict development program o f Sudan’s GoNU. The project aims at supporting the G o N U and state governments to strengthen their professional and technical capacities for formulation o f pro-poor and pro-peace policies, programs and projects. Effective.

Community Development Fund - Phase 1($42.8 million MDTF), including a scale up of $27.8m: The project supports community-led development in Northern Sudan (the first phase covers localities in the Three Areas- South Kordofan and Blue N i l e - and Nor th Kordofan and Kassala) through partnerships among local stakeholder, including local communities, NGOs and community- based organizations, on the basis o f sub-projects submitted by local communities and developed through a consultative, participatory planning process. The project’s objective i s to meet urgent community-driven recovery and development needs in the war-affected and underdeveloped areas o f Northern Sudan including the Three Areas by providing basic social and economic services and infrastructure. Effective.

Fifth Population Census Project ($19.1 million MDTF): Phase I1 for $12 mi l l ion was approved in August 2007 and fully disbursed. The main objective o f this project i s to support and facilitate the conduct o f the Fifth Population Census in accordance with international scientific standards in order to produce credible and accurate results. These results will be used for realizing the political, economic, social and environmental objectives enshrined in the I N C and CPA. A related objective i s to produce reliable and accurate demographic, economic and social data that can be used as a benchmark for development planning. This project will enable the primary target groups- the government, the international development community and the c iv i l society to have accurate and reliable data to formulate and monitor their plans. Effective.

Capacity Building of the Judiciary ($13 million MDTF): This Project’s main goal i s to strengthen the capacity o f the Judiciary to: enhance i t s independence; build the knowledge base o f judges; and, empower the judiciary to effectively and fairly apply the law and deliver justice. Effective.

Sudan National Emergency Transport Project ($43.5 million MDTF): The main aim o f the project i s to rehabilitate critical ra i l and river transport infrastructure in war-affected areas, including the Three Areas, on an emergency basis. In addition, the project wil l help to improve operational capability o f National Highway Authority, Sudan Railway Corporation and other transport agencies and remove supply constraints and transport capacity limitations in key traffic demand corridors. Effective

Decentralized Health System Development Project - Phase I ($6 million MDTF): The Project Development Objective i s to improve access to basic health services by conflict-affected and underserved populations in four target states while establishing the basis for reform, sustainable financing, and development o f the decentralized health system. Along with some activities at the level o f the Federal Ministry o f Health, the project targets the conflict-affected and poor states o f Southern Kordofan, Blue N i le , Kassala, and Red Sea, covering a population o f approximately 5.1 million. The target states include the Three Areas. Effective.

52

Sudan New Unified National Currency Project ($25 million MDTF): The main development objective o f the project i s to support the Central Bank o f Sudan to effectively, efficiently and transparently introduce a new national unifying currency into the country. The new currency will improve the formulation and implementation o f national monetary policy; restore normal local currency, economic and commercial activity by reducing transaction costs, and serve as a symbol for peace and unity by enhancing national economic integration and development -thus helping to maintain the integrity o f the CPA. Activities are complete and the currency i s in circulation, but some payments remain to be made. Effective

Sudan Microfinance Project ($10 million MDTF): The development objective i s to increase the availability o f affordable financial services to 200,000 households by supporting the establishment of commercially sustainable microfinance service providers. Effectiveness conditions being fulfilled.

South Kordofan Emergency Project ($7.9 million MDTF): The project has two key objectives: to contribute on the one hand to the supply o f basic services and facilities to the respective conflict- affected populations; and to contribute to capacity building o f the state government to enable it to more effectively execute i t s mandate, especially at the local (decentralized) level. The project i s supported by three grant agreements with the GoNU, UNICEF and UNIDO. Effective.

Improving Livestock Production and Marketing Project- Pilot ($4 million MDTF): The Project wi l l support the development o f livestock production and marketing in two poor and conflict ridden areas o f central and eastern Sudan. Improving livelihoods dependant on livestock i s a means to ensure peace dividends, mitigate natural resource-based conflict and improve food security. Effective.

Blue Nile Emergency Project ($7.3 million MDTF): The project initiates recovery o f basic infrastructure and social services for poor people in the conflict-affected area o f the Blue N i l e State and to lay the foundations for a program addressing capacity building needs in key state ministries in order to ensure future improvements in service delivery especially at the local level. The project i s also supported by 3 grant agreements with the GoNU, UNICEF and UNIDO. Grant with GoNU i s already signed for $1 . lm but not yet effective. Grants for UNICEF and UNIDO are Effective.

MDTF- South Sudan

Rapid Impact Emergency Project ($34.3 million MDTF, including supplemental financing of $8.8 million for Public Works and $5.5 million for the support to GoSS Commissions): The project addresses immediate needs, and has provided pharmaceuticals, vaccines, medical supplies to 700 health facilities throughout the ten states o f Southern Sudan. The grant delivered 20,000 educations kits, and 1 mi l l ion textbooks and 40,000 school kits for 2,600 primary schools. Support to the states was provided through vehicles, motorcycles, generators and office furniture. Prefabricated office structures, with generators for electricity, have been provided for key GoSS operations. Supplemental grants for $8.7 mi l l ion to support public works in the state capitals and $5.5million to support the GoSS Commissions and independent agencies were also approved. Effective.

Sudan Emergency Transport and Infrastructure Project ($50 million MDTF, of which $30 million WFP contract): This project covers the renovation o f key GoSS government buildings and the hospital in Juba and the Juba water supply system. The project includes emergency improvements for about 260 km o f tracks and seasonal roads to provide good access, maintenance o f 580 km o f already improved roads, upgrading o f 160 km o f roads to a l l weather standards, and design o f 45 1 km o f roads for improvements to paved standards. A feeder roads program for implementation in phase 2 i s to be also prepared. Effective.

53

Health Umbrella Project ($20 million MDTF): This project provides 750,000 mosquito nets, plus drugs and health equipment for treating the ailments that represent the heaviest burden on the population. The project will support contracting o f NGOs and f i r m s to deliver basic health services to a large share o f the population. The project provides technical assistance to the newly established Health Ministry to develop core capacities in managing public health programs. Effective.

Multi Donor Education Rehabilitation Project ($25.5 million): An additional grant amount o f $17.8m was added in November 2007 to meet the growing needs o f this project in Southern Sudan. This project i s designed to improve access to primary education and create learning opportunities for other groups critical to Sudan’s return to normalcy. These include internally displaced people and demobilized soldiers. The project provides for capacity building o f the Ministry (MoEST), procurement o f textbooks, and enrollment o f non-formal learners in alternate learning programs. There are also steps to accelerate teacher training, and to support the rehabilitation and construction o f new schools. Effective.

Core Fiduciary Project ($5.6 million MDTF): The project i s helping to establish minimal fiduciary systems to provide reasonable assurance to the GoSS and the MDTF regarding the use o f funds. I t supports the recruitment o f a Project Accounting Agent for providing accounting services and the recruitment o f an External Audit Agent for providing auditing services. An additional $2.6m was added to the original grant amount o f $3m as the cost o f the Accounting and External Audit Agents was higher than anticipated. Effective.

Fifth Population Census Project ($15.3 million MDTF): Phase I1 for $10 mi l l ion was approved in August 2007 and fully disbursed. The main objective o f this project i s t o support and facilitate the conduct o f the Fifth Population Census in accordance with international scientific standards in order to produce credible and accurate results. These results wi l l be used for realizing the political, economic, social and environmental objectives enshrined in the I N C and CPA. A related objective i s to produce reliable and accurate demographic, economic and social data that can be used as a benchmark for development planning. This project will enable the primary target groups- the government, the international development community and the community providing humanitarian assistance to have accurate and reliable data to formulate and monitor their plans. The delivery o f many government services rely on this population census, designed to produce reliable demographic, economic and social data. Effective.

Rural Water Supply and Sanitation Project ($15 million MDTF): The project i s designed to increase access to safe water and sanitation facilities in a l l states throughout Southern Sudan and to build capacity for sustainable management, regulation and expansion o f the rural water and sanitation sector. At the end o f the project it i s expected that an additional 1.8 mi l l ion people in rural areas w i l l have access to clean water and sensitized on key hygiene messages and support for hygienic behavior change; 225 schools and health units equipped with appropriate sanitation facilities; 80 sustainable public latrines shall be constructed in small market centers, bus stops and other public places. Effective.

Capacity Building, Institutional and Human Resource Development in Southern Sudan ($8.2 million MDTF): The project objectives are to provide the foundation for effective, efficient and transparent functioning o f the Government o f Southern Sudan and to increase access to labor market, welfare and vocational training services. These objectives wi l l be achieved through (i) the development andor strengthening o f institutions and systems; (ii) refurbishing offices and facilities or investing in new infrastructure where required; and (iii) training. Effective.

54

Livestock and Fisheries Development Project ($7.7 million MDTF): project i s to improve the performance o f the livestock and fisheries sectors in five selected States o f Southern Sudan through capacity building, improving animal health, reducing post-harvest losses and improving market infrastructure. Effective.

The objective o f this

Police and Prisons Support Project ($5.3 million MDTF): The project i s designed to provide to the Government o f Southern Sudan the necessary capital investment in police and prison infrastructure and equipment and to contribute to the institutional development o f the police and prisons, and to the training o f police and prisons staff. The project will be implemented by UNDP. The role o f the World Bank wil l be that o f a fiscal agent. Effective.

Sudan New Unified National Currency Project ($15 million MDTF): The main development objective o f the project i s to support the Central Bank o f Sudan and the Bank o f Southern Sudan to effectively, efficiently and transparently introduce a new national unifying currency into the country. The new currency wil l improve the formulation and implementation o f national monetary policy; restore normal local currency, economic and commercial activity by reducing transaction costs, and serve as a symbol for peace and unity by enhancing national economic integration and development - thus helping to maintain the integrity o f the CPA. . Activities are complete and the currency i s in circulation, but some payments remain to be made. Effective.

Southern Sudan Private Sector Development ($6.8 million MDTF): The development objective o f the PSD project i s t o develop the enabling environment for private sector growth in Southern Sudan, and to sustainably increase formal employment in Southern Sudan. The project focuses on building capacity among Southern Sudanese policy makers and the private sector to develop the policy and institutional framework for trade and investment through open consultation, provides policy, technical and financial support for the establishment o f the microfinance sector in Southern Sudan, supports the emergence o f industries, private sector institutions and finally establishes a wholesale market in order to create efficient f low o f products into rapidly-growing Juba, as wel l as backward linkages into the rural economy, while demonstrating a public-private partnership model for market infrastructure. Effective.

Southern Sudan Support to Agriculture and Forestry ($10 million MDTF): The Project supports the recovery o f the agriculture and forestry sub-sectors by facilitating group-based rapid introduction o f improved technologies (seeds, planting materials, tools, etc.), and help build functional capacity in the Ministry o f Agriculture and Forestry (MAF) and in States, which are not supported by other concurrent donor financing. The Project would strengthen linkages between the Central Government, State governments, and Local Governments, and involve both NGO’s and private sector service providers to facilitate implementation. Grant Agreement signed but not yet Effective

Southern Sudan HIV/ A I D S Project ($16 million): The purpose o f this multisectoral project i s to strengthen a coordinated national response to HIV/AIDS by building capacity at the GoSS, State and County levels o f Southern Sudan, and scale up delivery o f comprehensive H IV /A IDS services. The Project will support integration o f HIV/AIDS into critical GoSS sectors. Key project components include capacity building o f the SSAC at a l l levels; strengthening the line ministries’ and institutions’ response; strengthening c iv i l society response; and strengthening the health sector response to HIV/AIDS. Grant signed but not yet effective.

55

Annex 5: MDTF-National Sudan Portfolio (US$ millions, as of February 25, 2008)

15.0 CDF-I (Community Develop men t Fund) 11.2 10.0 0111 612006 04/26/2006 12/31/2008

Subtotal of effective projects 171.9 72.35 349.6

PSD (Rural microfinance - small enterprises) Blue Nile:

10.0 10.0 05/22/2007 Not effective 06/30/2011

State 1 .I 8.0 12/03/2007 Not effective 09/30/2009

Total 183.0 72.35 367.6 1

56

Annex 6: MDTF-Southern Sudan Portfolio (US$ millions, as of February 25, 2008)

RlEP Supplemental for Public Works 8.8 3.2 12l22l2QQ6 Q3I26l2QQ7 31 lQ3l2QQ8 8.8

20.0

7.7

17.8

15.0

8.2

Umbrella Program for Health System Education Rehabilitation Project Education Rehabilitation Project - Supplemental Rural Water Supply and Sanitation Project Cap. Bldg., Institutional & Human Res Development

I Total I 234.7 I 112.9 I 246.6 I I I I

9.01 60.0 Q3I23l2QQ6 Q7/28/2QQ6 Q6I3Ql2QQ9

3.0 15.4 Q3I3Ql2QQ6 Q7I27l2QQ6 Q9l3Ql2QQ9

5.0 1 1 lQ212QQ7 1 11Q2l2QQ7 Q9l3Ql2QQ9

1.5 15 IQ127l2QQ6 Q2I2Ql2QQ7 12/31 I201 Q

2.3 4.4 12/22/2QQ6 0211 412007 12/31 12009

57

Annex 7: MDTF Sources and Uses of Funds (As of February 25, 2008)

National Sudan MDTF: Sources and Uses of Funds (in $000)

Source of Funds A. Net Donor Contribution: 1, Donor contribution received 2. Investment Income 3. IDA overhead (0.4%) Uses of Funds B. Commitments: 1. Grant Agreement Signed 2, Program Administration* 3. Monitoring Agent contract

C. Net Commitment Authority Available (A-B)

220,899.5 208,084.5

13,593.1 (778.4)

192,573.2 183,039.0

7,000.0 2,534.2

28,326.3

Source of Funds A. Net Donor Contribution: 1. Donor contribution received 2. Investment Income 3. IDA overhead (0.4%) Uses of Funds B. Commitments: 1. Grant Agreements Signed 2. Program Administration* 3. Monitoring Agent contract

1 C. Net Commitment Authority Available (A-8)

398,834.6 376,621.6 23,617.6 (1,404.6)

247,875.8 234,635.5

10,000.0 3,240.3

150,958.8

"Program Administration cost is the cumulative approved budget for the cost of running the Technical Secretariat plus the project processing costs.

58

Annex 8: Summary of Non-Lending Support (As of March IO, 2008)

Product

Recent deliveries Joint Assessment (JAM) Basic Education in the North Anti-Money Laundering Assessment FSAP Decentralized Service Delivery Darfur Peace Agreement TA Education TA **Policy Note on Gum Arabic PSL4 **Policy Note on Livestock PSD TA Sudan Telecom TA Background Papers on Darfur Public Expenditure Review **South Kordofan Growth & Institutions

Underway Investment Climate Assessment Darfur JAM Diagnostic Trade Integration Study Country Integrated Fiduciary Assmt Licus Assistance and Cap. Blg Private Sector Development Health Financing Gezira TA Public Expenditure Review Phase I1 Natural ResourcesBnvironment Study Country Economic Memorandum (CEM) Southern Sudan State Effectiveness Study

PlannedE'roposed Southern Sudan Capacity Building Study

Cost ('US$OOO) * Audiencea Delively to Client (Fr)

05 05 05 05 05 06 06 07 07 07 07 07 07 07 08

08 08 08 08 08 08 08 09 09 09 09 09

1,966 139 71

243 12 55 101 -- 42 _-

24 1 69 --

5 00 47

75

190 170

78 55 46 40 10 52 95

--

--

Objectiveb

a. b.

* ** Funded by MDTF-N

Government (G), Donor (D),Bank (B), Public dissemination (P). (A) Knowledge generation, (B) public debate, (C) problem-solving, (D) donor coordination, (E) country strategy.

Cost to date for activities s t i l l underway.

59