Project Information Document (Pid) s25

PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB3702 Project Name Urban Local Govt Development Project Region AFRICA Sector Sub-national government administration (100%) Project ID P101474 Borrower(s) GOVERNMENT OF ETHIOPIA Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 2, 2008 Date of Appraisal March 11, 2008 Authorization Date of Board Approval May 29, 2008

1. Country and Sector Background

1. The development challenges facing Ethiopia are numerous. High population growth, low productivity and structural bottlenecks, together with dependence on unreliable rainfall combine to pose significant developmental difficulties. The different mechanisms hindering Ethiopia’s progress interact with each other and constitute “poverty traps” that prevent the country from breaking out of a situation of low income levels combined with low productivity and growth. This makes it essential to mount a major effort to accelerate growth – which forms the main thrust of the Federal Government of Ethiopia’s (GOE) Plan for Accelerated and Sustained Development to End Poverty (PASDEP).

2. There has been encouraging progress in recent years in improving some basic aspects of life in Ethiopia. Since 1996 (EC 1988) the literacy rate has increased by 50%, the rate of malnutrition has fallen by 20%, the share of the population with access to clean water has risen to 38% and there has been a steady decline in the reported incidence of illness1. National GDP growth rates have been consistently good since 2003/04 (EFY 1996). Nonetheless, human development indicators in Ethiopia remain at low levels compared to most of the rest of the world. Despite significant improvements during the past 10 years, the level of infrastructure coverage remains very low.

3. While one would expect human development indicators and infrastructure coverage to be better in urban areas than in rural areas, Ethiopia’s urban areas are marked by high and growing levels of poverty and relatively poor access to basic services. Urban poverty is more prevalent than rural poverty (46% vs 30%) and during a period when rural poverty was declining (1995- 1999), urban poverty was actually increasing at 4%. The urban unemployment rate is high at 20.6 percent (2005) compared to the rural unemployment rate which was substantially lower at 2.6 percent.2 The level of infrastructure and services across urban centers in Ethiopia is

1 Ministry of Finance and Economic Development. September 2006. Ethiopia: Building on Progress: A Plan for Accelerated and Sustained Development to End Poverty (PASDEP) (2005/06-2009/10). Volume 1 Main Text. And Volume 2, Policy Matrix. Addis Ababa. 2 World Bank, AFTU1, Draft June 2007. The Challenge of Urbanization in Ethiopia: Implications for Growth and poverty Alleviation generally inadequate. Even in Addis Ababa, arguably the most well endowed city, 45% of households have no access to piped water supply; 40% have no access to toilets; 35% of houses are not connected to a road network; and 67% of houses have no connection to any drainage facility. The situation is worse in most other towns. There has been little investment in urban infrastructure in the last 10 years as public funds have mostly been used to finance recurrent costs.

4. The situation in urban areas is likely to get worse as the urban population is increasing rapidly, with an average growth rate of 4 percent per annum since the early 1990s. With an estimated 16% of the population living in urban areas currently (approximately 13 million people), the urbanization level is expected to exceed 30% of the total before 2020, according to UN projections. In contrast, the rural population growth rate is currently half that of the urban growth rate (2.2%) and is projected to decrease.3 The new national census, conducted in May 2007, is expected to result in higher urban population figures and growth rates.

5. Even though Ethiopia is currently one of the least urbanized countries in the world, the urban economy is emerging as a major driver of growth. The contribution of urban development as a share of national GDP (approximated as the share of industry and services in GDP, since these are generally located in urban areas) has been increasing over the last decade--by 2005/06, urban areas contributed more than rural areas to total GDP (53%). More importantly, macroeconomic data show that 60% of the growth in GDP in recent years can be attributed to the urban economy4. During this period, urban growth was found to be three times more stable than the relatively volatile rural economy. While such contributions may still seem low compared to other sub-Saharan African countries5, they nevertheless represent a significant increase over the previous decade. The development of a system that balances rural and urban development offers the opportunity to increase market integration by facilitating exchange and division of labor, as well as allowing diversification in the non-agricultural sector. Further, cities offer the opportunity to deliver services more cheaply and can act as centers of growth, thereby playing an important role in poverty reduction.

Government Programs

6. The government approved a national Urban Development Policy in March 2005 (EC Megabit 1997). This policy was incorporated in the government’s current poverty reduction strategy (PASDEP 2005/06 - 2009/10), and it is expected that the main objective of the Urban Development Policy will be achieved during the PASDEP period, namely “That Ethiopia’s cities provide efficient and effective public services to residents, complement and facilitate rural development, are models of participatory democracy and build accelerated economic opportunities that create jobs”.

7. The Ministry of Works and Urban Development (MWUD) was created in October 2005 (EC Meskerem 1998) to implement government’s Urban Development Policy. Under MWUD’s 3 United Nations, 2004. World Urbanization Prospects, The 2003 Revision, Population Division of the Department of Economic and Social Affairs 4 World Bank, Draft June 2007. The Challenge of Urbanization in Ethiopia: Implications for Growth and poverty Alleviation, AFTU1. 5 In sub-Saharan African, an average of 79 percent of GDP growth was explained by industry and services for the period 1990-2003 was (Kessides 2005) leadership, a PASDEP Urban Strategy was developed and the Urban Development and the Urban Good Governance Programs were launched in 2006/2007. The Urban Development Program (UDP) contains those government initiatives that will support the delivery of urban based public services – infrastructure, municipal services, jobs, housing, etc. The Urban Good Governance Program (UGGP) contains government initiatives that will promote institutional and organizational aspects of good governance that can be described in terms of efficiency, effectiveness, accountability, transparency, participation, sustainability, the rule of law, equity, democratic government and security. Together these two programs, which involve substantial public and private investment, form an integrated and complementary set of initiatives that comprise the government’s “urban agenda” for the implementation of the urban component of PASDEP.

Institutional Framework for Urban Local Governments

8. Under the highly centralized Derg regime (1975 to 1991), Ethiopia’s municipalities were marginalized and did not function as independent local authorities. After the fall of the Derg, GOE adopted decentralization as the cornerstone for building a multi-ethnic democratic country. Since 2000, proclamations to establish city governments have formed part of a large scale reform of government resulting in the creation of institutional and legal frameworks for urban local governments. Combined with a commitment to fiscal decentralization, these signify the intention to give local governments more direct and transparent control over public spending. The objective has been to create and strengthen urban local governments that will ensure public participation and democratization, and enhance decentralized service delivery.

9. Under the decentralized system, Addis Ababa and Dire Dawa are federal Chartered Cities with the status of regions (whose City Councils report directly to the federal government). Addis Ababa is the primate city with a population of over 3 million (about 25% of the country’s urban population) and is ten times larger than Dire Dawa, the second largest city. All nine Regional States have adopted “City” Proclamations creating urban local governments which have the authority and mandate to raise revenues, deliver services and be accountable to their own councils (which report to the regional government). These urban local governments (ULGs) have a governance model that includes an elected council, an elected mayor, a Mayor’s Committee and city manager system.6 About 84 cities have been granted this status, although this number increases regularly as more urban local governments are brought under the proclamations. Addis Ababa, Dire Dawa and the ULGs in Ethiopia comprise more than 60% of the total urban population. In addition, there are over 800 settlements classified as urban. These settlements have populations of less than 20,000 (about 500 have populations of less than 5,000). They are not autonomous and report to woreda (rural district) councils. In most regions, the Bureaus of Works and Urban Development are responsible for urban management and development issues within the regional government, supported by Regional Urban Planning Institutes (RUPIs).

10. Under the relatively new decentralization structure, urban local governments in Ethiopia have been assigned dual responsibilities—provision of “state services” such as education, health, justice and security; and provision of “municipal services” such as urban roads, drainage, solid waste collection and sanitation. State functions are financed from regional to local block grant 6 In practice, a large number of urban local governments do not currently have elected councils or elected mayors. transfers, which are often barely enough to cover the recurrent needs in these sectors. All municipal functions are expected to be funded from own local revenues—for both recurrent and capital expenditures. The intergovernmental fiscal framework of GOE does not currently include any form of fiscal transfers for funding municipal services. Urban local governments sometimes receive financial assistance from specific donor/NGO projects, through federal grants such as the Road Fund and the Food Security Program, and selected cash transfers and asset transfers from the region. However, these funds flows are highly unpredictable, and often arbitrary.

Key Challenges to Urban Development

11. A large amount of analytical work has been carried out on the urban sector between 2001- 2007, partly by the government through a Bank-financed project (Capacity Building for Decentralized Service Delivery or CBDSD) and through the Bank’s Economic and Sector Work (The Challenge of Urbanization in Ethiopia: Implications for Growth and poverty Alleviation, Draft June 2007). These studies have highlighted the following challenges: (i) land markets are not functioning effectively; (ii) infrastructure is not managed efficiently and coverage is far from meeting the needs of households and businesses; (iii) there is a massive shortage of housing, and affordability is a key issue, particularly for the poor; (iv) top-down planning practices are leading to inefficient outcomes; (v) there is inadequate management of municipal finances; and (vi) urban management and governance practices need to be improved.

12. The CBDSD studies were completed as part of technical assistance support provided to a set of 18 cities across the four major regions and Dire Dawa and Harar. Based on direct contact with cities and on-the-ground analysis, these studies focused on practical recommendations for institutional and systems reforms and implementation plans. These recommendations were reviewed at the city, regional and federal levels, and contributed to the design of the government’s Urban Good Governance Program (UGGP). Within the framework of its broader objectives (as summarized above in para 7), the UGGP aims in particular to (i) establish improved financial management systems in city administrations and enhance their financial capacity; (ii) improve the organizational structure and systems of city administrations for infrastructure and service delivery; (iii) develop and implement transparent, efficient and effective systems of land development and land administration; (iv) provide an enabling and effective institutional and organizational framework for spatial and development planning; (v) establish participative democracy for public empowerment and to ensure residents benefit from urban development; and (vi) improve the urban justice system and the rule of law at the city level. Concurrently, the Urban Development Program (UDP), within its general objective of promoting the development of urban infrastructure (see para 7), is focusing its resources on a large-scale Integrated Housing Development Program and a program to promote Micro and Small Enterprises.

13. This leaves two key challenges identified through the studies that need to be scaled up:

(a) Acceleration of the growing contribution of urban areas to economic growth requires a heightened focus on improving the overall performance of urban local governments to enable them to more effectively address both the serious shortfall of infrastructure assets necessary to support sustainable growth, and the high levels of urban poverty characterized by inadequate basic services.

(b) Improvement in the overall performance of the urban local governments, and building on the capacity enhancement initiatives under the CBDSD and PSCAP, requires a system of predictable resource flows, both from transfers and from locally generated revenues, that will foster more effective and accountable planning, implementation, and operations and maintenance of urban services.

14. The proposed project aims to address these two specific challenges. As outlined above, this focus is fully aligned with the government’s strategies and programs and will complement the existing programs which are already being financed through MWUD.

2. Objectives

15. The project’s development objective is to support improved performance in the planning, delivery and sustained provision of priority municipal services and infrastructure, thereby contributing to the government’s Urban Development and Urban Good Governance Programs.

16. The expected outcomes of the project are that participating cities will plan for investments using more inclusive participatory approaches and be more accountable to citizens; that cities will improve service and infrastructure delivery and management; and that they will manage their financial resources better, both in terms of accounting and reporting, as well as in terms of revenue mobilization. The following monitoring indicators will be used for the participating cities: (i) the percentage of people reporting that service delivery has improved according to their priorities; (ii) the number of marginalized groups represented in the capital investment planning process; (iii) the number of cities disseminating information on plans, budgets, expenditures & physical progress of investments to the public; (iv) the number of cities with clean audits; (v) the percentage increase in local revenues and/or the percentage achievement of revenue targets in city revenue enhancement plans; and (vi) the percentage increase in municipal assets in good condition (to capture new assets) and the percentage of municipal assets whose condition has improved (to capture improved operations and maintenance). The indicators and targets to be achieved will be discussed further during appraisal. The possibility of including indicator(s) to measure the cost-effectiveness and outcomes of specific investments will also be discussed during appraisal. Please see Annex 3 for details.

17. The project will contribute to GOE’s policies, goals and programs for achieving the Millennium Development Goals (MDGs) and PASDEP targets.

(a) Improved management of urban centers and improved performance in sustained provision of services and infrastructure are expected to promote local economic development, improve the investment climate, reduce unemployment and contribute to economic growth and poverty alleviation.

(b) Implementation of the Urban Good Governance Program is expected to lead to improved management of cities, participation of citizens in, particularly, the investment planning process, and improved downward accountability. ULGDP will enhance Ethiopia’s commitment to decentralization as this approach will bring decision making closer to local levels and to citizens.

(c) Improvements in municipal performance in providing sustainable, priority services and infrastructure are expected to improve the environmental conditions in cities, and lead to better health outcomes.

3. Rationale for Bank Involvement

18. In the early 2000s, GOE started a program of reform for local governments by introducing formal urban local governments through various regional proclamations. The World Bank contributed to the early stages of establishing these urban local governments through the CBDSD project, which focused on enabling regions and cities to establish the necessary legislative and fiscal financial frameworks, as well as providing a range of training and other technical assistance activities to establish cities as viable entities that are able to fulfill their mandates. CBDSD activities addressed 18 cities—the regional capitals and three of the largest cities in each of the four major regions7, plus Dire Dawa and Harar. Specific assistance was also provided to Addis Ababa. The capacity building efforts of CBDSD have had a significant impact on the targeted cities, with most cities at different stages of implementing the recommendations and action plans produced. CBDSD started in 2002 and is currently in its last year of implementation (see Annex 1 for further details).

19. In 2004, CBDSD was scaled up under a broader Public Sector Capacity Building Program (PSCAP). PSCAP established a transparent, predictable funding mechanism to finance capacity building efforts in seven key program areas, one of which is Urban Management. PSCAP is designed to respond to the demands of regions and cities. Cities, through their regional Bureaus of Capacity Building, are expected to prepare capacity building proposals based on their needs and to obtain the regional allocation of funds set aside for urban management activities.

20. The proposed project aims to build on and consolidate the Bank’s previous support for urban development. While a lot of progress has been made through the capacity building efforts under CBDSD and PSCAP, it is known that for capacity building to "take hold" it must be done in the context of real performance improvements with real outputs. Now that the legal and institutional systems and structures are in place (or in the process of being implemented), the provision of predictable resource flows tied to improved performance in the delivery and operation of services is the anticipated next phase in the Bank’s support for urban development. The proposed project will focus on the 19 cities that have been supported through CBDSD (including Addis Ababa).

21. The Bank has also been instrumental in working with GOE to establish an intergovernmental fiscal architecture as part of its decentralization strategy. The elements of this architecture which are already in place, all of which have been supported by the Bank, include the following:

7 Bahir Dar, Kombolcha, Gondar and Dessie in Amhara Region; Mekelle, Adigrat, Axum and Shire Endeselassie in Tigray Region; Adama, Bishoftu, Jimma and Shashemene in Oromia Region; and Awassa, Arbaminch, Wolayta Sodo and Dilla in SNNPR  The regional Block Grant. This provides support for recurrent expenditures at the local level from the federal treasury, and has been enhanced through the Protection of Basic Services (PBS) project. It is a formula-driven “equity” grant for rural woredas (districts).  The regional PSCAP Specific Purpose Grant. This provides programmatic support for capacity building in seven program areas based on demand. It is a formula driven but conditional grant (performance driven), and was initiated through the Bank’s PSCAP project which forms part of a multi-donor SWAP  The pilot Local Investment Grant. This provides support for capital investments in rural woredas, and is being initiated as a pilot with Bank-funding under the PBS project. If successful, it will be scaled up to become a programmatic, formula-driven conditional grant (performance based) to finance capital investments to all rural local governments in Ethiopia.

22. The only remaining piece of the fiscal decentralization architecture as originally conceived is a programmatic, formula-based, conditional performance grant that would support the country’s urban local governments’ ability to expand and sustain the full range of municipal infrastructure and services. This project aims to set up this grant mechanism as a Specific Purpose Grant for urban local governments that is incentive-driven and supports enhanced performance by urban local governments in implementing the government’s urban reform agenda. The Bank’s history in working with GOE to set up the fiscal architecture for decentralized local government provides a clear rationale for the Bank’s involvement in this project.

23. In addition to its historical involvement in urban development and the fiscal decentralization architecture, the Bank has been providing support for conditional grant transfers to local government through a number of projects in Africa (including Uganda, Tanzania, and Swaziland) as well as in other regions of the world. It therefore has a comparative advantage in supporting GOE’s efforts in this arena by bringing in the experiences and lessons learned from different countries.

24. The only other development partner providing significant support for urban development in Ethiopia currently is the German bi-lateral cooperation. GTZ and KfW have both been actively involved in capacity building and investment projects for urban development in Ethiopia. The Bank has been working closely with them in the past, and this project has been designed in close collaboration with them. GTZ support is a critical element of the implementation support that will be required for this project, and their next 3 years of support has been designed accordingly, while KfW is considering providing parallel financing for the project once it has been designed.

25. The Bank’s Country Assistance Strategy (CAS) for Ethiopia is being updated and will be presented to the Board later this fiscal year. The CAS will continue to consolidate support for PASDEP’s governance, growth and service delivery targets, and this project will form the core of these efforts at the level of urban local governments.

4. Description

26. The project comprises two components, namely Performance Grants and Implementation Support. The performance grant will be provided as a conditional Specific Purpose Grant (SPG). The project will support the establishment by GOE of a performance-based grant transfer mechanism—fully integrated within the intergovernmental fiscal framework—to Ethiopia’s urban local governments. The project will initially support 19 urban local governments8 (cities that have been supported through the capacity building efforts under CBDSD), which constitute x% of the total urban population (to be updated with most recent census results). If implemented well, it could be sustained through additional funds and expanded to other regions and cities. The planning and budgeting for ULGDP at federal, regional and ULG levels will be integrated into and aligned with the existing GOE Public Investment Program financial calendar and systems.

Component 1: Performance Grants (US$138.6 million, of which US$99 million from IDA)

27. Through this component, grants will be provided to eligible urban local governments (ULGs) to promote positive change in their overall institutional/organizational performance. The component aims to do this through access and performance criteria which are designed to: (i) provide incentives for urban local governments and regions to continue to implement the government’s proposed reforms under the Urban Good Governance Program, which are needed for sustainable urban services and growth; and (ii) enable ULGs, as a result of enhanced performance, to more effectively address urban infrastructure backlogs which have received little attention in the past.

28. The access criteria are aimed to provide assurances that: (a) funds will be managed adequately; and (b) investments undertaken by the cities respond to the priorities of citizens, can be implemented, will generate jobs and promote the local economy, and can be operated and maintained adequately (an Asset Management Planning Framework is currently being implemented in the ULGs through the Ministry’s Urban Good Governance Program which will assist in determining these factors). Funding envelopes for cities will be determined based on transparent formulae, and cities can access their envelope once they meet the access criteria. However, cities’ performance in the use of the funds and in the implementation of the reforms being promoted through the Urban Good Governance Program will be continually assessed. To encourage good performers, and to ensure that funds are not “locked” by poor performers, reallocations will be carried out annually. The criteria for assessing performance will be based on measures related to: (a) fund utilization; (b) financial performance; (c) procurement and safeguards compliance; and (d) performance on participation and accountability. See Annex 2 for details on access and performance criteria.

29. As part of the access criteria, ULGs will prepare a 3-year rolling capital investment plan. The capital investment plans are expected to contain the full range of services and infrastructure for which ULGs are legally responsible, including rehabilitation and new investments. As a federal Specific Purpose Grant, MWUD has established that the performance grant can be used to finance priority municipal services and infrastructure with a small negative list (see Annex 2 for details). The grant can be used to cover all capital costs of eligible investments, as well as costs for the design and supervision of civil works contracts and the preparation of related 8 These are the chartered cities of Addis Ababa and Dire Dawa; Bahir Dar, Kombolcha, Gondar and Dessie in Amhara Region; Mekelle, Adigrat, Axum and Shire Endeselassie in Tigray Region; Adama, Bishoftu, Jimma and Shashemene in Oromia Region; Awassa, Arbaminch, Wolayta Sodo and Dilla in SNNPR; and Harar in Harari Region. environmental impact assessments, environmental management plans, cultural resource management plans, and resettlement action plans.

30. Funding envelopes will be set at two levels, by the federal government for regional envelopes, and by the regions for city envelopes. It is proposed that initially, the entire Performance Grant amount of US$99 million from IDA will be allocated to each of the five participating regions and the two federal cities (Addis Ababa and Dire Dawa) based on: (a) A lump sum allocation of US$ 10 million to Addis Ababa, which, as the capital city and commercial centre of the country has greater access to additional sources of finance than other ULGs; (b) A lump sum amount of US$ 9.2 million to Dire Dawa - calculated to provide parity with the largest of the other 17 ULGs; (c) The population of the remaining participating ULGs aggregated to a regional population (as a percentage share of US$99m minus $19.2m—see Annex 2 for details). Separate allocations are determined for Addis Ababa and Dire Dawa given their populations, as providing funds to all 19 ULGs based purely on population would mean that Addis and Dire Dawa would get the bulk of the funds, with very little left to share between the other 17 ULGs.

31. It is expected that the Regional Authorities will provide indicative funding amounts for each participating ULG for the purpose of developing the first 3-year capital investment plans and identifying projects for investment in mid-March 2008. Regions will make allocations to ULGs by developing formulae taking into account the following criteria: (a) An initial allocation based on population using the same data source (Central Statistical Agency census data) as used in determining regional allocations; With adjustments to take account of: (b) regional priorities (c) contribution of the city to the regional economy. It is expected that the criteria or formula developed based on (a) above will, in the case of the adjustments described in (b) be a percentage increase in the allocation made which will result in a decrease in the allocation available to other ULGs. [to be discussed further during appraisal with a view to ensuring that the allocations are made as objective and transparent as possible]

32. While the federal government will be using the proceeds of this credit towards this component, regions will be expected to provide 20% as counterpart funds. In addition, cities are expected to contribute counterpart funding of 20%.

Component 2: Implementation Support (US$1 million from IDA + CBDSD + PSCAP + GTZ capacity building support )

33. It is expected that only a small amount of IDA funds from this project will be required for implementation support. This will involve primarily project management and monitoring costs including city performance assessments and evaluations; regional visits and workshops; consultancy services to support cities in the implementation of the Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) activities as required - including training, screening, and monitoring compliance with safeguards frameworks; a MOFED based expert responsible for financial disbursements and reporting; and support for preparation of mid-term and final evaluation reports (including the Implementation Completion Report).

34. The usual implementation support costs related to capacity building and training are being covered through a number of parallel capacity building activities that are already under way in regions and cities through other sources of funding. This project is well aligned with these programs, which have themselves been designed to target the 19 project cities.

35. As of 2007, MWUD is implementing its Urban Good Governance Program which will enable cities to complete some of the critical reforms that will be necessary for the successful implementation of this project, particularly in the areas of participatory planning, organization and human resource development, financial management and management of infrastructure and service delivery. MWUD is using various resources and support mechanisms in the implementation of this Program:

(a) Until December 2008, the on-going CBDSD project is financing a number of consultancies and training that are geared to assist cities in attaining the access criteria. These include (i) preparation of an improved financial management system and Chart of Accounts for ULGs, and associated training; (ii) preparation of an Asset Management Framework and associated training; (iii) engineering support to selected cities; and (iv) training in the ULGDP Project Implementation Plan and Operational Manual.

(b) For other implementation support including training of staff in selected areas and support for procurement and implementation, cities/regions will access the IDA- financed Public Sector Capacity Building Program (PSCAP). PSCAP’s Urban Management Sub-Program is designed to provide this type of support based on demand, and the proposed project will provide the incentives to cities and regions to utilize these funds effectively.9

(c) Under the Ethio-German Cooperation, GTZ is financing teams of experts at the regional level to support the selected 19 cities in participatory planning and financial management specifically (five teams of 3 experts each in the major regions and in Dire Dawa/Harar and one team in Addis). These teams started in 2007 and will continue to support the cities and regions for at least 2 years.10

5. Financing Source: ($m.) BORROWER/RECIPIENT 39.6

9 PSCAP funding available in fiscal year 2007/8 (EFY2000) specifically for the urban management sub-program are approximately as follows: Addis Ababa US$530,000; Dire Dawa US$400,000; Tigray US$900,000; Amhara US$3million; SNNPR US$1.8 million; Oromiya US$650,000; and Harari US$200,000. Similar amounts would be available in subsequent years.

10 The funds agreed for the GTZ program is Euro 4.2 million to cover the period January 2007-2009. Bilateral discussions will be confirmed by summer 2008 to agree on continued support for this program. International Development Association (IDA) 100 Total 139.6

6. Implementation

36. As described above, the World Bank has been collaborating closely with the German bi- lateral cooperation (GTZ and KfW) to support the government’s efforts in promoting urban development. GTZ and KfW have been closely consulted in the preparation of this project, and have actively participated during all key preparation activities. Under the current Ethio-German Cooperation Agreement, GTZ is supporting MWUD and regions in further capacity building of the 18 cities that were targeted under CBDSD, as well as Addis Ababa—the same 19 cities that will initially benefit from ULGDP. GTZ’s support in financing teams of experts to these regions/cities will be an essential element of the implementation support that will be required for ULGDP. The German bi-lateral cooperation is further committed to supporting the approach undertaken in this project and intends to provide parallel financing for the performance grants through KfW (negotiations for this funding will take place in early 2008).

37. The ULGDP will be implemented over a period of five years using existing government structures. ULGDP will operate on a decentralized basis through ULGs. The institutional and implementation arrangement will be as follows:

38. Ministry of Works and Urban Development (MWUD). At the federal level, MWUD, through its Urban Development and Capacity Building Office (UDCBO), will be responsible for ULGDP. MWUD will have overall responsibility for the oversight, coordination, monitoring and evaluation of project activities. It will ensure the overall quality and timeliness of project implementation, including compliance with all aspects of the ULGDP Operational Manual. It will also be responsible for determining reallocations between regions based on assessments of performance. UDCBO will be responsible for the day to day coordination of project activities, liaising with other departments as needed.

39. Ministry of Finance and Economic Development (MOFED). MOFED will be responsible for managing the WB Special Account (and accounts of other donors, if applicable) and manage disbursements and replenishments and preparing consolidated quarterly and annual Interim Financial Reports (IFR).

40. Regional Level Implementation Arrangements.

(a) At the regional level, the Bureau of Works and Urban Development (BWUD) will be responsible for coordinating project implementation, and providing technical assistance to cities in the preparation of capital investment plans. Regions will be responsible for the overall quality and timeliness of project implementation for the cities within their respective jurisdiction. Regions will support and motivate cities to meet their access and performance criteria (themselves incentivized by inter- regional reallocations determined by the performance of their participating cities), and will facilitate their access to PSCAP and other capacity building support mechanisms. Regions will be responsible for determining reallocations between cities based on assessments of city performance.

(b) The Bureau of Finance and Economic Development (BOFED) will have the responsibility of providing financing to participating urban local governments for the ex-ante capital investment plans and for the preparation of consolidated regional quarterly and annual IFRs.

41. Urban Local Government Level Implementation Arrangements. At the city level, the urban local government council will be responsible for reviewing and approving the city annual and multi-year plans and budgets. The City Manager’s office will be responsible for the day to day operations of ULGDP, addressing financial management/performance requirements, preparing multi-year and annual investment plans and budgets consistent with appropriate consultation and accountability good practices, processing sub-project proposals, appraising sub-projects, supervising implementation, and ensuring sound maintenance of assets. The City Manager’s office will also be responsible for maintaining project monitoring information and reporting on progress in a timely fashion to the region and to UDCBO.

7. Sustainability

42. Sustainability of ULG capital investments. The following aspects of the ULGDP design are aimed at promoting sustainability of capital investments carried out by ULGs: (a) Citizen/community ownership of investments. ULGDP explicitly promotes a participatory capital investment planning process to ensure that the priorities of citizens are reflected in the investments undertaken by cities. (b) ULG ownership of investments. Participating ULGs are expected to provide 20% of total capital investments costs. This is directed towards preventing an attitude that the grants are “gifts” from regions/federal government and increasing ULGs’ stake in ensuring the relevance and operational quality of investments. (c) Technical viability. A rigorous screening and appraisal process will ensure that sub- projects are viable, will deliver expected benefits to the city residents in keeping with standard costs, and can be maintained at reasonable expense and with local technical capacity and resources. This will be complemented through the implementation of the Asset Management Framework (see Section IV b, Technical Appraisal). (d) Operations and Maintenance. ULGDP explicitly promotes consideration for operations and maintenance costs in the capital investment planning process, by requiring (i) the allocation of adequate O&M budgets; (ii) monitoring outcomes related to improved O&M; and (iii) incentivizing (and monitoring) improved revenue mobilization to cover increased O&M costs. The Asset Management Planning Framework and revenue enhancement activities (supported through the GTZ-financed teams) will support these activities.

43. Sustainability of the grant transfer mechanism. A key concern of the project is whether grants for ULGs will cease after this project closes. This concern is mitigated by two factors. First, by using the intergovernmental fiscal framework for channeling the funds (as opposed to providing funds directly to the line ministry, MWUD, for disbursement to ULGs), additional funding can be easily accommodated (whether through donor funding or federal government contributions). In addition, by using the regular government systems for implementation (rather than special Project Implementation Units), the likelihood that the system can be sustained in the future when additional funding is made available is increased. Second, by ensuring that regional governments contribute 20% of the grant amount, the project aims to establish a practice at the regional level of considering formula-based allocations of funds for ULGs. Even without large allocations of donor or federal level funding in the future for ULG capital investments, it is hoped that regions will continue the practice of channeling their own resources to promote the development of urban centers using this mechanism.

8. Lessons Learned from Past Operations in the Country/Sector

44. The lessons learned from implementing performance-based conditional grants internationally indicate that performance grants are effective at bringing about institutional change. A combination of minimum conditions and performance measures has provided local governments with strong incentives to improve key institutional performance areas like planning, budgeting, financial management and project implementation, but also within areas of good governance. A key lesson is that minimum/access conditions and performance measures need to be clear and easy to measure objectively, and that their number should be kept at a minimum. Another lesson is that in order to be credible, the system needs to have clear, transparent and objective formulae for allocations and reallocations.

45. A general lesson from implementing local government projects is that, in order to be sustainable, they need to be mainstreamed into the policies and programs of regions and municipalities, or they will remain an enclave operation without having the benefits accrue to the local government as a whole.

46. Lessons learned internationally as well as from the pilot infrastructure investments under CBDSD as well from KfW’s on-going Urban Development Fund indicate that projects involving a variety of smaller investments at the local government level should be implemented locally rather than managed by a federal ministry. This is also critical for ownership and capacity building of the local government. Planning the size of investments will be particularly important —sub-projects need to be scaled down so that small contractors or MSEs can handle the job, or scaled up such that large firms would be interested in bidding. There seems to be shortage of medium-sized contractors capable of handling contracts in the range of US$500,000 – US$1m interested in working in the smaller, more remote cities. For larger investments, the CBDSD and UDF experience demonstrate that local governments will still need specific support for design, supervision and contract management.

47. Experience with large investment projects involving multiple sub-projects has demonstrated that the Bank clearly does not have a comparative advantage in financing and supervising small individual sub-projects, as sub-project implementation gets bogged down by the Bank’s procurement and other fiduciary requirements. The Bank should be more of a “financier” and “catalyst” to support building up the client’s management capacity. 9. Safeguard Policies (including public consultation)

48. The project has triggered OP 4.01 Environmental Assessment, OP 4.11 Physical Cultural Properties, and OP 4.12 Involuntary Resettlement due to the construction and rehabilitation of infrastructure investments such as roads, water supply and sanitation facilities, solid waste management, etc. The environmental screening category is B and the safeguards category is S2.

49. Consistent with the requirements of OP 4.01, the government has prepared an Environmental and Social Management Framework (ESMF). This includes provisions for addressing Physical Cultural Resources, consistent with the requirements of OP4.11. Consistent with the requirements of OP 4.12, the government has prepared a Resettlement Policy Framework. Both documents will be approved and disclosed in publicly accessible places by the government in Ethiopia and by the Bank at its Infoshop in Washington D.C. prior to appraisal.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

10. List of Factual Technical Documents

To be completed

11. Contact point Contact: Rumana Huque Title: Sr Urban Spec. Tel: 5358+395 / 251-11-517-6095 Fax: Email: [email protected] Location: Addis Ababa, Ethiopia (IBRD)

12. For more information contact: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop