Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 50028 - LK

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized PROPOSED CREDIT

IN THE AMOUNT OF SDR 33 MILLION (US$50.00 MILLION EQUIVALENT)

TO THE

DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA

FOR A

Public Disclosure Authorized NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT (NELSIP)

April 19, 2010

Sustainable Development Department Urban and Water Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective August 2009)

Currency Unit = Sri Lankan Rupee US$1 = SLR 115 US$1 = SDR 0.667401

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACLG Assistant Commissioner of Local GoSL Government of Sri Lanka Government GPN General Procurement Notice ADB Asian Development Bank GTZ German Technical Cooperation AF Asia Foundation IC Individual Consultants APRC All Party Representatives Conference ICB International Competitive Bidding CAS Country Assistance Strategy IDA International Development CBC Community-Based Contracting Association CBO Community Based Organization IEC Information Education and CDD Community Driven Development Communication CEA Central Environmental Authority IFAD International Fund for Agricultural CFAA Country Financial Accountability Development Assessment IMF International Monetary Fund CLG Commissioner of Local Governments IOM International Organization for CQ Consultants’ Qualifications Migration CWSSP Community Water Supply & Sanitation IPDP Indigenous Peoples Development Plan DA Designated Account ISDS Integrated Safeguards Data Sheet DC Direct Contracting IUFR Interim Unaudited Financial Reports DPS Designated Procurement Specialist JICA Japan International Cooperation DSD Divisional Secretariat Division Agency LA Local Authority EIA Environmental Impact Assessment LADP Local Authority Development Plan EMP Environment Management Plan LAPIM Local Authority Project Implementation ENREP Emergency Northern Recovery Project Manual ESAMF Environmental and Social Assessment LGIIP Local Government Infrastructure Management Framework Improvement Project ESMF Environmental and Social Management LKR Sri Lankan Rupees Framework FAO Food and Agriculture Organization MC Municipal Council FBS Fixed Budget Selection MDTU Management Development and FM Financial Management Training Unit FMIS Financial Management Information M&E Monitoring and Evaluation Systems ML&E Monitoring, Learning and Evaluation FMR Financial Management Report MED Ministry of Economic Development FR Financial Reports MoFP Ministry of Finance and Planning GA Government Agent MOU Memorandum of Understanding GAAP Governance and Accountability MTR Mid Term Review Action Plan NCB National Competitive Bidding GNDs Gram Niladhari Divisions NEA National Environment Act

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NELSIP North East Local Services Improvement SBD Standard Bidding Document Project SEC State Engineering Corporation NGO Non-Governmental Organization SLILG Sri Lanka Institute of Local NIRP National Involuntary Resettlement Plan Government NPA National Procurement Agency SWAP Sector Wide Approach NPC Northern Provincial Council SSS Single-Source Selection NPSC National Project Steering Committee UC Urban Council ODU Organizational Development Unit UNDB United Nations Development OP/BP Operational Policy/Bank Policy Business PAD Project Appraisal Document UNDP United Nations Development PC Provincial Council Program PCN Project Concept Note UNHCR United Nations High Commissioner For Refugees PDO Project Development Objective UNICEF United Nations International Children’s PCU Project Coordination Unit Fund UNOPS United Nations Office for Project PIC Project Implementation Cell Services PM Praja Mandalaya USAID US Agency for International PPC Provincial Planning Development Committee VDP Village Development Plan PS Pradeshiya Sabha WA Withdrawal Application PTF Presidential Task Force WFP World Food Program QBS Quality-Based Selection QCBS Quality and Cost Based Selection RAP Reawakening Project (popular name For Community Livelihoods in Conflict Affected Areas Project) RFP Request For Proposal

Vice President: Isabel Guerrero Country Director: Naoko Ishii Sector Director: John Henry Stein Sector Manager: Gajanand Pathmanathan Task Team Leader: Seenithamby Manoharan

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SRI LANKA North East Local Services Improvement Project (NELSIP)

CONTENTS

Page

I STRATEGIC CONTEXT AND RATIONALE ...... 1 A. Country and sector issues...... 1 B Rationale for Bank involvement ...... 3 C Higher level objectives to which the project contributes ...... 4

II. PROJECT DESCRIPTION ...... 4 A. Lending instrument ...... 4 B. Project development objective and key indicators ...... 4 C. Project components ...... 5 D. Lessons learned and reflected in the project design ...... 7 E. Alternatives considered and reasons for rejection ...... 7

III. IMPLEMENTATION ...... 8 A. Partnership arrangements ...... 8 B. Institutional and implementation arrangements (see Annex 6) ...... 9 C. Monitoring and evaluation of outcomes/results ...... 10 D. Sustainability...... 11 E. Critical risks and mitigating measures ...... 11 F. Loan/credit conditions and covenants ...... 13

IV. APPRAISAL SUMMARY ...... 15 A. Economic and financial analyses (see Annex 9)...... 15 B. Technical ...... 15 C. Fiduciary (see Annex 7, 8 and 10) ...... 16 D. Social...... 18 E. Environment ...... 20 F. Safeguard Policies ...... 20 G. Policy Exceptions and Readiness...... 21 H. Supervision Strategy ...... 21

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Annex 1: Country and Sector or Program Background ...... 22

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 25

Annex 3: Results Framework and Monitoring ...... 27

Annex 4: Detailed Project Description ...... 29

Annex 5: Project Costs ...... 43

Annex 6: Implementation Arrangements ...... 44

Annex 6A: Supervision Strategy...... 48

Annex 7: Financial Management and Disbursement Arrangements ...... 54

Annex 8: Procurement Arrangements ...... 71

Annex 9: Economic and Financial Analysis ...... 79

Annex 10: Safeguard Policy Issues ...... 83

Annex 10 (a): Social Issues ...... 87

Annex 11: Project Preparation and Supervision ...... 90

Annex 12: Governance and Accountability Action Plan (GAAP) ...... 92

Annex 13: Reconciliation and Conflict Filter ...... 95

Annex 14: Youth and Gender Strategy ...... 98

Annex 15: Documents in the Project File ...... 100

Annex 16: Statement of Loans and Credits ...... 101

Annex 17: Country at a Glance ...... 102

Annex 18: Map (IBRD 37153) ...... 104

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SRI LANKA

NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT (NELSIP)

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA

SASSD

Date: April 19, 2010 Team Leader: Seenithamby Manoharan Country Director: Naoko Ishii Sectors: Roads and highways (60%); Sub- Sector Manager/Director: Gajanand national government administration (20%); Pathmanathan Water supply (10%); Irrigation and drainage (10%) Themes: Rural services and infrastructure (25%); Participation and civic engagement (25%); Conflict prevention and post-conflict reconstruction (25%); Decentralization (25%) Project ID: P113036 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level:

Project Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 50.00 Proposed terms: Standard IDA terms with a maturity of 20 years, including a grace period of 10 years. Financing Plan (US$m) Source Local Foreign Total BORROWER/RECIPIENT 34.00 0.00 34.00 International Development Association 48.00 2.00 50.00 (IDA) Local Communities 2.00 0.00 2.00 Total: 84.00 2.00 86.00

Borrower: Democratic Socialist Republic of Sri Lanka

Responsible Agency: Ministry of Economic Development 177, Galle Road Colombo 3; Sri Lanka Tel: (94-11) 238-2067 Fax: (94-11) 238-2066 [email protected]

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Project implementation period: Start July 15, 2010 End: June 30, 2015 Expected effectiveness date: July 15, 2010 Expected closing date: December 31, 2015

Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [X] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated “substantial” or “high”? [X]Yes [ ] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD IV.G.

Project development objective Ref. PAD II.C., Technical Annex 3 The primary development objective of the project is to improve the delivery of local infrastructure services by local authorities in the Northern and Eastern Provinces of Sri Lanka in an accountable and responsive manner.

Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component 1: Infrastructure Service Delivery (US$76.0 million): The objective of this component is to improve the quantity and quality of public goods delivered and maintained by LAs. These may include rural roads, drains, culverts and bridges, public buildings, markets and fairs, waste disposal, rural water supply, parks, recreation facilities and libraries, nursery schools, playgrounds and dispensaries.

Component 2: Institutionalizing Accountabilities (US$2.0 million): This component aims at ensuring that LAs undertake public expenditures and deliver local services in a transparent and accountable manner. It will strengthen upward and downward accountability systems at the LAs and will support: (a) transparent and independent annual financial audits of LAs to ensure their financial accountability; (b) social and technical audits of public expenditures undertaken by LAs to ensure effective use of funds in line with citizen expectations; and (c) systems and processes to bring greater transparency in LA affairs and strengthen citizen voice in planning, budgeting and monitoring. This component will also support an Information Education & Communication (IEC) campaign aimed at disseminating project related information to different stakeholders at all levels. Further, it will facilitate working with other civil society stakeholders to strengthen demand-side approaches to local governance.

Component 3: Building Capacities (US$4.0 million): This component aims at strengthening the service delivery systems and capacities of the LAs to deliver their mandated services as well as strengthening the monitoring capacities of the provincial and national level institutions. It will support (a) improving the efficiency of current systems and procedures relating to planning, budgeting, financial management, revenue management and procurement at the LA level, (b) improving the efficiency, timeliness and follow up of the internal and external audits of LAs, (c) training elected representatives and staff of LAs on financial management, procurement and project management, (d) providing effective hand holding support to LAs on day to day basis,

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and (e) developing a long term capacity building strategy for LAs. It will also support the strengthening of the capacities of the national and provincial level institutions that play a critical role in the support and oversight of local government functions.

Component 4: Assessments and Evaluation (US$1.0 million): This component will finance: (i) activities pertaining to establishing a comprehensive monitoring system, including baseline assessment, repeater surveys of social assessments, social accountability assessment, and capacity assessments; (ii) evaluating technical and social audits and preparation of citizens score cards; and (iii) other needed analysis as and when they are needed.

Component 5: Project Management (US$3.0 million): This component will support the key agencies at the central, provincial and local levels that are involved in the day to day management of the project to procure necessary consultant, equipment and operational support for the smooth implementation of the project.

Estimated disbursements (Bank FY/US$m) FY 2010 2011 2012 2013 2014 2015 Annual 4.00 10.00 11.00 12.00 10.00 3.00 Cumulative 5.00 14.00 25.00 37.00 47.00 50.00 Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 OP/BP 4.01 Environmental Assessment

Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: None

Loan/credit effectiveness: None

Covenants applicable to project implementation: General Implementation & Project Management:

1. GOSL to ensure that the MED shall be responsible for operationalization of the project, ensuring coordination among the two Provincial Councils as well as the other agencies involved in the project and shall maintain the staff with skills, qualifications and experience, and in sufficient number, as set out in the Project Implementation Plan (PIP) agreed with IDA.

2. GOSL to ensure that the CLGs shall be responsible for management and coordination of project activities and shall maintain the staff with skills, qualifications and experience, and in sufficient number, as set out in the PIP agreed with IDA.

3. GOSL shall cause the PCs and all LAs of North and East to implement the Project in accordance with the PIP, Local Authority Project Implementation Manual (LAPIM), the Governance and Accountability Plan (GAAP); and the Environmental & Social Management Framework (ESMF) as agreed with IDA. The PCs shall: (a) implement the Project in accordance

ix with the PIP, LAPIM; the GAAP; and the ESMF, as agreed with IDA; (b) shall take necessary measures to ensure that the LAs carry out activities as agreed and set forth in the PIP, LAPIM, GAAP and ESMF; and (c) not amend or waive any provision of PIP, LAPIM, GAAP and ESMF without MED and IDA concurrence.

4. The MED will make necessary arrangements for the independent external audit of the Project during the Project implementation period. In addition, the MED will also make arrangements for any other types of audit, assessment or evaluation that is necessary for effective Project oversight and management. The Terms of Reference (TOR) of such audits shall be agreed in advance with IDA.

5. The MED shall prepare and adopt, by August 31, 2010, an information disclosure policy satisfactory and acceptable to the IDA and thereafter implement it through the project implementation.

6. In carrying out the Project, the MED shall ensure that there would be no involuntary land acquisition; and the Project shall be implemented as far as reasonably practicable on publicly- owned land, using exclusively land free from squatters, encroachments or other encumbrances; any acquisition of private land, if needed, would be through outright purchase at market rates or voluntary donation and in accordance with guidelines and procedures set forth in the PIP.

Local Government Grants: 1. PCs shall ensure that: (i) Local Authority Development Plan and sub-projects are prepared and appraised in accordance with the criteria and procedure specified in the LAPIM; (ii) Credit funds are released to LAs in a timely manner in accordance with agreed Grant Agreements; (iii) the Grant Agreements are used exclusively to finance goods, works and services required for preparation and implementation of LA Plans; and (iv) each Grant is calculated according to a pre-determined cost-sharing formula as specified in the LAPIM.

2. All books of accounts, records of transactions, books of inventories, records of minutes, and procedures are maintained and updated by participating LAs.

Monitoring and Evaluation 1. The MED shall submit to IDA, Quarterly Progress Reports giving status of project processes, financial and technical progress.

2. The LAs, under the supervision of the ACLGs, shall maintain an MIS with dual entry for expenditure and outputs (expenditure tracking system) throughout Project implementation.

3. The MED shall procure the services of an institution/firm with the capacity of implementing the citizen’s score card by September 30, 2010.

4. The MED shall carry out a mid-term review of the Project by December 31, 2012.

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I STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. This project has been prepared in the aftermath of many years of armed conflict in Sri Lanka. The cessation of military confrontation in May 2009 brought to an end almost three decades of armed conflict in the country. Since the early-1980s, people in the North and East have been repeatedly displaced due to the conflict—their houses, public facilities and the basic infrastructures necessary for their livelihoods have been severely damaged or destroyed. The decades of fighting have also negatively affected growth in the country at large. This project complements a number of other Bank-funded operations in the conflict-affected north and east that aim to address the urgent and long-term needs in the conflict-affected areas, and will focus on improving the delivery and sustainability of key public infrastructure services delivered by Local Authorities (LA).

2. The armed conflict in the Eastern Province ended about 2½ years ago, in July 2007. At that time, more than 150,000 people had been displaced due to the military confrontations. Since then, the situation in the East has stabilized significantly. Almost all IDPs have returned to their places of origin, and the local economy has been boosted by a sharp increase in paddy production following reclamation of previously un-cultivated paddy fields, and by an easing of security-related fishing restrictions. More recently, increased numbers of tourists have also helped boost the local economy. Elections for the Eastern Provincial Council, which had not taken place previously due to the conflict, were held in May 2008. The Government, in their “Nagenahira Navodaya”, ‘Kilakkin Udayam’ or ‘Eastern Revival’ plan laid out a three-pronged strategy for reinvigorating the Eastern Province focusing on (i) relief, resettlement, rehabilitation and reconciliation among and between displaced persons and host communities, (ii) restoration and development of livelihoods and reconstruction of basic infrastructure and restoration of services to the communities, and (iii) establishment of effective administration and service delivery arrangements.

3. In the Northern Province, the armed conflict ended in May 2009. The considerable challenges that lie ahead differ according to location because of variations in the capacity and continuity of government control in recent years as well as levels of conflict- related damage and numbers of returning Internally Displaced people (IDPs). On or around March 26, 20101, about 198,110 persons had returned to their districts of origin in the Northern Province. Some 81,919 individuals remained in IDP camps, mostly in the Vavuniya area. The Government’s post- conflict plans have followed the same pattern as in the Eastern Province, with a short term (180 day) program aimed at rapid resettlement and a comprehensive three year development plan (“Wadakkil Wasantham” or ‘Northern Spring’) for the period 2010 to 2012. The medium term program focuses on improving infrastructure facilities and uplifting the living conditions of the returning people.

4. The conflict-induced backlog of needed local level infrastructure facilities and services in the Northern and Eastern provinces is considerable. Rural roads that provide inter- connectivity and village level infrastructure such as drainage systems, primary health clinics,

1 Weekly updated reports on or around March 26, 2010 on IDP movements prepared jointly by UNHCR and OCHA.

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schools and markets are severely damaged. Most urban, peri-urban and rural drinking water schemes are in severe disrepair and need to be reconstructed. Services such as street lighting, solid waste collection and library facilities are also insufficient in many locations. The major challenge is therefore not only to return the IDPs to their original places, but also to restore and sustain the vital social and economic infrastructure and services for these returnees to resume their livelihood.

The Local Authority System

5. The LAs constitute the lowest tier in the existing Government structure. The legal framework governing the different tiers of Government is laid out in the 13th Amendment to the Constitution, which was passed in 1987. The 13th Amendment created a premier governance institution in the form of nine Provincial Councils (PCs) and, below them, Pradeshiya Sabhas (PSs), Urban Councils (UCs) and Municipal Councils (MCs), which together make up the category “Local Authorities”. In the Northern and Eastern Provinces, there are a total of 77 LAs, including 65 Pradeshiya Sabhas (28 in the Northern Province, and 37 in the Eastern Province), nine Urban Councils (five in the north and four in the east), and three Municipal Councils (Jaffna in the north, and Batticaloa and Kalmunai in the east).

6. Formally, LAs have a diverse set of responsibilities. LAs have the potential to play a vital role in the participatory planning, prioritization, execution and maintenance of local facilities and services. In the words of the relevant acts and ordinances2, each LA is responsible, within its area, for the “regulation, control and administration of all matters relating to public health, public utility services and public thoroughfares and, generally, with the protection and promotion of the comfort, convenience and welfare of the people and all amenities within such area”. Specifically, these responsibilities include for example the construction and maintenance of local roads, drains, culverts and bridges, public buildings, markets and fairs, waste disposal, rural water supply, parks, recreation facilities and libraries, nursery schools, playgrounds and dispensaries.

7. In practice, LAs in the North and East face several impediments to effectively discharging their responsibilities. The impediments revolve around LAs administrative and technical capacity, their available resources, and their responsiveness to citizens’ needs and priorities. In terms of administrative and technical capacity, each LA formally has a cadre of minimum ten administrative and financial staff (including Local Government Secretary, Local Government Assistant, Technical Officer(s), Community Development Officer, Program Assistant, Management Assistant and Revenue Officer). Understaffing is a perennial problem for many LAs, as are low skill levels and inadequate administrative systems including for financial management, budgeting and procurement, although there is significant variation among LAs.

8. Central government transfers are a key source of funding for LAs, but it is often insufficient and erratic. For investment purposes the central government Treasury channels two types of grants through the Provincial Councils to the LAs, namely Criteria-Based Grants

2 The Pradeshiya Sabhas Act (No. 15 of 1987), Urban Councils Ordinance (Chapter 255) and Municipal Councils Ordinance (Chapter 252). A National Policy on Local Government was also approved by the Cabinet on December 19, 2009 – Extra Ordinary Gazette no. 1632/26.

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(which are allocated on the basis of a formula encompassing population, poverty level, and other socio-economic indicators) and Province-Specific development Grants. Actual allocations are often lower than agreed allocations due to cash flow problems, revenue short falls or other problems affecting national finances. This hampers effective implementation of planned local infrastructure investments.

9. LAs offer the public significant opportunity to participate in local decision making, but participation and dialogue need strengthening to enhance accountability and responsiveness. The preamble of the PS Act states that it was enacted “with a view to provide greater opportunities for the people to participate effectively in the decision making process relating to administrative and development activities at local level”. An important feature of the LA system is that local leaders are subject to elections, which in theory enables citizens to use their ballots to extract greater transparency and effectiveness from LAs. In part because LA elections have so far only taken place in the Eastern Province and a few places in the North, and in part because of “top-down” pressure on LAs from the national level there are in many instances less than desired levels of accountability. These pressures are, however, to some degree mitigated by the existence of local-level forums for public participation, including citizens’ membership on council standing committees, business associations, and informal wards. The Government is firmly committed to improve these deficiencies under the national policy (Refer footnote No. 2).

B Rationale for Bank involvement

10. IDA has moved swiftly to support the GOSL as it implements the three main pillars of its short to medium term development plans for the Eastern and Northern Provinces. The recovery and community livelihoods projects (ENREP and RAP Additional Financing), approved in December 2009, focus particularly on restoring the livelihood of IDPs over the next two years. These projects cover infrastructure essential to recovery as well as the restoration of livelihoods in selected areas in the North. There are, however, significant needs with respect to improving local capacity to effectively maintain and create local public goods and services to all citizens in the North and East. NELSIP is a complementary piece of the overall package which addresses those needs, further helping to lay the foundation for long-term socio-economic development of the two provinces.

11. In both the Eastern and Northern Provinces, the total financing needs for reconstruction and recovery are very large and pose a fiscal challenge to the Government of Sri Lanka (GOSL). Financing assistance from development partners is therefore required to cover a large portion of the investment needs. For its part, IDA has responded by supporting a program of assistance for livelihoods, public services and infrastructure facilities. These include the ongoing Reawakening Project and its Additional Financing (P086747 and P119152), the North East Housing Reconstruction Program (P083932), the Health Sector Development Project (P050740), the Education Sector Development Project (P084580), the Emergency Northern Recovery Project (P118870) and the Provincial Roads Project (P107847). The North East Local Services Improvement Project (NELSIP) aims to complement these activities with vitally needed support for the local infrastructure services such as rural roads, drinking water supply, drainage and waste disposal, provided and maintained by Local Authorities in the Northern and Eastern provinces.

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C Higher level objectives to which the project contributes

12. The project is aligned with two of the three pillars of the Country Assistance Strategy (CAS): the quality, efficiency and effectiveness of service delivery and the expansion of economic opportunities in the lagging regions for inclusive and equitable economic development. It also holds great potential for addressing the causes and consequences of conflict in Sri Lanka – a key aspect of the CAS. This is because while targeting development objectives it also addresses issues of voice and empowerment of the different communities in the North and East. With the central government now strengthening local government institutions, their ability to respond to local needs will help advance a durable solution to the concerns of the people of the North and East.

II. PROJECT DESCRIPTION

A. Lending instrument

13. The lending instrument proposed is a Specific Investment Loan (SIL). The project will be financed under an International Development Association (IDA) credit, on standard IDA terms with a maturity of 20 years, including a grace period of 10 years.

B. Project development objective and key indicators

14. The primary development objective is to improve the delivery of local infrastructure services by local authorities in the Northern and Eastern Provinces of Sri Lanka in an accountable and responsive manner.

15. Key performance indicators are as follows (see Annex 3 for more details):

Project Outcome Indicators:

 Service delivery coverage, measured by improvement in public goods delivered by LAs such as the construction/rehabilitation of (i) rural and other village roads (kilometers), (ii) drainage systems (meters), (iii) water points (number), (iv) piped water connections (number of households), (v) playgrounds and nursery facilities (number), and (vi) waste collection facilities (number);  Percentage of capital grants released against allocation; and  Satisfaction of local people measured by score cards and assurance audits to verify improved access and quality of local service delivery.

Intermediate Outcome Indicators:

 Financial reporting capacity, measured by number of LAs preparing annual financial statements within three months after close of the financial year;  Financial management capacity, measured by number of acceptable audit opinions of LA accounts;

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 Participatory budgeting, measured by number of LAs with budgets prepared in a participatory manner; and  Budget and expenditure transparency, measured by number of LAs whose revenues, expenditures and procurement decisions are publically disclosed.

C. Project components

16. The project would cover sixty five Pradeshiya Sabhas, among which twenty eight are located in the five districts of the Northern Province and thirty seven, are in the three districts of the Eastern Province. In addition, it would cover nine Urban Councils – five in the North and four in the East – and three Municipal Councils, i.e. Jaffna, Kalmunai and Batticaloa. The project would specifically support the following components and activities (further details are in Annex 1).

17. Component 1: Infrastructure Service Delivery (US$ 76 million): The objective of this component is to improve the quantity and quality of public goods delivered and maintained by LAs. These may include rural roads, drains, culverts and bridges, public buildings, markets and fairs, waste disposal, rural water supply, parks, recreation facilities and libraries, nursery schools, playgrounds and dispensaries and similar public utility services. This component will ensure predictable and transparent resource transfers in the form of Capital Grants from the central government to the LAs, to enable them to plan and deliver these services in accordance with the GOSL’s guidelines for participatory planning.3

18. The Capital Grants will be allocated to all LAs in the North and East that meet a set of eligibility criteria comprising of (i) completion of all annual accounts; (ii) receipt of an acceptable audit opinion4 from the Auditor General on the annual accounts for the past two financial years; (iii) presence of adequately trained key staff at the LA level; (iv) submission of a participatory plan and budget; and (v) establishment of standing committees for citizen participation (Annex 4). The LAs will be assessed on these eligibility criteria for acceptance into the program, and continue to be assessed on an annual basis for further continuation of assistance.

19. The Capital Grants are similar to the existing Province Specific Development Grants and Criteria Based Grants received by LAs, and to enhance predictability and sustainability of fund flow will be disbursed in parallel to those5. In total, IDA and GOSL contributions during the five year project period are about US$41 million and US$33 million respectively. Beneficiary contribution towards infrastructure rehabilitation is about US$ 2 million (Annex 4). On average, a LA would receive Rs15 million in the first year, compared to an average of Rs10 million received in 2009. The initial increase is motivated by a desire to enable LAs to rapidly make inroads on the backlog of needed investments. At the same time, recognizing that it takes time to

3 Please refer to the guide to participatory planning and budgeting for LAs in Sri Lanka, designed and published by the Ministry of Local Government and Provincial Councils in 2007 to help LAs to prepare an effective and systematic “program of action” that addresses the priority needs and concerns of citizens and also to prepare a realistic medium term plan. 4 Acceptable Audit opinion is an audit opinion that is not (a) an adverse opinion; or (b) a disclaimer of opinion. 5 These capital grants should not be confused with the existing “block grants” received by the LAs from the Provincial Councils, which cover recurrent expenditures.

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build capacity in the LAs, it is envisaged that the grant size will only increase gradually over time. Eventually, the grant for an average LA is projected to reach Rs30 million—a level broadly similar to the current average in the rest of the country. The GOSL share of total grants paid to LA’s is programmed to increase during the project period. In the project’s final year the average GOSL grant payment would be Rs20 million—twice the level of today.

20. The amount of the individual Capital Grant allocation to a LA will be based on a formula that takes into consideration population size, land area and number of displaced people, with a minimum allocation to ensure that LAs with smaller population and land area are sufficiently covered. This formula would be kept flexible, and IDA will work with the GoSL in adjusting this formula during implementation of NELSIP as appropriate. Though the capacity of the LAs is limited, there had been noticeable improvement in the capacity of many LAs during the project preparation period and the project will continue to work with all LAs to build their capacity while they perform their services with the initial Capital Grants.

21. It is expected that the roll-out of Capital Grants will be staggered to take account of varying capacity levels. Initially, it is expected that 15 LAs will benefit from the Grants, with another 15 being included after one year. The remaining LAs are expected to qualify after 18 months. LAs in the East and in some areas of the Jaffna district generally have the highest capacity, and are expected to be included in the early batch. In much of the Northern Province, the institutional challenges are more significant. The LAs that do not qualify initially will receive support for strengthening their basic capacities and systems from the inception. They will then be re-assessed for eligibility for capital grants.

22. Component 2: Institutionalizing Accountabilities (US$ 2 million): This component aims at ensuring that LAs undertake public expenditures and deliver local services in a transparent and accountable manner. It will strengthen upward and downward accountability systems at the LAs and will support: (a) transparent and independent annual financial audits of LAs to ensure their financial accountability; (b) social and technical audits of public expenditures undertaken by LAs to ensure effective use of funds in line with citizen expectations; and (c) systems and processes to bring greater transparency in LA affairs and strengthen citizen voice in planning, budgeting and monitoring. This component will also support an information, education & communication campaign aimed at disseminating project related information to different stakeholders at all levels. Further, it will facilitate working with other civil society stakeholders to strengthen demand-side approaches to local governance.

23. Component 3: Building Capacities (US$ 4 million): This component aims at strengthening the service delivery systems and building capacities of the LAs to deliver their mandated services as well as strengthening the monitoring capacities of the provincial and national level institutions. It will support: (a) improving the efficiency of current systems and procedures relating to planning, budgeting, financial management, revenue management and procurement at the LA level; (b) improving the efficiency, timeliness and follow up of the internal and external audits of Las; (c) training elected representatives and staff of LAs on financial management, procurement and project management; (d) providing effective hand holding support to LAs by the district local government staff on day to day basis; and (e) developing a long term capacity building strategy for LAs including the Organizational Development Unit (ODU) of the local government departments. It will also support the

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strengthening of the capacities of the national and provincial level institutions that play a critical role in the support and oversight of local government functions.

24. Component 4: Assessments and Evaluation (US$ 1 million): This component will finance: (i) activities pertaining to establishing a comprehensive monitoring system, including baseline assessment, repeater surveys of social assessments, social accountability assessment, and capacity assessments; (ii) evaluating technical and social audits and preparation of citizens’ score cards; and (iii) other needed analysis as and when they are needed.

25. Component 5: Project Management (US$ 3 million): This component will support the key agencies at the central, provincial and local levels that are involved in the day to day management of the project to procure necessary consultant, equipment and operational support for the smooth implementation of the project.

D. Lessons learned and reflected in the project design

26. Lessons learned in a post-conflict context from Asia and Africa suggest that: (i) community participation from the inception; (ii) provision of quick basic local level infrastructure facilities using local resources; (iii) sufficient competent staff in place from the beginning of the project; and (iv) extensive information and communication to inform citizens about project design, work plans and the grievance redressal mechanism are necessary ingredients for successful implementation of projects.

27. Experience from local government operations in South Asia and internationally shows the positive impacts that can flow from improved resource allocation to LAs, where spending decisions are based on a clearer understanding of local needs and performance is ultimately reflected in the local electoral process. Initiatives like this project can also help institutionalize participatory approaches to the planning and management of local development. Increased fund flows designed to enhance the role of local government will likely result in improved democratic decision making but also need to be accompanied by improvements in operational systems, management procedures and accountability mechanisms if local government is going to provide high quality public goods. Moreover, the combined ‘package’ creates incentives for improved own revenue mobilization and value-for-money development as well as mitigation against governance related risks.

E. Alternatives considered and reasons for rejection

Local authorities vs. deconcentrated agencies

28. Given the extent of the conflict related damage in the North and the limited capacity of LAs in many parts of the Northern and Eastern Provinces, it could be argued that it is appropriate to meet the needs exclusively through ‘deconcentrated’ agencies at the local level. In the short term, this is the pragmatic approach on which the Bank financed ENREP project has been based. In the longer run, however, the local infrastructure needs of these areas need to be met by the LAs that have the legal mandate to serve the citizens at the local level. Also, in a longer term, these LAs will also have a responsibility to maintain and sustain the infrastructure that will be

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provided through central government channels. For these reasons, this project focuses on the issues of responsiveness, accountability and capacity in these local bodies.

Non-governmental vs. state-building approach

29. In some post-conflict contexts, a community-driven approach that assigns local and national government bodies only a marginal role may be sought. In Sri Lanka, however, the state is operational in all parts of North and East. LAs are already operating in both provinces. In the East and in parts of the North, elected councils are functional though under-staffed. In other parts of the North, LA elections are likely to occur in the first or second year of the project. These LAs urgently need to be enabled to fulfill their mandated responsibilities. Bypassing LAs and operating exclusively through central government agencies, NGOs and community groups would risk undermining the quality and sustainability of local development in the longer term. Elsewhere in the country, under projects like the Community Development & Livelihood Improvement Project (Gemi Diriya) and the Second Community Water Supply and Sanitation Project, there has been considerable success in involving LAs in community-driven development. Thus a bottom up state-building approach was deemed to be most beneficial for the long term development of the North and East.

III. IMPLEMENTATION

A. Partnership arrangements

30. A number of development partners have been providing support to local governance in recent years. In the North and East, GTZ has long provided technical assistance to provincial authorities to increase their efficiency in the planning, implementation and monitoring of the rehabilitation and development activities. For 11 Pradeshiya Sabhas in the Eastern Province, USAID’s Support for Regional Governance project (SURGE) has delivered a similar menu of advisory inputs, training, and coaching for human resource development, organizational development, planning, information management, and governance. With funding from different donors, the Asia Foundation also has a history of ongoing engagement in promoting local governance. JICA is building capacity of some local government offices in the East. UNDP is in the process of broadening its local governance project (LOGOPRO), which includes the provision of equipment to PS offices. The management information system of NELSIP will help the LAs to monitor the location and modalities of all development activities in their area. In addition to coordinating demand-side approaches to governance with aforementioned stakeholders, NELSIP will channel much needed discretionary resources through provincial councils and LAs.

31. The project will pay close attention to information, education and communication both in building LA capacity and in reaching out to the public. Local media, NGOs and universities (such as Jaffna and Eastern) will be commissioned to help provide basic information to local government officials, community and civil society on the size and condition of access to the LA capital grants. They may also be engaged in the delivery of training, facilitation of meetings and strengthening of village participatory processes as needed.

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B. Institutional and implementation arrangements (see Annex 6)

32. At the local level, the LAs will take full responsibility for managing and communicating activities in their assigned area through the existing Praja Mandalayas (PM) / Sanasamuha Nilayam. PMs have been legally formed in each GND by the LAs and they are responsible for planning and implementing local level activities. LAs will prepare the participatory plans and budgets with the assistance of the PMs and will then receive the basic capital grants for implementing the approved participatory plans and budget. Participating LAs will self-check themselves with the eligibility conditions (see Annex 4) and then apply for capital grants. Continuation of eligibility in subsequent years will depend on continued compliance with the eligibility criteria.

33. At the provincial level, project implementation, financial management, monitoring, grievance redressal and awareness-raising will be the responsibility of the Commissoner of Local Government (CLG) in each province. The CLG will ensure that grant funds are transferred in a timely manner in accordance with the Grant Agreement agreed with each participating LA. The CLG will report to and seek necessary approvals from the Chief Secretary through Secretary in charge of Ministry of Local Government at the provincial level and the Project Coordinator in the Project Coordination Unit (PCU) within MED. He/she will also ensure liaison with the existing Provincial Planning Committee (PPC), which will review overall project progress and coordinate activities among the different government agencies and with other development programs at the provincial level. The Deputy Chief Secretary-Finance (DCS) will verify the eligibility of LAs at the entry level as well as in subsequent years, and will submit the eligible list of LAs to the PPC for approval. A Fiscal Analysis Cell (FAC) will be created at the office of the DCS that will support the DCS in carrying out the verification process as well as enable the DCS to monitor the follow up of the audit recommendations.

34. The provincial CLG will be supported by the Assistant Commissoner of Local Government (ACLGs) in their respective jurisdictions at the district level. The ACLGs will guide LAs in the preparation of LA participatory plans and budget and submit these plans to the CLG for conveying them to the DCS-Finance. They will oversee implementation progress and utilization of capital grants by LAs and assist them in the application of rules and regulations related to procurement, financial management, and social and environmental safeguards. It is the responsibility of the ACLG to monitor the implementation at the district level.

35. At the centre, inter-ministerial coordination will be ensured through a National Project Steering Committee (NPSC) co-chaired by the Secretary, MED and the Secretary, MLGPC. The NPSC consists of senior officials from Ministry of Finance and Planning and key national level ministries, the Finance Commission, provincial Chief Secretaries, Secretaries of Provincial Local Government Ministry and CLGs, representative LA chairs from each district (on a rotational basis) and a civil society representative (as observer). The NPSC will provide policy guidance and support at national level and also the necessary linkages with other line ministries.

36. The MED will be responsible for ensuring that the project resources are managed in an accountable and transparent manner and in coordination with relevant line ministries and development assistance. Within the MED, the Project Coordination Unit (PCU) will oversee overall implementation of the project and reports to IDA on a timely manner.

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37. Project Implementation Period: The project is expected to be implemented and completed over five years by June 30, 2015. The Credit Closing date is December 31, 2015.

38. Project Costs and Financing Plan: Total estimated project cost is US$ 86 million (the project costs by components are given in Annex 3). The project cost is financed 58% by IDA including the taxes and duties, 40% of the project cost will come from GOSL domestic funds whereas the beneficiary contribution is 2%.

C. Monitoring and evaluation of outcomes/results

39. The project’s monitoring system will track two types of information: one, trace project expenditure by LAs, fund flows, and administrative functions performed by LAs; and two, track development activities and investments by other stakeholders within the boundary of each LA.

40. With respect to project monitoring, a computerized Management Information System will track expenditure by LAs against measurable outputs (service delivery indicators). Currently, LAs use similar, but not identical formats to report on the use of various grant funds. The project will support the utilization of a single and uniform format to be used in all LAs, in which expenditure and outputs can be aggregated easily at the CLG level, irrespective of, but distinguishable by, the source of funding. These formats are presently sent from the LAs to the CLGs via ACLGs. The project will use the same arrangement for monitoring LA expenditures up to CLG level. In addition, project monitoring will add one more layer by having CLG offices send consolidated quarterly progress reports and annual reports on LA expenditures and performance to the PCU at the center and the DCS - Finance at the provincial level.

41. In order to enhance the accountability channels between LAs and their citizens, a range of social accountability initiatives will be supported. These include:

 citizen scorecards to track, over time, citizens’ perceptions of and satisfaction with the local services they receive from their LA. A baseline sample survey will be undertaken during the first year of project implementation, and will be repeated at mid-term review and before project closure;  assurance audits that will be a comprehensive evaluation of the overall performance of the LA, and include an assessment of the quality and quantity of public expenditures and development works carried out by the LAs, the number of consultative meetings held with local stakeholders, the number and category of grievances received and addressed, the number of staff trained, etc. The assurance audit results will be publicly disclosed to the citizens.

42. Beyond and above the monitoring of project-financed activities and tracking of funds, NELSIP will support the development of a comprehensive strategy to monitor all development activities carried out by different stakeholders within the geographical space of a LA. Numerous investments are undertaken by institutions other than the LA, and often many of these institutions have their own monitoring systems. The project will support bringing all stakeholders under a single monitoring framework to enable better coordination, reduce duplication, and enhance economies of scale and scope in development works. The strategy for

10 this will be developed during the first year by consultants, and implemented during the later part of project implementation.

D. Sustainability

43. There are two key issues related to the future sustainability of the improvements achieved under the project. The first relates to maintenance of physical infrastructure and the continued use and upkeep of systems built under the project. The second relates to the continuation of the capital grants beyond the completion of the project.

44. In terms of maintenance and systems upkeep, by making LAs more accountable to their citizens and investments more in line with local preferences, the project strengthens incentives for LAs to improve the maintenance of local assets. Moreover, with respect to the maintenance of physical assets, the project will aim to align asset creation with O&M capabilities. Further, it will provide long term institutional development support to enhance the capability of LAs in the areas such as local level planning, budgeting, revenue generation, financial management and procurement, project and office management, etc. The emphasis will be on creating sustainable local institutions that can effectively coordinate local development and manage service delivery.

45. In terms of future fund-flows to LA’s, the project has been carefully designed to enhance sustainability. Three particular features of the project help in this regard. The first is that the IDA-financed Capital Grants would be disbursed in full parallel with existing Government grants for LAs, thereby building expectation and precedence for their payment. The second is the gradual increase in the Government’s share of the average transfer, which is scheduled to increase from 29 percent in the first year to 67 percent in the last year, thereby reducing the impact on average transfers of the eventual ending of the IDA contribution, and establishing a new “baseline” for the Government’s budgetary allocations for LA grants. Finally, the project’s capacity building efforts to institutionalize accountability, improve transparency and enhancing monitoring and evaluation would also help to sustain grants to LAs in the future at a higher level than today.

E. Critical risks and mitigating measures

46. The project area consist of different ethnic groups (see Annex 10 A) and it has a history of tensions vis-à-vis the country’s central government. For much of the last three decades, these provinces have been under armed conflict. Interference from various segments, delay in transfer of counterpart funding, slow reconciliation of underlying ethnic conflict, insufficient capacity of LAs for immediate participation in the project, and weak mechanisms to deal with local minority issues are some of the main risks identified through the assessment conducted by the task team during the project preparation. These risks, however, are mitigated by the project design as much as possible. For example, the focus is on building systems for responsive service delivery and accountable local governance that will help enhance the credibility of the State among citizens. With regard to implementation arrangements, the emphasis is on working with and strengthening existing institutional arrangements rather than create project-specific structures that are not sustainable in the long term.

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47. For this reason the project faces considerable reputational, social and operational risks. The table below provides a summary of the main potential risks, mitigating measures and the rating with mitigation. The full risk assessment and description of mitigation measures are presented in the Governance and Accountability Action Plan (GAAP) in Annex 12 and ‘Conflict and Reconciliation Filter’ in Annex 13. As a further measure to protect against risks over the course of the project, a continuous Social Impact Assessment will be conducted in order to assess: (i) the overall direct and indirect social impact of the planned project activities on the different communities in the North and East, and on their internal relationship with a particular view to the past history of conflict; (ii) how LAs have been functioning during the recent years of armed conflict; and (iii) perception regarding the role and functions of LAs by the various stakeholder groups and their expectations hereof for the future. The findings of the SIA will help outline specific approaches which can further reconciliation across communities and help consolidate the public trust in the state.

RISK MATRIX

Potential Risks Mitigation Measures Rating with Mitigation To Project Development Objectives Reputation that the Bank’s support The Bank is providing substantial funds to the Low to the North and East comes at the lagging regions through the ongoing, recently- expense of supporting poverty approved and upcoming projects. reduction and development of less developed areas of the country. Interference from various segments Transparent and predictable fund flow as well as Substantial with investment priorities thereby strong empowerment of local authorities and undermining the devolved functions citizens with transparency and accountability of Las. mechanisms at all levels will effectively mitigate this risk Continuation of ethnic and regional Progress toward tackling the underlying Substantial tensions in North and East. political reasons for the long standing ethnic tensions will need to move forward at national level. While the successful implementation of the project would likely help to improve the trust between citizen and government, political developments in both N and E should be closely monitored to watch out for any escalation of tensions. Regular project implementation support missions and continuous social impact assessments would provide opportunities to interact with communities and authorities to reduce the tension.

Insufficient LA capacity to deliver The project’s support to the local authorities to Moderate post-conflict reconstruction and build their capacity while performing their development. services will mitigate this risk to a great extent. Moreover, under the project, it is also agreed to engage private contractors and other organizations such as universities, professional bodies and local consulting firms to support the implementation and provide independent auditing and monitoring support and the project

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includes provisions to secure these services. Weak local accountability. The project will have limited control on the High LA’s policy decisions on these issues. However, technical and social audits and bi-annual social assessments are key components of the project. These will reduce some political distortions, but the overall risks in the affected areas will remain high. Delay in receiving counterpart funds Project design envisages a lesser amount than Low from the centre. the present grant received by the LAs as initial counterpart funding; this grant will gradually increase over the project period. To Components Lack of competitive bidding on There would be a roster of civil works Moderate infrastructure contracts and less contractors selected through both a technical opportunities for local firms. capacity and security clearance process. While the Bank would be able to review the technical screening it will have no control on the security clearance. However, there are many contractors already working in these areas. Insufficient project implementation The local authorities responsible for the design Moderate and monitoring capacity. and construction supervision of the reconstruction of infrastructure have established technical norms and specifications. They are presently carrying out such works. To support these local authorities, the project includes provisions to hire qualified Civil Engineers fielded at each district to verify and certify construction quality and specifications as well as final payments to the civil works contractors. Inadequate fiduciary capacity Procurement processing will be carried out with Substantial provides avenues for adequate staff in place and with contract misappropriation of resources at supervision carried out at district level. various levels. Absence of a system Disclosure of contract award information and a of fiduciary performance and computerized fiduciary monitoring system will compliance mechanism. be mandated and regularly monitored. Bank fiduciary staff would provide continuous guidance and feedback on post reviews to ensure rules and procedures are clearly understood. In depth post reviews will be conducted frequently together with independent third party technical, financial and social audits.

F. Loan/credit conditions and covenants

48. The following are Credit Covenants:

General Implementation and Project Management

1. GOSL to ensure that the MED shall be responsible for ensuring coordination among the two Provincial Councils as well as the other agencies involved in the project and shall

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maintain the staff with skills, qualifications and experience, and in sufficient number, as set out in the Project Implementation Plan (PIP) agreed with IDA.

2. GOSL to ensure that the CLGs shall be responsible for management and coordination of project activities and shall maintain the staff with skills, qualifications and experience, and in sufficient number, as set out in the PIP agreed with IDA.

3. GOSL shall cause the Provincial Councils and the LAs of North and East to implement the project in accordance with the PIP, Local Authority Project Implementation Manual (LAPIM), the GAAP and the Environmental & Social Management Framework (ESMF), as agreed with IDA.

4. At the provincial level, the Provincial Councils shall: (i) implement the Project in accordance with the PIP, LAPIM, GAAP and the ESMF, as agreed with IDA; (ii) shall take necessary measures to ensure that the LAs carry out activities as agreed and set forth in the PIP, LAPIM, GAAP and ESMF; and (iii) not amend or waive any provision of the PIP, LAPIM, GAAP and ESMF without the concurrence of the MED and IDA.

5. The MED will make necessary arrangements for the independent external audit of the Project during its implementation period. In addition, the MED will also make arrangements for any other types of audit, assessment or evaluation that is necessary for effective project oversight and management. The Terms of Reference (TOR) for such audits shall be agreed to in advance with IDA.

6. The MED shall prepare and adopt, by August 31, 2010, an information disclosure policy satisfactory and acceptable to the IDA and thereafter implement it through the project implementation.

7. In carrying out the Project, the MED shall ensure that there would be no involuntary land acquisition; and the Project shall be implemented as far as reasonably practicable on publicly-owned land, using exclusively land free from squatters, encroachments or other encumbrances; any acquisition of private land, if needed, would be through outright purchase at market rates or voluntary donation and in accordance with guidelines and procedures set forth in the PIP.

Local Government Grants

1. The Provincial Councils shall ensure that: (i) Local Authority Development Plan and sub- projects are prepared and appraised in accordance with the criteria and procedure specified in the LAPIM; (ii) Credit funds are released to LAs in a timely manner in accordance with Grant Agreements agreed between LAs and CLGs; (iii) the Grant Agreements are used exclusively to finance goods, works and services required for preparation and implementation of LA Plans; and (iv) each Grant is calculated according to a pre-determined cost-sharing formula as specified in the LAPIM.

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2. All books of accounts, records of transactions, books of inventories, records of minutes, and procedures are maintained and updated by participating LAs.

Monitoring and Evaluation

1. The MED shall submit to IDA, Quarterly Progress Reports giving status of project’s total institutional, financial and technical progress.

2. LAs, under the supervision of ACLG, shall maintain an MIS system with dual entry for expenditure and outputs (expenditure tracking system) throughout project implementation.

3. The MED shall procure the services of institutions /firms with the capacity of implementing the citizens’ score card by September 30, 2010 and the Social Impact Assessment (SIA) by midterm and towards the end of the project.

4. The MED shall carry out a mid-term review of the project by December 31, 2012.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses (see Annex 9)

49. Completion of outstanding annual accounts and clearing the audit back log of many years is expected to enable many LAs to have up-to-date audited annual financial statements and then receive project funds to meet the urgent demands of their citizens. Because the LAs will have discretion in the selection of public investments to be financed by capital grant funds, it is not possible to determine ex ante the precise composition of investments to be made. The project is expected to have significant economic and social benefits in the form of: greater efficiency and effectiveness of LAs in delivering basic local services; and improved local governance by strengthening local planning processes and accountability.

50. As noted above, the basic capital grant will be distributed based on a formula that takes into account the actual needs of reconstruction. In addition, NELSIP would provide capacity support on basic revenue mobilization and administration through training that emphasizes alternative sources of local revenues, rules and procedures for better collection and administration of local revenues. However, there are significant variations in the capacity to rise own source revenues in the North and East. For example, some UCs in Jaffna raise substantial amount of revenues; and for some other LAs such as those in Kilinochchi, low or little revenue sources exist given the massive property destruction due to war. While NELSIP capacity building efforts will take into account this variation, it is unlikely that all LAs will drastically increase their revenue mobilization efforts during the initial years of the project.

B. Technical

51. The LA Development Plan will be formulated by the LA applying a bottom up participatory planning process by involving community members through Praja Mandalayas. Prioritization of development at village level will be done by considering criteria such as (i) the

15 size of population and villages covered; (ii) cost effectiveness; (iii) ability to contribute to improve local services; (iv) ability to acquire technology and resources (including labor participation); and (v) social and environment impact. ACLG staff who have been trained by other development partners and the Management Development and Training Unit (MDTU) and ODU staff who will be trained by Sri Lanka Institute of Local Government (SLILG) under this project on participatory planning will facilitate the LAs in the preparation of participatory plans and execution of infrastructure development activities.

52. The Project Appraisal Team (PAT) based in the ACLG’s office will support LAs in making sure that their sub-project proposals are technically feasible, economically viable and consistent with local, regional and provincial development plans; satisfy all agreed criteria for sub-projects; have followed a bottom-up planning process; and avoid regional imbalances and duplication of investments.

53. Depending on their size and scope, sub-project proposals will consist of: (i) feasibility studies (ii) pre-appraisal by PAT; (iii) detailed investigation, design and estimate; and (iv) implementation plan. Existing GOSL procedures for the technical design, costing and procurement of investment projects will be used, but in accordance with IDA Operational Procedures. The project includes provisions for the Provincial Councils to hire consultants as and when needed till the approved LA cadres are in place.

54. The implementation of sub-projects will be overseen by LA Technical Officers (TOs) trained on procurement procedures and GOSL specifications (that meet IDA standards). The TOs will be assisted, if needed, by officials/civil engineers at the ACLG level in finalizing the technical design and costing of budgeted schemes, using existing thresholds for approval by certified professionals. The project also provides for hiring independent technical audits to verify construction quality and specifications as well as final payments to the civil works contractors.

C. Fiduciary (see Annex 7, 8 and 10)

55. The project will use country systems to the extent they are consistent with the IDA guidelines in order to promote the use of a single financial management and procurement system as well as harmonization among donors. Capacity building inputs under Component 3 of the project will at the same time strengthen the government’s own fiduciary systems in the interests of sustainability and improving confidence about the proper use of funds.

56. Project Financial Management: Due to the flow of funds through different tiers and the weak financial management systems and capacities at the various levels, the project financial management risk is assessed as high. The PCU at MED will be responsible for overall project financial management as well as for the operation of the Designated Account for the project at the national level. At the provincial level the two CLGs will be responsible for project financial management and for obtaining the financial reports and audit reports from the participating LAs. LAs will account for the project capital grant funds transferred from the CLG in their books of accounts in accordance with the Local Authority (Financial and Administrative) Rules, 1989. The office of the Deputy Chief Secretary (Finance) of the respective provincial councils (DCS-F) will verify the eligibility of LAs to receive capital grants on an annual basis.

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57. The audit of the project will be carried out by the Auditor General of Sri Lanka (AG). The PCU within the MED will coordinate with the AG's Office to ensure that audits are conducted on timely basis and the annual audit reports submitted to IDA. There are no outstanding audit reports or material audit findings for Bank financed projects being implemented by the MED. The LAs wishing to be part of the program will be required to undergo the annual audit of their financial statements by the AG and obtain an audit opinion that is not an adverse/disclaimer opinion. Passing the annual audit is one of the criteria for continued eligibility under the program. In addition the Department of Provincial Internal Audit will carry out value for money audits that will assess the efficiency and effectiveness of expenditures from the capital grant at the local level. The project will also institute project specific internal audits that will be carried out by a firm of chartered accountants based on a TOR that will be agreed with the IDA.

58. Disbursement and Fund Flow Arrangements: Disbursements from the Credit will be made on the basis of interim unaudited financial reports to be submitted to the IDA on a quarterly basis in form and substance agreed and considered satisfactory. The reports would include the Financial Management Reports and any other information, as the IDA shall specify by notice to GoSL (Report-based Disbursements). A Designated Account will be opened at the Central Bank of Sri Lanka and would be operated by the PCU of Ministry Economic Development and Ministry of Finance. The initial advance into the Designated Account would be equal to the projections made by the PCU for the first two quarters. Replenishments into the designated account will be based on interim unaudited financial reports and will be processed on a quarterly basis. The interim unaudited financial reports will provide information on expenditure made in the previous quarter and forecast of expenditures for the next two quarters. The quarterly financial reports will provide summarized information on the fund releases to/funds utilized by LAs. Quarterly disbursements would be made based on these financial reports, providing funds for next six months after adjustment for past disbursements. The Interim Financial Reports will also include a list of payments against contracts that are subject to the Bank's prior approval. The form and contents of these reports will be agreed during negotiations and included in the Financial Management Manual. The Designated Account will be operated in accordance with IDA’s operational policies. The PCU of MED will open a current account in LKR in the Bank of Ceylon to which funds are credited from the designated Account (DA) in the Central Bank of Sri Lanka. The payments relating to Components 2, 3, 4 and 5 will be made from this LKR account. The payment to provincial councils relating to capital grants under Component 1 will be transferred from this account to the CLGs through a LKR account maintained by the MOF. MOF will transfer grant portions of IDA and GOSL to accounts of CLG twice a year. Analytical work on this arrangement will be carried out during MTR and necessary modifications will be made.

59. Each year, a list of eligible LAs will be prepared by the DCS (Finance) of the respective Provincial Council after verification of the compliance of the eligibility conditions by the LAs interested in being part of the project. The list of eligible LAs will be reviewed by the PPC and approval for the allocation of capital grants will be accorded prior to the start of the financial year and the notification on the approval will be communicated to the MED, CLGs and the participating LAs. The annual allocation of the capital grant funds will be made in two tranches from the LKR Account maintained by MOF to the Finance Departments of the respective Provincial Councils who will then transfer the funds to the project bank accounts of the two

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CLGs to be maintained at the Bank of Ceylon (BoC). The CLGs will provide BoC with the list of eligible LAs who are entitled to receive the capital grant allocations and request the BoC to transfer the approved allocation to the individual bank accounts of the LAs through the electronic fund transfer system of BoC. The LAs will be required to open a separate bank account for the receipt and custody of the capital grant funds at the time they join the project. The BoC will provide a consolidated advice to the CLGs that will provide confirmation of the receipt of the grant funds by the participating LAs. The CLG will also provide intimation to the ACLGs regarding the funds transferred to the participating LAs. Detailed description of this is provided in Annex 7.

60. Procurement: Procurement of goods, works and non-consultancy services under this project would be carried out in accordance with World Bank Guidelines: Procurement under IBRD Loans and IDA Credits, dated May 2004, Revised in October 1, 2006. No major value contracts either in works or goods are envisaged under this project. Consultants will be selected in accordance with the World Bank Guidelines on the Selection and Employment of Consultants by World Bank Borrowers dated May 2004, Revised in October 1, 2006. The overall procurement risk is rated substantial, based on an assessment of capacities at the implementation level. At the LA level, there is limited awareness on the guidelines and procedures while the potential is there to improve, with focused capacity building. Strengthening the capacity at provincial and local government levels, together with the introduction of a procurement planning and monitoring system will help mitigate the risk. Annual procurement progress reports will be provided to the Bank, which will include status updates, procurement audit reports, and an analysis of agreed procurement indicators. An extension to the proposed Local Authority Operational Manual will include a detail procurement manual for LAs, which will be used to train dedicated staff assigned to carry out procurement activities.

D. Social

61. Inclusion and participation: The population of the Northern Province is almost entirely Tamil. In the Eastern Province as a whole, Tamils account for just over 40% of the population, Muslims just below 40% and Sinhalese just over 20%. However, there are considerable variations between the three districts of the East. The most recent election to PC and LA took place in the East in 2008 with a voter turn-out of almost 66%, and in May 2009, elections were conducted for the Jaffna and Vavuniya Urban Councils. The latter were the first local elections held in the Northern Province for more than 11 years. Turnout was very low in Jaffna (22%) but it was better in Vavuniya (52%).

62. For most of the population of the North and East, the local authorities are less known to the population than the deconcentrated government bodies. In most LAs, their full potential in reaching the local population has been hampered by the fact that as all of the mandatory five Standing Committees are not formed, and neither are the Advisory Committees, both of are mechanisms meant to channel the engagement and participation of local citizens, CSOs and other local non-governmental stakeholders into the local governance process. Now that the armed conflict is over, there is a great opportunity to restore and establish these institutional structures to increase voice and accountability and the proposed project can play an important role. Furthermore, the major challenge in the East is to ensure equitable participation, representation and cooperation across the three main communities, which in many localities are also spatially

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segregated, following year of conflict. In the North, lack of elected representatives and the major resettlement effort of the displaced people following an end to the conflict recently, are equally challenging.

63. Gender: Women’s representation in elected bodies in Sri Lanka is low and there has been no substantial change in the number of women representatives since independence in 1948. Following the Parliament election in 2004, only 4.8% of MPs are women, with less representation at Provincial Councils- and 3% in MCs, 2% in UCs and in PSs 1%. Women also have a very limited, if any, representation on the Standing Committees and Advisory Committees. However, studies indicate that main vehicle for women to have their voices heard at district or local level is through complaints, where they tend to reach parity with men, except in Muslim dominated areas. NELSIP aims to empower women through 50% representation in all committees towards greater participation and decision making vis-a-via local government and accountability in order to ensure women’s access to services in an equitable manner.

64. Social Safeguards: Since the exact locations of project interventions are not known at appraisal, the social safeguard related impacts will be determined on a continuous basis according to the annual LAPDP and received by the LA. The GOSL has prepared an Environmental and Social Safeguards Framework (ESMF) and disclosed in country on January 23, 2010, contains a negative list of characteristics that would make a proposed subproject ineligible for support, and a Framework for Land Acquisition and Involuntary Resettlement, consistent with the requirements of the National Involuntary Resettlement Policy and OP/BP 4.12. No sub-project affecting more than 200 people will be allowed. If resettlement and land acquisition is unavoidable, it will be carried out in accordance with these guidelines.

65. Most communities of Indigenous People (Veddah) in Sri Lanka live in remote locations in the East, such as in Muraththanai, Akkuranai, Minuminuththaveli, Paalchenai and Kathiraveli in the Batticaloa district and in Muthur East in Trincomalee,as well as in bordering villages of the East. While OP/BP 4.10 does apply to these reasonably well defined groups in the interior of Sri Lanka, it is not expected that stand-alone Indigenous Peoples Development Plans (IPDP) will be necessary, as the project-funded investments are targeted at fairly small-scale rural connectivity infrastructure which are under the responsibility of the LAs. The project Social Officer recruited to the CLG offices is responsible to monitor it continuously. The Social Impact Assessment carried out in year 2 and year 4 will also update issues and mitigation measures.

66. A separate Social Impact Assessment will be conducted to assess (i) the overall direct and indirect social impact of the planned project activities on the different communities in the North and East, and on their internal relationship with a particular view to the past history of conflict; (ii) how local authorities have been placed and functioning during the recent years of armed conflict; and (iii) the perception of the role and function of the local authorities by the various stakeholder groups and their expectations thereof for the future. The results will guide the implementation support missions and they will be also used to update the LAPIM during project implementation.

67. Social Protection: In already poor areas the consequences of war have exacerbated already very difficult circumstances. New or larger groups of vulnerable such as war widows, orphans, etc. may be particularly vulnerable to negative shocks and may use short term but

19 ultimately harmful coping strategies such as reducing consumption expenditures on food, health, and education. LAs will work closely with community leaders to identify and assist the most vulnerable in their locality. Proposed strategies include supporting safety net programs (cash transfers, public works programs, food for wok programs, scholarships etc.) at local level as well as developing sound targeting methodology for identifying the most vulnerable at the GN level and scoring/prioritizing projects that especially benefit vulnerable populations.

E. Environment

68. The exact locations of interventions are not known at the time of appraisal as they will be based on local participatory development plans. The activities are, however, likely to have environmental impacts at the local level. The project is, therefore, classified under Safeguards Category “B”. An ESMF has been prepared which provides the directions to: (1) identify sub- projects or activities that will not be supported by the project; (2) identify the sub-projects or activities that will require GOSL clearances based on the National Environmental Act (NEA); and (3) the process of conducting Environmental Assessment (EA) and preparation of Environmental Management Plans (EMP) for each activity based on the NEA and World Bank OP/BP 4.01 and OP/BP 4.04. Any direct or indirect activity that brings about impacts to areas under the Fauna and Flora Protection Ordinance and Forest Ordinance will not be supported. The assessment of environmental impacts of each proposed LAPDP sub-project will guide the introduction of the necessary safeguards in project design as well as measures to maximize environmental resources management and socio-economic benefits to local communities within the scope of the sub-project.

69. The process of EA will be described in the LAPIM and activity and site specific guidance will be developed as an Environmental Manual. The implementing agency is expected to provide bi-annual progress reports on the environmental safeguards implementation for each of the sub- project. Additionally, independent environmental audits will be conducted every two years of the project to ensure safeguards compliance.

F. Safeguard Policies

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 People (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]

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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Details of Environmental and social safeguards requirements are provided in Annex 10.

G. Policy Exceptions and Readiness

70. The project is consistent with all applicable Bank policies, and there are no policy exceptions requiring management approval.

71. Since the existing local government institutions will implement the project, most of the required staff is already in place. The PCU has been established in the MED and is already staffed with core staff. A project preparation advance of $1.0 million has been approved by IDA to begin recruiting additional staff required for project implementation.

72. The PIP and LAPIM and other operational documents detailing project activities, time scales, fund flow arrangements (see Annexes 7 and 8) and safeguards and disclosure have been drafted and are pending final agreement. Agreement has been reached with GOSL on remaining new staff recruitment (Annex 6) and on counterpart financing arrangements (the GOSL has allocated funds—approximately US$ 5 million—for the project in 2010).

H. Supervision Strategy

73. As with the rest of the Bank’s package of assistance to the Northern and Eastern provinces, enhanced project supervision is necessary because of the risks associated with working in a conflict-affected context. The main responsibility for project supervision will be anchored with the World Bank, Colombo office, given the need for proximate oversight and monitoring by IDA. During the initial six months period it is expected that the supervision will be particularly intense. Two full supervision missions are planned to be carried out during this period. Thereafter, full supervision missions will be carried out once in every six months. A Mid Term Review is scheduled in December 2012. Annex 6a details the objectives, methodology and expected outcome of the supervision strategy for NELSIP. The objectives are monitoring the critical risks identified in the Risk Identification Worksheet and the GAAP; and monitoring implementation progress.

74. The supervision would focus on, but not be limited to, the following aspects: (a) development effectiveness of the project – focusing on the achievement of the PDO of the project; (b) management of reputational risks to the Bank; (c) management of expectations of different stakeholders, including those of various international and national DPs and LAs; (d) implementation progress including technical quality of the project activities; (f) effectiveness of the grievance redressal mechanism and IEC activities; (g) compliance with fiduciary requirements of the project, including procurement and financial management; and (h) compliance with social and environmental safeguards.

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Annex 1: Country and Sector or Program Background SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. Sri Lanka is going through an important time in its history. In May 2009, the Sri Lankan armed forces defeated the Liberation Tigers of Tamil Eelam (LTTE) and ended almost three decades of armed conflict in the Northern and Eastern provinces of the country. The conflict had devastating impacts on the North and East. Since the early 1980s, tens of thousands of people lost their lives in the war; many people were displaced; and infrastructure and property were destroyed. An estimated 70,000 people lost their lives. Many Sri Lankans were affected by physical and psychological trauma. As of September 2007, over 500,000 persons were internally displaced and more than 131,000 persons were reported as refugees in India and other countries. In terms of service delivery, huge deficits exist. Only 10 percent to 15 percent of the road surfaces are said to be intact. Forty six percent of the population in the North and East has access to safe drinking water compared to 62 percent in the rest of the country.

2. In the Eastern Province, the Government established control in July 2007. Its immediate priority was to protect and resettle the displaced community. To meet the short to medium term needs of the Eastern Province, Government formulated a three year development plan, the “Nagenahira Navodaya” or ‘Eastern Revival’, within the framework of the “Mahinda Chinthana” (MC)—the 10 year (2006-2016) development framework for Sri Lanka. The objectives of the three year provincial plan included: relief, resettlement, rehabilitation and reconciliation among and between displaced persons and host communities; restoration and development of livelihoods together with the establishment of basic infrastructure; restoration of services to communities; and establishment of sound administration and service delivery arrangements. By October 2009, almost all of the 187,000 people displaced during the war in the East had returned to their original areas and wider recovery was getting underway.

3. In the Northern Province, the war ended in May 2009 and the transition to peace is now taking roots. The considerable challenges that lie ahead differ according to location due to variations in the capacity and continuity of government control and the extent of damage and degree of displacement (reflected by the number of IDPs). By mid-March 2010, about 192,640 persons had returned to their districts of origin; almost half of whom have moved to Jaffna district. Some 88,350 individuals are reported to remain in IDP camps, largely in Vavuniya. The Government’s post-conflict plans have followed the same pattern as in the East, with a short term (180 day) program aimed at rapid resettlement and a comprehensive three year development plan, the “Wadakkil Wasantham” or ‘Northern Spring’, for the period 2010 to 2012. The medium term program focuses on improving infrastructure facilities and uplifting the living conditions of the returning people.

4. Consistent with the MC, the Government has embarked upon reconstruction and recovery efforts in the North and East provinces. The focus is on integrating those displaced or affected by the conflict, rehabilitation and expansion of service delivery—including through investments in physical infrastructure, and strengthening the role of local governments. However, these efforts would require huge resources and stronger local institutions that support sustained improvements in service delivery. Although between 2003 and 2008, economic growth has averaged 6.3 percent, Sri Lanka continued to face macroeconomic imbalances, particularly high inflation and

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persistent budget deficits. In the context of fiscal stress faced by the Government, financing assistance from Development Partners is required to cover a large portion of the investment needs. The International Development Association has assembled a package of support for livelihoods, public services and infrastructure facilities. These include the ongoing Reawakening Project and its Additional Financing, the North East Housing Reconstruction Program, the Health Sector Development Project, the Education Sector Development Project, the Emergency Northern Recovery Project and the Provincial Roads Project. NELSIP aims to complement these activities with vitally needed support for local infrastructure and services such as rural roads and water supply, drainage and waste management, provided and maintained by local authorities in the North and East. It will thus help ensuring the transition from early recovery toward long-term sustainable development in the two provinces.

5. NELSIP’s project development objective and higher development objective are consistent with the Country Assistance Strategy (CAS) 2009—2012 for Sri Lanka. Specifically, NELSIP responds to expansion of economic opportunities in the lagging regions to facilitate inclusive and equitable economic development and helps to strengthen the delivery of basic local public goods by providing discretionary capital grants and capacity support to strengthen local institutions. Evidence gathered from various countries (e.g. in Bangladesh, India, Tanzania and Uganda) where similar projects that focus on local governments and communities have been implemented suggests that development outcomes—such as access to and quality of water, and access to roads—are likely to improve when discretionary capital grants are available for use by local governments in an environment that fosters local planning and enhanced support systems such as financial management, procurement and social and environment safe guards.

Sector issues

6. Sri Lanka has a dual system of government at local level. On the one hand, there are ‘deconcentrated’ structures represented by the hierarchy of Grama Niladhari officers, Divisional Secretaries and District Secretaries (Government Agents) as well as local offices of national line ministries. The reporting lines of these bodies directly flow up to the central government. On the other hand, there are the devolved structures in the form of provincial councils and, below them, Pradeshiya Sabhas (PSs), Urban Councils (UCs) and Municipal Councils (MCs) – all falling under the category of Local Authorities (LAs) – which have certain responsibilities assigned to them by the Constitution and related legislations. These bodies have administrative and financial officers as well as a council that should be periodically elected by their local constituencies.

7. The legal framework for decentralization is set out in the 13th Amendment to the Constitution which was passed in 1987. This has placed the third ‘tier’ of government (LAs) under the purview of the Provincial Councils. The Pradeshiya Sabhas Act (No. 15 of 1987), Urban Councils Ordinance (Chapter 225) and Municipal Councils Ordinance (Chapter 252) specify that the LAs within its area with the “regulation, control and administration of all matters relating to public health, public utility services and public thoroughfares and, generally, with the protection and promotion of the comfort, convenience and welfare of the people and all amenities.” Under the Act, LAs have been granted a wide range of functions including: the construction and maintenance of local roads, drains, culverts and bridges, public buildings, markets and fairs, waste disposal, rural water supply, parks, recreation facilities and libraries,

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nursery schools, playgrounds and dispensaries. At the Grama Niladhari (GN) level, the Praja Mandalay is the legal entity endorsed by the Ministry of Local Government and Provincial Council (MLGPC) to work directly with the LAs. It is made up of representatives of all village organizations that exist at the GN Division. Together, in principle, these provide the cover for LAs to deliver local public goods and services in a supposedly bottom up and participatory manner.

8. Despite the constitutional mandate and the supporting legal framework, Sri Lankan public administration and service delivery arrangements continue to be highly centralized. Only about 12 percent of total public expenditures occur at the sub-national level and 7 percent of total government revenues come from sub-national governments in Sri Lanka. The share of LAs in sub national expenditures and revenues is arguably low. There is a mismatch between the functions mandated to LAs and their capacity and resources to execute them. With respect to grants from the center to the LAs, a significant portion finances recurrent expenditure and there are insufficient resources available for capital investments. In terms of administration, LAs have no control over the total number of permanent employees and their wages. With respect to revenue assignments, LAs neither levy the maximum tax rates available nor use all taxes at their disposal. Furthermore, the lack of more discretionary funds has inhibited LAs’ abilities to deliver critical basic local public goods and services. The funds from the center are often unpredictable in their regularity and amounts.

9. A National Policy on Local Government has been approved by the Cabinet in December 2009. The aim of the policy is to establish the necessary institutional and legal framework and build a supportive environment backed by adequate safeguards and guarantees for achieving the highest feasible level of effective local government as an integral part of a three tier representative governance, by (a) boarding the scope of the local government with adequate functions, powers and resources; (b) raising the consciousness, vision, commitment, planning and managerial capabilities of local authorities and of their civil society partners; (c) building the capacity of local authorities to fully exercise the powers assigned to them to harness local strengths and resources; (d) mobilize stakeholder participation and support for physical and socio-economic development of their area of jurisdiction, within their own distinct cultural setting; and (e) making local governments more effective, people friendly and equity building institutions of democratic governance.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies SRI LANKA: North East Local Services Improvement Project (NELSIP)

Latest Supervision ISR Ratings (Bank- financed projects only) Implementation Development Sector Issue Project Progress Objective Bank Financed Projects (Local Governance) Sub-national India - Karnataka Panchayats Strengthening MS MS Government Project Administration. Social Services Sub-national Bangladesh - Local Governance Support Project MS MS Government Administration Bank Financed Projects (Other Sectors) *Irrigation and Sri Lanka - Emergency Northern Recovery Drainage, Water Project Supply *Roads and Highways Sri Lanka - Provincial Roads *Infrastructure Roads Sector Assistance Project ll Livelihoods Poverty Reduction Sri Lanka - Community Livelihoods in Conflict S MS Inclusive Growth Affected Areas Project (Yali Pibedemu Viyapruthiya) (Maru Eluchchithittum) Access to Infrastructure Sri Lanka Community Water Supply and S S Livelihoods Sanitation Project Sri Lanka- Community Development and S S Livelihood Improvement Gemi Diriya Project – APL Phase 1 Poverty Reduction, India—Andhra Pradesh District Poverty S S Inclusive Growth, Initiatives Project Access to India—Andhra Pradesh Rural Poverty S S Infrastructure, Reduction Project (Cr.37320-IN) Livelihoods , India—Rajasthan District Poverty Initiatives US US Private-public Project Partnerships, India—Chhattisgarh District Poverty Initiatives MU MS Market Linkages, Project Women’s India—Madhya Pradesh District Poverty S S Empowerment. Initiatives Project India—Tamil Nadu Empowerment and Poverty S S Reduction Project Bangladesh Social Investment Project S S Women’s Rural Women’s Development and S S Empowerment Empowerment Project * Ratings still to be determined IP/DO Ratings; HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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Projects by Other Development Agencies DFID Sri Lanka Support to various programs for poverty and hunger reduction and promoting livelihoods, especially in conflict-affected areas. India The Eastern India and Western India Rainfed Farming Projects Support to Watershed-based Development Programmes in Andhra Pradesh, Karnataka, and Western Orissa Madhya Pradesh Rural Livelihoods Programme (MPRLP) West Bengal Strengthening Rural Decentralization Programme (SRD) Orissa Tribal Empowerment and Livelihoods Programme (OTELP) IFAD Sri Lanka Smallholder Plantations Entrepreneurship Development Programme Dry Zone Livelihood Support and Partnership Programme India Mitigating Poverty in Western Rajasthan Project Women's Empowerment and Livelihoods Programme in the Mid-Genetic Plains Tejaswini Rural Women's Empowerment Programme Livelihoods Improvement Project in the Himalayas Orissa Tribal Empowerment and Livelihoods Programme Jharkhand-Chhattisgarh Tribal Development Programme

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Annex 3: Results Framework and Monitoring SRI LANKA: North East Local Services Improvement Project (NELSIP)

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information

To support local government  construction/rehabilitation of Measure improvement of service authorities in the Northern and (i) rural and other village roads delivery achieved under the Eastern provinces of Sri Lanka to (kilometers); project. deliver services and local (ii) drainage systems (meters); infrastructure in a responsive and (iii) water points (number); accountable manner. (iv) piped water connections (number of households); (v) playgrounds and nursery facilities (number); (vi) waste collection facilities (number); and (vii) others to be tracked as they occur (see eligible list of potential investments).

 Percentage of capital grants Measures the success of capital released against allocation. grant allocation.

 Rising satisfaction of local Gauge improved access and people with service delivery quality of local service delivery. by Las.

Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Enhanced capacity of LAs to deliver local public goods and  Number of LAs preparing Measure financial reporting services. annual financial statements capacity. within 6 months after close of the financial year.

 Number of “acceptable” audit Measure financial management opinions of LA accounts. capacity.

 Number of LAs with budgets Measure responsiveness of LAs prepared in a participatory to its citizenry.

manner.

 LA revenues, expenditures, Gauge accountability of Las. and procurement decisions publicly disclosed.

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Arrangements for results monitoring Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Data Collection Responsibility for Reports Instruments Data Collection  construction/rehabilitation of Since spending by local authorities is Annually Quarterly and PCU (MED), LA, (i) rural and other village roads 0 demand-based, on the type of service Annual Reports, ACLG and CLG. (kilometers), delivery improvements the project will Expenditure

(ii) drainage systems (meters), 0 facilitate are not a priori known. The project Tracking (iii) water points (number), 0 has an expenditure tracking system to System, Social (iv) piped water connections (number 0 monitor outputs delivered under the project, and Technical of households), some of which are consistent with the IDA Audits. (v) playgrounds and nursery facilities 0 16 core indicator requirements, where these (number), are already defined. (vi) waste collection facilities 0 (number) (vii) others to be tracked as they occur  Percentage of capital grants 0 100% 100% 90% 80% 70% Yearly Annual Budgets. CLG and DCS released against allocation (Finance) 1 st  Rising satisfaction of local people tbd 50% 60% 70% 80% Yearly, 1 year, Service Delivery PCU (MED) with service delivery by LAs mid-term review, Surveys and project including citizen closure score cards. Intermediate Outcome Indicators  Number of LAs preparing annual 28 28 30 40 50 60 Yearly Annual Progress CLG and Internal financial statements within 3 months Reports. Auditors of after close of the financial year Provincial Councils  Number of “acceptable”2 financial 18 18 30 40 50 60 Yearly Annual Progress Auditor General’s audits of accounts Reports. Office  Number of LAs with budgets 15 15 30 40 50 60 Yearly, mid-term Annual Progress CLG / DCS (F) prepared in a participatory manner review and Reports, Citizen project closure Score Card, Social Audits.  Number of LAs whose revenues, 0 0 5 15 30 40 Yearly Annual Budgets CLG / DCS (F) expenditures, and procurement (publicly decisions are publicly disclosed disclosed). Notes: 1 Baseline survey will be implemented during first year of project implementation 2 “Acceptable” is defined as all audits that do not have an “adverse audit opinion” or a “disclaimer of opinion”. This definition is in accordance with the LK audit standards.

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Annex 4: Detailed Project Description SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. The total financing needs to restore the local service delivery in North and East and to rehabilitate the damaged infrastructure are very large. This is well above the level which can be financed directly by the Government using its own resources. Therefore, the project aims to make a platform for the Government to mobilize additional resources from IDA as well as other development partners. It has been designed to establish a framework and platform for other development partners to support the Government’s development strategy.

2. Project activities would target short to medium term rehabilitation and reconstruction needs that are currently under-funded or not funded at all. The first project component has been selected on this basis. Rehabilitation of schools, hospitals, irrigation schemes, and main roads are covered under existing or planned IDA and other donor operations. ENREP along with Reawakening Project support would focus on providing immediate livelihood assistance to the IDPs and the rehabilitation and reconstruction of rural roads, irrigation schemes, urban and peri-urban drinking water supply schemes and public buildings. This project support would focus on providing assistance to LAs in order to deliver services and local infrastructure in a responsive and accountable manner. ENREP addresses most urgent needs in the Northern Province. NELSIP builds on progress made over two years in Eastern Province and on ENREP in the Northern Province.

3. The level of fiscal transfer investments supporting LAs on infrastructure rehabilitation, and the timing and sequencing of those investments have to be carefully tailored to the degree of damage and needs for recovery accounting for specific circumstances of individual LAs.

4. The project would support and enhance the capacity of Local Authorities (LAs) in the conflict affected North and East provinces (Table 1) to deliver local public goods and services to their citizens in an accountable and responsive manner. Further, the project will also aim to strengthen the ability of relevant institutions at the provincial and central government level to monitor, support and regulate these Local Authorities. The amount of IDA Credit would be US$ 50 million over a period of five years. Most of the IDA resources (about US$ 41 million) would go towards capital grants to LAs within four years. The amount of GOSL contribution would be US$ 34 million, having about US$ 33 million towards capital grants and the balance for project management. The beneficiary contribution of US$ 2 million would be an addition towards capital grants on their part of civil work execution as labor.

5. The key project outcome indicators are (i) number of households receiving improved local services overseen by LAs under the project; (ii) percent of capital grant allocation released to LAs financed by IDA showing the sustainability of capital grant allocation; (iii) percentage of planned LA spending aligned with people’s preferences reflecting demand responsive local spending; and (iv) rising satisfaction of local people with service delivery overseen and provided by the LAs.

6. The intermediate outcome indicators are (i) number of LAs preparing annual financial statements within three months after close of the financial year showing progress on capacity building; (ii) number of acceptable financial audits of accounts showing local, capacity of technical and financial management; (iii) number of LAs with budgets prepared in a participatory manner showing stronger responsiveness of LAs to their citizenry; and (v) LA revenues, expenditures, and procurement decisions publically disclosed showing accountability of LAs. 29

7. Distribution of LAs within the project area is given below:

Table 1 Province Districts PSs UCs MCs Northern Jaffna 13 3 1 Mannar 4 1 Vavuniya 4 1 Killinochchi 3 Mullaitivu 4 Sub Total 28

Eastern Batticaloa 10 1 1 Ampara 16 1 1 Trincomalee 11 2 Sub Total 37 Total 65 09 03

8. Component 1: Infrastructure Service Delivery (US$ 76.0 million): The objective of this component is to support a form of fund transfer for infrastructure development called Basic Capital grants. These grants are the foundations upon which other four components of the project are built to rehabilitate infrastructure and improve services, institutionalize accountability, strengthen local government capacity, evaluate performance and assist in the articulation of policy environment for local governance in Sri Lanka. Table 2 indicates the qualifying criteria for LAs to receive capital grants under the project. LA assessments will be conducted around October annually to identify qualifying LAs. The first such LA assessment carried out under the project in October 2009 indicated mixed results. Only 19 out of the 60 LAs satisfied the qualifying criteria. It was also found that this situation existed for the last decade or so and only those qualified LAs benefitted with investments from various projects. As such, it was agreed to concentrate on the non qualifying LAs in order to build their capacity during the first six months. The capital grants will be disbursed in two equal installments in January and July of each financial year. In case of year 2010, there will be only one installment in July. Capital grants will be made available to LAs in a phased manner. Deputy Chief Secretary (Finance) in consultation with CLGs will determine calculation, allocation, publication and disbursement of the grants based on eligibility and compliance information received from the CLGs and the PCU of the MED. Though these capital grants are different from the present “capital grants” that are received by the LAs and used for recurrent expenses, they are similar to the “block” such as Provincial Specific Development Grant and Criteria Based Grant. IDA and GOSL basic capital grant contributions are about US$ 41 million and US$ 33 million respectively. Beneficiary contribution towards infrastructure rehabilitation is US$ 2 million.

9. Participatory Planning, Appraisal & Implementation of Subprojects: A Consolidated LA Development Plan will be formulated by the LA applying a bottom up planning process by involving community members through Praja Mandalayas (Community Centre or Sanasamuha Nilayam). The objective of the bottom up planning is to assist the LAs’ members to work jointly with community members and identify and prioritize the development needs and investments through a participatory process starting from villages upwards. Prioritization of development at village level will be done by considering criteria such as (i) the size of population and villages covered; (ii) cost effectiveness; (iii) ability to contribute to improve local services; (iv) ability to acquire technology & resources (including labor participation); and (v) social and environment impact. The sub-project proposal should consist of 30

(a) feasibility study; (b) pre-appraisal with appraisal engineer; (c) detailed investigation, design and estimate; and (d) preparation of implementation plan and preparation of sub project proposals.

10. NELSIP is not a traditional investment project. It is a multisectoral intervention, to test an innovative approach for participatory and demand driven investment planning, budgeting, execution and maintenance of projects at the local government level. Preparation of Local Authority Development Plans (LAPDP) will be guided by: (i) GOSL’s guidelines which was prepared based on current planning models utilized at the village level by United Nations Office for Project Services (UNOPS), US Agency for International Development (USAID), Asia Foundation (AF), GTZ and UNDP; (ii) bottom-up planning, budgeting and implementation; (iii) holistic and integrated planning approach to Local Authorities Development; (iv) fixed budget envelopes based on a per capita basis; and direct funding to the Local Authorities subject to compliance with agreed rules; (v) inclusion and participatory decision-making processes; (v) simple and transparent rules of engagement; (vi) cost sharing and cost effectiveness; and (vii) building capacity within local governments and existing public sector agencies.

11. Sub-project investments would be decided during the implementation of NELSIP on a purely demand driven basis at the local government level, following the participatory identification by local communities. Sub-projects are identified, designed and appraised during the course of NELSIP implementation. To ensure that only technically, economically and socially viable subprojects are approved for funding and that the investments are implemented cost effectively and sustained, the approach to choosing sub-projects has been included in the Local Authority Project Implementation Manual (LAPIM) as part of the project design, would involve (a) identification of eligibility and appraisal criteria to guide selection of subprojects for funding; and (b) use of unit cost standards and measures to guide subproject appraisal. Eligibility principles to determine sub-projects would include (a) the subproject in line with the priorities of Local Authority; (b) the subproject is technically feasible and socially & economically viable; (c) Local Authority is capable of effectively managing the implementation of the subproject; and (d) beneficiary communities are involved in decision making related to subproject planning, supervision and maintenance.

Table: 2 Qualifying Criteria for Local Authorities

Parameter Measuring Indicator

1. Staff Capacity  No of Technical Officers in place.

 No of Qualified Graduates in place (Program Assistants at LA level).

 Dedicated staff assigned for Procurement and Environmental management.

2. Service Delivery  Of the annual actual revenue in immediate past two years, percentage of expenditure allocated for development activities.

 Of total expenditure in immediate past two years, percentage allocated for staff emoluments. 31

Parameter Measuring Indicator

3. Financial  Completion of Annual Accounts up to and including the immediately Management past financial year.  Receipt of an acceptable audit opinion from Auditor General on the Annual Accounts for the past two financial years viz 2007 and 2008.  Presence of adequately trained staff at the PS level for financial management.

4. Participatory  Availability of LA development plans completed using participatory Planning Process methods.  Availability of trained staff for formulating participatory LA development plan.

5. Citizen  Citizen representation in all committees including: participation  Finance and policy making  Housing and Community Development  Technical Service  Environmental & Common Amenities  Library etc.

 Evidence of consultations with LA citizen groups for participatory planning, budgeting and monitoring.  Community grievance redress mechanism in place  Complaint box  Complaint log book

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Table 3: Projected Availability of Capital grants to LAs

PRADESHIYA SABHA's Number of PS's Average Allocation (M LKR) Total Transfers (M LKR) Batch 1 Batch 2 & 3 Batch 1 Batch 2 & 3 Grand IDA GOSL IDA GOSL IDA GOSL Total IDA GOSL IDA GOSL Total 2009 65 10 10 650 650 2010 15 15 50 11 4 15 10 165 560 725 2011 15 15 50 50 14 6 20 10 4 710 290 1000 2012 15 15 50 50 17 8 25 13 6 905 420 1325 2013 15 15 50 50 14 14 28 16 8 1010 610 1620 2014 15 15 50 50 10 20 30 13 14 800 1000 1800 3590 2880 6470 URBAN COUNCILS Number of UC's Average Allocation (M LKR) Total Transfers (M LKR) Batch 1 Batch 2 & 3 Batch 1 Batch 2 & 3 Grand IDA GOSL IDA GOSL IDA GOSL IDA GOSL IDA GOSL Total 2009 9 10 10 90 90 2010 3 3 6 11 4 15 10 33 72 105 2011 3 3 6 6 14 6 20 11 4 108 42 150 2012 3 3 6 6 17 8 25 14 6 135 60 195 2013 3 3 6 6 14 14 28 17 8 144 90 234 2014 3 3 6 6 10 20 30 14 14 114 144 258 534 408 942 MUNICIPAL COUNCILS Number of MC's Average Allocation (M LKR) Total Transfers (M LKR) Batch 1 Batch 2 & 3 Batch 1 Batch 2 & 3 Grand IDA GOSL IDA GOSL IDA GOSL IDA GOSL IDA GOSL Total 2009 3 30 30 90 90 2010 1 1 2 35 15 50 30 35 75 110 2011 1 1 2 2 45 15 60 35 15 115 45 160 2012 1 1 2 2 55 15 70 45 15 145 45 190 2013 1 1 2 2 45 30 75 55 15 155 60 215 2014 1 1 2 2 35 60 95 45 30 125 120 245 575 345 920 4699 3633 8332

33

35 Average Annual transfer to PS's, M LKR

30

25

20

GOSL IDA 15

10

5

0 2009 2010 2011 2012 2013 2014

34

12. Basic Capital grants: LAs that are qualified to receive the basic capital grants will receive an average allocation of LKR 14 million in FY 2010 which will rise to an average of LKR 30 million by FY 2014, where the GOSL contribution is twice that of IDA contribution. This represents an increase of about 40% per annum. The basic capital grant will be allocated on a formula based on population, land extent and degree of conflict damage, regarded as sufficient to ensure equity in allocations between LAs, with a minimum allocation of LKR 8 million to protect the LAs with small populations or land extent which is necessary to ensure that even small LAs have an incentive to seek eligibility for the new project grant and can deploy it for useful purposes. It is estimated that all 77 LAs will become eligible for basic capital grant by the FY 2011.

13. Separate manuals prepared under Re-awakening Project and ENREP have been revised and will be used for potential public workfare activities that are of immediate importance to communities and implemented by the LAs on cash-wage-based community driven way with adequate community oversight and involvement in decision making at all levels. List of eligible LAs will be drawn based on highest vulnerability ranking using proportion of landless laborers to total population and those LAs which are currently being assisted by other programs will be excluded. The list of beneficiaries will be compiled and discussed at open meetings by the Praja Mandalaya (PM) and submitted to the LAs. All eligible households selected for workfare will be given equal chance to benefit by rotating work opportunities among beneficiaries.

14. The grievance redressal mechanism established under Component 2 will be used to check on the accountability and transparency of the whole processes and procedures. An impact assessment will be carried out on (i) LAs selected against targeting criteria; (ii) proportion of eligible LAs missed out; and (iii) selected household welfare indicators of families assisted with similarly placed families in the control groups.

15. The key sustainability questions posed by proposed project relate to (i) the maintenance of physical infrastructure; (ii) the continuation of capital grants during the project period; (iii) the continuation of capital grants after project closure; and (iv) the continued use and upkeep of systems built under the project. By making LAs more accountable to their citizens and investments more in line with local preferences, the project creates better incentives for LAs to improve the maintenance of local assets. With respect to the maintenance of physical assets, the project will aim to align asset creation with O&M capabilities. Further, it will provide long term institutional development support to enhance the capability of LAs in the areas such as local level planning, budgeting, revenue generation, financial management and procurement, project and office management, etc. The emphasis will be on creating sustainable local institutions that can effectively coordinate local development and manage service delivery.

16. Component 2: Institutionalizing Accountability (US$ 2.0 million): The objective of this component is to institutionalize accountability into the existing system based on incentives associated with the capital grants and complimented by disclosures by LAs to communities and higher tiers of governments. Public disclosure, reporting and regular open meetings will be made conditions of enhanced and performance block grant releases. NELSIP aims to enhance the planning, budgeting, procurement, reporting and auditing systems and process of LAs with the objective of making local level expenditure more efficient, transparent and accountable. Standard financial management procedures such as financial cum physical reporting, and audit will have the aspect of accountability built into the design. IDA funding will cover the whole expenses of this component.

17. Monitoring, Evaluation & Reporting: The project will strengthen the existing requirements of monitoring that include; (i) quarterly reporting of capital grants including financial, physical, 35

procurement, environmental, social and disclosure aspects in the last quarter and a certification by the LA Council that the quarterly report is displayed in the LA notice board; (ii) enforcement of reporting cycle that release of successive installments of capital grants would be upon receipt of quarterly reports by a specified date; (iii) reporting channels where quarterly reports are sent to ACLG and PM notice boards. The PCU of MED will process the next tranche of a grant based on second and fourth quarterly reports submitted by the CLGs, with copies to Secretary, Provincial Ministry of Local Government, Chief Secretary and Governor. The CLG will have two weeks to record any objection on a report based on his/her assessment. The CLG’s report will be evaluated by the Chief Secretary and suitable action will be taken against any criminal misconduct or any misappropriation of expenditure of a block grant; (iv) training to build the capacity of LA members and committees about the capital grants; and (v) monitoring and evaluation to introduce a suitable MIS to originate the quarterly reports from FY 2011 onwards. It will also maintain a comprehensive database with public access to the data on the project website. Annual FMR also will be prepared.

18. Enhancing Transparency and Accountability in Public Expenditure Management: The project will support LAs to strengthen the institutional systems and processes for public expenditure management viz; planning, budgeting, procurement, financial reporting and auditing with the objective of enabling local governments to enhance their transparency and accountability. The project will provide the necessary training and incentives to the participating LAs to carry out their annual planning and budgeting exercises in a consultative manner. Social accountability measures will be integrated into standard financial management and procurement procedures with the LAs publishing the annual financial statements and list of contracts in a public notice/display board. Independent external audits will ensure integrity of the public financial management and procurement systems in sustaining a robust accountability framework. The Auditor General (AG) of Sri Lanka, who has the mandate for the external audit of the public sector entities in Sri Lanka, will provide assurance on the annual accounts of the LAs on a regular and timely manner. The LAs under the program will be required to present the audit report in an open meeting of the local citizens. The Fiscal Analysis Cell (FAC) to be formed as part of the office of the DCS (Finance) of the two provinces will monitor the financial reports and audit reports of LAs and will work with the CLGs to ensure that follow up actions are taken on audit observations on a timely basis.

19. Information, Education and Communication (IEC): The objective of this subcomponent is to provide basic information to local government officials, community and civil society on the size and condition of access to the LA capital grants. IEC will be implemented annually through selected service providers such as mass media, NGOs, internal government channels, among others. Additional IEC activities on the conditions of access to and outcomes of the enhanced capital grants and performance capital grants will be designed and undertaken in the second and third year of project implementation. In addition, a series of district level workshops will be held annually to ensure project information dissemination. Resources will be provided to support the IEC campaigns and the activities will include design of IEC materials, training of trainers for service providers, media campaign and assessment of IEC outcomes.

20. Participation and Public Disclosure: Community voice will be strengthened at the local level through regular and reliable information through open meetings, LA notice boards and sign boards displaying information on each infrastructure scheme.

21. Grievance Redressal Mechanism for Citizens: Citizens will have three avenues to seek redress in case of safeguards and checks through (i) open LA meetings; (ii) bi-weekly meetings of the Social

36

Audit Committee of the LAs; and (iii) written complaint to Government Agent, Chief Secretary, or Secretary/MED. This process will provide opportunities to increase their level of engagement and the efficacy of this strategy will be closely monitored, evaluated and disseminated during implementation, with corrections introduced as necessary.

22. Component 3: Building Capacities (US$ 4.0 million): This component will provide support to strengthen systems and capacities of LAs to enable them to deliver their mandated services. It will also support the strengthening of the capacities of the institutions at the national and provincial level like the Finance Commission, CLGs, ACLGs, Provincial Finance Department, Provincial Audit Departments, and SLILG that play a critical role in the support and oversight of local government functions. Activities under this component will initially focus on enabling LAs in the North and the East to satisfy the eligibility conditions to gain access to the block grant for the transparent and efficient utilization of the block grant funds. At the same time, the project will work with the SLILG, who are the mandated training institution for LAs in Sri Lanka to roll out its existing menu of training courses relating to the strengthening of local government management with a focus on the LAs of the North and the East. This component will also support the Provincial Governments of the North and the East to develop a long term capacity building framework for LAs that will ensure a coordinated approach between the initiatives taken by the national and provincial governments as well as the donor community. The various activities under this component are described below. IDA funding will cover the whole expenses of this component.

23. Developing and Strengthening Systems and Processes: This sub-component will support the strengthening of the critical components of the public expenditure management cycle of LAs in the Eastern and Northern Provinces. This would include improving the efficiency of the current systems and processes relating to planning, budgeting, accounting and financial management, revenue management, procurement, and auditing. The existing procedures in each of the above areas will be reviewed and strengthened as necessary. Manuals and guidelines will be prepared to ensure the uniform and efficient application of such procedures. Technical assistance will be provided to improve the quality of the participatory planning and budgeting process. Specific assistance will be provided to LAs to clear the existing backlog of audits (where such backlogs exist) and to obtain a “clean” audit opinion. Technical assistance will be provided to the provincial audit departments of both provinces to improve the quality of their mandated internal audit function as well as to progress to new areas like Value for Money (VFM) audits. The Provincial Finance Departments will be provided technical assistance and advisory support to build up skills and systems for effective fiscal and financial monitoring of local government public expenditure management. The Fiscal Analysis Cell (FAC) to be formed as part of the office of the DCS (Finance) will be provided support for carrying out the verification of the eligibility of LAs to access the capital grants under the project as well as to ensure robust follow up on the audit observations relating to LAs. At the national level, the project will support the institutions like the Finance Commission to fulfill their roles and responsibilities in strengthening the LAs.

24. Supply of Formal Training to LAs: This component will support the development and roll-out of a series of structured training programs with the objective of building up of the skills and competencies of LA staff and leadership. The development and roll out of the training programs are planned to be carried out in two tracks; under track no.1 a series of targeted short term courses relating to the eligibility conditions of the project and the utilization of the capital grants provided through the project will be developed and rolled-out to the LAs immediately after the start of the project. Under track #2 the content and delivery of the existing menu of courses offered by SLILG relating to the core areas of local government management will be strengthened with a focus on the LAs of the North and the East. The courses in track #2 will cover a broader set and will include both the elected 37

representatives as well as executives of LAs in its coverage. The Ministry of Local Governments and Provincial Councils (MLGPC) will form a Committee under the Chairmanship of the Secretary/Additional Secretary MLGPC that will provide oversight on the content of the training courses and will be responsible for the overall management of the roll-out of the training programs. The PCU and MLGPC will coordinate with the Management Development Training Units (MDTUs) of the two provinces and SLILG on the development of training content, standardization of delivery through a variety of service providers ( including formal training institutions like SLILG and SLIDA, NGOs and private sector providers) as well as provide quality assurance of the training programs. In addition to classroom courses, this sub-component will also provide support for other training modes like exposure visits, in-country long term courses etc on a limited scale.

25. Strengthening the mentoring role of CLG and ACLGs: At present the CLG and the ACLGs play a critical role of supporting the efficient functioning of LAs by providing guidance and advice on LA management. This sub-component aims to strengthen this mentoring role of the CLG and ACLG by strengthening the skills and capacities of the CLG and the ACLG staff. In addition, consultant support will be provided to the office of the ACLGs to set up rapid response teams in their offices in technical areas like financial management, procurement, preparation of technical estimates and supervision of works that will enable the ACLGs to provide just-in-time support to the LAs. The ACLGs will also be supported to facilitate peer learning among LAs whereby good practices can be shared among the LAs.

26. Demand driven Capacity Building Support: Considering the various types of LAs involved in the project and the differences in the capacities and requirements among them, the project proposes to set up a window for providing capacity building support that is tailored to the specific requirements of LAs on a demand driven basis. The window will invite proposals from LAs on a specific menu of areas that are not covered by the other activities under this component. Based on the evaluation of these proposals by a competent committee, support by way of financial resources and/or technical assistance will be provided. This window will be operational from the third year of the project following the development of detailed operating rules and criteria.

27. Developing a Long Term Capacity Building Strategy: This sub-component will support the MLGPC and the Provincial Councils of the North and East to develop a coordinated and strategic approach for the long term capacity building of LAs in the North and the East. The project will support the preparation of a Capacity Building strategy that will assess the existing capacity building efforts carried out by the national and provincial governments as well as the various donors, assess the long term needs and requirements of LAs, and will help to prepare a road-map for the long term capacity building of LAs.

28. Component 4: Assessments and Evaluations (US$ 1.0 million): This component will improve the ability of GOSL to evaluate the impact of capital grants and able to analyze data generated by the project through its quarterly/annual financial, procurement, social and environmental audits. Baseline, midterm and end of project surveys will be used for the evaluation of capital grants. In terms of policy analysis, a wide variety of information will be available on the effectiveness of local decision making and as such the LAs and the public at large will benefit from the comparison of their own experience with other LAs to see if there is a deficiency in their measures to assure inclusion or if the efficiency of their spending can be improved. In-house capacity may take time but simple aspects of management will be addressed with substantial help from IDA during supervision missions. IDA funding will cover the whole expenses of this component.

29. Component 5: Project Management (US$ 3.0 million): This component will support agencies at the central, provincial and local levels that are involved in the day to day management of 38

the project to procure necessary consultant and equipment support for the smooth implementation of the project. In particular, this will include agencies such as the Ministry Economic Development & Estate Infrastructure Development at the central level, the offices of the CLG at the provincial level and ACLG offices at the district level. Part of the expenses of this component will be covered by IDA funding.

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Attachment 1: Particulars of LAs in Northern and Eastern Provinces

Elected Area Local Authority Population Members (km2) District Mullaitivu Manthai East Pradeshya Sabha 0 494 24,298 Mullaitivu Maraitimepattu Pradeshya Sabha 0 728.6 55,809 Puthukkudiyiruppu Pradeshya Mullaitivu Sabha 9 968 115,605 Mullaitivu Thunukkai Pradeshya Sabha 0 326.3 24,965 Vavuniya Vavuniya Urban Council 11 22.5 75,175 Vavuniya Vavuniya North Pradeshya Sabha 0 Vavuniya South (Sinhala) Vavuniya Pradeshya Sabha 0 188.5 15,000 Vavuniya South (Tamil) Pradeshya Vavuniya Sabha 0 588.2 93,147 Vengalacheddikulam Pradeshya Vavuniya Sabha 0 399.1 23,448 Mannar Mannar Pradeshya Sabha 9 286.4 0 Mannar Mannar Urban Council 9 27.85 22,581 Mannar Manthai West Urban Council 9 1,053.06 46,639 Mannar Musali Pradeshya Sabha 9 458.25 6,195 Mannar Nanattan Pradeshya Sabha 9 256.1 19,223 Kilinochchi Karachchi Pradeshya Sabha 0 240.57 161,997 Kilinochchi Pachchilaipalli Pradeshya Sabha 0 167.09 12,405 Kilinochchi Poonakari Pradeshya Sabha 0 448.75 27,455 Jaffna Chavakachchery Pradeshya Sabha 0 239.9 72,325 Jaffna Chavakachchery Urban Council 0 19.4 21,693 Jaffna Delft Pradeshya Sabha 9 47.16 5,679 Jaffna Jaffna Municipal Council 23 20.2 83,563 Jaffna Karainagar Pradeshya Sabha 0 21.3 10,873 Jaffna Kayts Pradeshya Sabha 5 45.11 14,709 Jaffna Nallur Pradeshya Sabha 12 20.59 42,451 Jaffna Point Pedro Pradeshya Sabha 0 220 47,766 Jaffna Point Pedro Urban Council 0 11.65 20,543 Vadamarachchi South‐West Jaffna Pradeshya Sabha 18 68.95 53,541 Jaffna Valikamam East Pradeshya Sabha 21 102.2 75,935 Valikamam North Pradeshya Jaffna Sabha 21 58.5 26,566 Valikamam South Pradeshya Jaffna Sabha 16 33.26 57,619 Valikamam South‐West Pradeshya Jaffna Sabha 16 55.24 62,201 Jaffna Valikamam West Pradeshya Sabha 14 47.3 47,620 Jaffna Valvettithurai Urban Council 9 4.85 18,000 40

Jaffna Velanai Pradeshya Sabha 11 180 19,725 Eachchalampaththu (Verugal) Trincomalee Pradeshya Sabha 98 6617 Gomarankadawala Pradeshya Trincomalee Sabha 285 5879 Trincomalee Kanthalai Pradeshya Sabha 11 397.3 48,632 Trincomalee Kinniya Pradeshya Sabha 146.9 61,558 Trincomalee Kinniya Urban Council 7 9.5 44,034 Trincomalee Kuchchaveli Pradeshya Sabha 9 333.3 29,967 Trincomalee Morawewa Pradeshya Sabha 116 10,000 Trincomalee Muthur Pradeshya Sabha 11 179.4 60,000 Trincomalee Padavi Siripura Pradeshya Sabha 9 217.1 13,000 Trincomalee Seruwila Pradeshya Sabha 277 13,886 Trincomalee Thampalakamam Pradeshya Sabha 9 244 33,967 Trincomalee Trincomalee Urban Council 12 7.5 101,958 Trincomalee Town & Gravets Pradeshya Sabha 148 89,046 Batticaloa Batticaloa Municipal Council Batticaloa Eravur Pattu Pradeshya Sabha 585.7 77,203 Batticaloa Eravur Town Pradeshya Sabha 9 4.9 40,819 Batticaloa Kattankudy Urban Council 9 6.5 46,597 Batticaloa Koralai Pattu Pradeshya Sabha 242 125,000 Koralai Pattu North Pradeshya Batticaloa Sabha 11 645 21,202 Koralai Pattu West Pradeshya Batticaloa Sabha 9 25 29,614 Manmunai Pattu (Arayampathy) Batticaloa Pradeshya Sabha 21.5 30,218 Manmunai South & Eruvil Pattu Batticaloa Pradeshya Sabha 44.17 70,256 Manmunai South West Pradeshya Batticaloa Sabha 9 161.6 25,279 Batticaloa Manmunai West Pradeshya Sabha 9 292.65 30,026 Batticaloa Poratheevu Pattu Pradeshya Sabha 176 49,066 Ampara Addalaichchenai Pradeshya Sabha 9 94.5 43,499 Ampara Akkaraipattu Pradeshya Sabha 11 64.22 39,148 Ampara Alayadivembu Pradeshya Sabha 9 129.2 26,175 Ampara Amparai Urban Council 32.34 17,965 Ampara Damana Pradeshya Sabha 426.2 35,705 Ampara Dehiyatakandiya Pradeshya Sabha 432.5 55,930 Ampara Kalmunai Municipal Council 19 22.8 100,427 Ampara Karaitivu Pradeshya Sabha 5 8.6 18,435 Ampara Lahugala Pradeshya Sabha 616.9 8,259 Ampara Maha Oya Pradeshya Sabha 10 697.8 17,801 Ampara Namal Oya Pradeshya Sabha 9 105.1 Ampara Navethanveli Pradeshya Sabha 57.69 21,803 Ampara Nintavur Pradeshya Sabha 7 42.9 28,247 41

Ampara Padiyatalawa Pradeshya Sabha 464.4 16,451 Ampara Pottuvil Pradeshya Sabha 9 269 31,995 Ampara Sammanthurai Pradeshya Sabha 12 198.4 75,257 Ampara Thirukkovil Pradeshya Sabha 9 212.12 29,860 Ampara Uhana Pradeshya Sabha 15 415 60,071

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Annex 5: Project Costs SRI LANKA: North East Local Services Improvement Project (NELSIP)

Local Foreign Total Project Cost By Component and/or Activity US $million US $million US $million

1. Fund Transfer 74.00 0.00 74.00 2. Institutionalizing Accountabilities 1.50 0.50 2.00 3. Building Capacities 3.50 0.50 4.00 4. Policy Development and Evaluation 1.00 0.00 1.00 5. Project Management 3.00 0.00 3.00

1 (A) Beneficiary Contribution 2.00 0.00 2.00

Total Baseline Cost 85.00 1.00 86.00 Physical Contingencies - - - Price Contingencies - - - Total Project Costs 85.00 1.00 86.00 Interest during construction Front-end Fee Total Financing Required 85.00 1.00 86.00

Note: The Project Preparation Advance of US$ 1 million is included in Components 3 and 5.

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Annex 6: Implementation Arrangements SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. The design of the overall implementation arrangements for the project took into consideration the special conditions prevailing in the Northern and Eastern provinces of Sri Lanka. The overall structure of implementation arrangements are shown in figures 6.1 and 6.2.

2. Central Level: At the central level, the Ministry Economic Development (MED), headed by the President of Sri Lanka, will be responsible for the execution of the project, providing direct administrative support to the project and ensuring that the project resources are managed in an accountable and transparent manner at all levels. MED is the coordinating ministry at the center responsible for all developmental initiatives pertaining to Northern and Eastern Provinces.

3. Within the MED, the existing Gama Neguma Unit (GN Unit) will be responsible for coordinating all foreign funded projects. An Additional Secretary of MED oversees this GN Unit, whereas a Senior Assistant Secretary of the Ministry is in-charge of this GN Unit. This Senior Assistant Secretary is the Project Coordinator (PC) of NELSIP and he will report to the Secretary, MED. The PC will liaise closely with the above said Additional Secretary. The PC will be responsible for coordinating project activities at the national level, overseeing overall implementation of the project and reporting to the Bank. The NELSIP Project Coordination Unit (PCU) will be organized into two sections: Administration, Finance and Procurement; and Monitoring/MIS/reporting, Learning and Communication. The main responsibilities of the PCU relating to project implementation include:  ensuring overall policy coordination;  maintaining linkages with various line ministries and government agencies involved in local development, issuing Circulars/GOs as necessary, and ensuring coordination and synergy with other development programs in the two provinces;  carrying out project–related overall financial management, auditing, monitoring and reporting, and administration functions;  acting as convener of the National Project Steering Committee (NPSC);  ensuring coordination across the two provinces in smooth implementation of the project at local level;  raising awareness regarding the project among key stakeholders, including politicians and senior government officials, as well as ensuring that lessons learned are captured and disseminated nationally and;  ensuring adequate budgetary support for the project.

4. Inter-ministerial coordination at the national level will be ensured through a National Project Steering Committee (NPSC). The NPSC will be co-chaired by the Secretary, MED and Secretary, MLGPC and consist of senior officials from key national level ministries (such as Finance and Planning, Local Government and Provincial Councils, Public Administration and Home Affairs, etc.), provincial level Chief Secretaries and Commissioners of Local Governments, and one representative LA chairs from each district. The NPSC will be responsible for:  providing policy guidance and monitoring support at national level;  ensuring overall linkages with other line ministries; and  promoting an enabling environment.

5. Provincial level: At the provincial level, overall implementation of the project will be managed by the Commissioner of Local Government (CLG) in each province, who will be supported by the Assistant Commissioners of Local Government (ACLGs) in each district. The CLG will report to the Chief Secretary at the provincial level and to the PCU at the national level. The CLG-level team will 44 be fully responsible for the smooth implementation of the project at the provincial and district levels. The team will consist of administrative section, finance and internal audit section, planning and development section, and legal and reform section.

6. Key responsibilities of the CLG will include:  coordinating closely with PCU at national level and reporting on progress;  selecting LAs for participation in the project implementation based on eligibility criteria;  providing support to ACLGs and LAs on project implementation matters;  operating a public grievance redressal mechanism;  coordinating provincial level capacity building activities;  ensuring financial management of the program, including coordinating audit of LAs, receiving funding from the Treasury and remitting to LA bank accounts;  conducting program monitoring include gathering baseline data, process and impact monitoring activities;  raising awareness about the project at the provincial level through IEC programs;  liaising with Provincial Coordinating Committee and submitting LA development plans to Provincial Secretariat for necessary approvals; and  ensuring coordination and linkages with other development programs.

7. At the provincial level, the existing Provincial Planning Committee (PPC) will provide overall oversight and advice to the CLG, monitor overall progress, iron out issues that cut across different ministries/departments/line agencies at the provincial level, and recommend institutional changes/reforms, as warranted, to the provincial government. Decisions regarding the initial eligibility of the LAs into the program by verification of the compliance of the eligibility criteria and the continuation of the LAs in the program through compliance with the eligibility criteria in subsequent years will be made by the PPC. A Fiscal Analysis Cell (FAC) will be constituted in the office of the Deputy Chief Secretary (Finance) which will assist the PPC in the verification of the eligibility conditions. The FAC will also enable the provincial government to collect data on the fiscal performance of LAs, carry out analytical studies relating to the revenue and expenditure performance of LAs and monitor the follow up of the audit recommendations relating to LAs. At district level, the ACLGs will undertake the responsibility for supervising, supporting and monitoring project activities carried out by the LAs in their jurisdiction.

8. The ACLGs will report to their respective CLGs and their responsibilities will include:  support, supervise and monitor LAs and oversee implementation progress and utilization of capital grants at the LA level;  assist LAs in the preparation of LA development plans and budgets and help submit these plans to the CLG for approval;  assist LAs in the application of rules and regulations related to procurement, financial management, and social and environmental safeguards;  supervise and certify requests for funds of LAs;  carry out technical supervision of infrastructure sub projects prepared by LAs;  function as the liaison between higher levels of governments and LAs;  assist the CLG in program and impact monitoring activities as well as in capacity building activities; and  oversee public grievance redressal mechanism at the district level.

9. Local Government level: The LAs selected for the project will take full responsibility for implementing the project at divisional level. The responsibilities of the participating LAs will include:  undertake the overall project implementation responsibility at the divisional level; 45

 prepare the consolidated LA Development Plan with the assistance of the Praja Mandalayas (PM);  receive capital grants and performance grants and utilize the monies for implementing the approved Development Plans;  prepare and submit progress and financial reports to the ACLG and CLG;  disseminate project related information to all relevant stakeholders;  maintain all records pertaining to the project including but not limited to financial management, procurement, safeguards;  maintain a separate accounting documentation and a bank account for the project;  support and help build capacity of PM for implementing Gram Niladhari (GN) level projects; and  maintain liaison with communities.

10. For purposes of advising the LA Council on participatory development related activities, the existing LA Advisory Committee will be revived. This Advisory Committee will advise the LA Council on development activities including managing the resources. The composition of the Advisory Committee will be decided by the LA. However, the percentage of members representing the Praja Mandalaya (citizens) should be higher than the Council members. The Advisory Committee will report to the LA Council. The PM members of the Advisory Committee are selected from the elected members of the PM. The Committee represents the citizens in the decision making process of the LA. The roles and responsibilities of LA Advisory Committee will include:  advising the LA Council;  coordinating closely with LA standing committeesl;  assisting LA in the prioritization of sub project proposals submitted by the PM, and help to prepare the consolidated LA Development Plan;  representing the LA in the Divisional Coordinating Committee;  advising LA on implementation of development programs;  disseminating project related information to all relevant stakeholders; and  liaising closely with political as well as the administrative authority at the divisional level.

11. Within each LA, the PM—which is established by the LA under a Circular of MPCLG—will act as the community level mechanism, to carry out development works and implement project activities under the guidance of the LA. It will operate at the Gram Niladhari (GN) level. The PM is an autonomous organization, and will report on progress of the project to the LA Advisory Committee through the Community Development Officer of the LA. The responsibilities at this level will include:  undertake project implementation activities as assigned by the LA;  help organize participatory planning sessions with the assistance of the LA to formulate the Village Development Plan and submit it to the LA Advisory Committee for funding;  undertake procurement for village level infrastructure;  supervise sub-project construction work undertaken by service providers;  coordinate with other stakeholders on village development initiatives;  coordinate closely with the village based government officials (GN, Samurdhi Development Officer, Family Health Officer, and Agricultural Officer);  monitor project activities through the established monitoring mechanisms; and  hold progress review meetings at the village level and prepare progress reports to the LA.

12. The overall objective of the above institutional arrangements is to ensure effectiveness, transparency and accountability at the central, provincial and local levels. The structure and arrangements are unique to the special circumstances existing in the two provinces.

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47

Annex 6A: Supervision Strategy SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. As with the rest of the Bank’s package of assistance to the Northern and Eastern provinces, enhanced project supervision is necessary because of the risks likely to emerge in a post-conflict environment. The main responsibility for project supervision will be anchored with the World Bank Colombo office, supported by staff from Head Quarters. In the initial six months period supervision will be particularly intense. Two full implementation support missions are planned to be carried out, one after the first three months and the second after six months. Thereafter, full supervision missions will be carried out once in every six months, including the Mid Term Review (MTR) scheduled in December 2012. This annex details the objectives, methodology and expected outcomes of the supervision strategy for NELSIP. The objectives are: monitoring the critical risks identified in the Risk Identification Worksheet and in the GAAP; and monitoring implementation progress to ensure achievement of the PDO.

2. The supervision methodology comprises of (i) team composition; (ii) activities; (iii) tools; and (iv) resources. The Bank team will comprise a skill mix of the following expertise and specialists: economists, conflict, technical, financial management, local government, procurement, environment, social development, operations and monitoring and evaluation.

3. The main activities to be monitored will reflect the underlying principles of NELSIP. More broadly, the team will encourage the Government to implement the project in accordance with the project implementation plan and operations manual. The Project Coordination Unit (PCU) will prepare an annual work plan outlining all activities expected during the following fiscal year.

4. The activities will include:

i. Support the PCU in operational aspects; for example, guidance on execution of procurement rules and procedures in accordance with the procurement plan; ii. Ensuring adherence to the criteria for eligibility to access NELSIP capital grants as well as access to the enhanced capital grants; iii. Monitor adherence to all fiduciary and social safeguard issues; and iv. Keep track of the project indicators in the ISR.

5. The team will utilize the following tools to accomplish the supervision objectives: i. Adhere to the OPCS guidelines for project supervision, and will provide timely feedback to management for action. Throughout the implementation the team will seek guidance from the country operations and legal advisors; ii. Support the PCU to regularly update the monitoring information system (MIS) to keep track of both the fiscal and service delivery inputs and outputs; iii. Encourage the PCU to establish complementary methods to supervision through other stakeholders such as the media and non-Government organizations; and iv. Establish a website that will encourage open discussion on implementation of NELSIP.

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Summary: Supervision responsibilities, tools and expected outcomes

Government--—Activities & Bank Team—Activities & Expected Outcome Tools Tools  Prepare the annual work plan of  Ensure that the project  Coordinated flow of activities. components are communication  PCU coordinates with all other implemented in spirit between the client and stakeholders involved in the consistent with the PDO the Bank team. project to ensure continuity in and higher development  Quality reporting to NELSIP activities. objective. Senior Management  PCU and CLGs execute  Prepare timely Aide (AMs, BTORs). activities as envisaged in the PIP Memoires (AMs) and  Early identification of and OM. Back to Office Reports weakness and  PCU maintains an update MIS (BTORs). problems—to allow system.  Provide guidance on all PCU and Bank to  PCU and CLGs develop and aspects of the PIP and anticipate appropriate update regular websites. LAPIM (emphasis will be solutions.  PCU to follow up closely on all put on ensuring that the  Compliance with fiduciary related matters on a local planning processes, fiduciary covenants. timely manner in accordance with procurement and GoSL guidelines, including fiduciary aspects are contracts, and monitoring reports. carefully implemented as  GoSL ensures that all key posts envisaged). are filled to ensure smooth  Review the financial implementation. management and audit  Compliance to social reports. assessments and ESMF.  Provide feedback on annual plans and various ToRs.  During supervision monitor all project activities through field visits, review progress reports, review conflict & reconciliation filter, hold interviews with key stakeholders, etc.  Ensure adherence to all social and environmental safe guards.

6. The Bank team plans to field two implementation support missions during the first 6 months from project effectiveness. Subsequently the team will visit Sri Lanka twice a year. The supervision activities will be intensive in nature, preferably drawing on the presence of all team members during the supervision week (s). Periodically, the TTL and other Bank staff, particularly those on fiduciary related issues, will conduct interim supervision activities in liaison with the client and will also participate in the PPC meetings. The Bank team will carry out the mid-term review after 30 months of credit effectiveness. A final evaluation of the project will be carried out at close of the project. As and when necessary, specific studies will be carried out to inform the PCU and Bank on how to address specific project related issues. 49

7. Resources: Effective supervision requires a reasonable budget. The Bank team estimates a conservative budget of about US$ 180,000 annually during the first two years and US$ 120,000 annually for the remaining period of the project. The budget will cover Bank staff, consultant fees and travel expenses.

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Figure 6.1: Overview of Implementation Arrangements

National Project Gama Neguma Cell Steering Committee Ministry of Ministry of Economic (NPSC) Provincial Council Development and Local Government (MPCLG)

Technical Consultants

Monitoring Monitoring SL Institute Provincial Council of Local Project Secretariat Governance Provincial (SLILG) Coordinating Provincial Training Unit Committee Commissioner of Local Government (CLG)

Management Management Management Development District Regional Assistant Training Unit Commissioner of (MDTU)/ Coordinating Committee Local Government ODU (ACLG)

Building Capacity

Capacity BuildingStudies / Divisional Supervision Coordinating Committee Local Authority (LA)

n

mplementatio I

Praja Praja Praja Mandalaya Mandalaya Mandalaya

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Figure 6.2: Institutional Structures MED

PCUAssistant S LEVEL

Project Coordinator Capacity Building Financial Management MIS/M&E IEC Firm Specialist Specialist/Manager Specialist ESMF Firm CENTRAL Social Assessment Firm

CLG (N/E) Audit Firm

Finance & Internal Audit Unit Planning & Development Unit Legal & Reforms Unit Administration Unit Accountant Assistant Director Assistant Commissioner Administration Officer Internal Auditor Civil Engineer Community Dev. Officer Program Assistant Financial Management Assistant Procurement Specialist Program Assistant Management Assistant Program Assistants Institutional Dev. Specialist Management Assistant

LEVEL Management Assistants

Social Protection Specialist IEC Specialist Program Assistant Regional Management Assistant ACLG (N/E) PROVINCIAL

Planning & Community Dev. Financial Technical Unit Administrative Human Resources Investigation & Good Governance Monitoring Unit Unit Management Unit SCW – 1 Unit Service Unit Internal Audit Unit Reforms Committee Comm. Dev. Fin. Asst. - 1 Tech. Off.– 1 Staff Asst. – 1 Investigation Officers - CDOs - 1 Local Govt. Asst. –1 Officers - 2 Program Asst. – 1 D’ person - 1 Mgt. Asst. – 1 Program Asst. - 2 2 Program Asst. – 1 Civil Eng - 1 Driver CDOs - 1

Local Authority (N/E) LA Council

Chairperson, Secretary LEVEL Planning & Monitoring Financial Mgmt. Unit Administration Unit Revenue Unit Public Utility Unit Unit Finance Asst. – 1 Chief Mgt. Asst. – 1 Program Asst. – 1

LOCAL Local Govt. Asst – 1 Mgt. Asst. - 1 Clerks - 1 Revenue Supervisor - 1 Technical Officer - 2 Program Asst. – 1 Com Dev Officer - 1 52

Figure 6.3: Staff Associated with the Project

National level Provincial level (for North District level (for each LA level ( for each LA) and East separately) District covered by the Project) Project Coordinator Project Director/CLG Deputy Project Director/ACLG Accountant/LA Secretary M&E Specialist Asst. Project Director/Asst. Civil Engineer Technical Officers Director Senior Technical Officers PFM Specialist Accountant Draftsperson Local Government Assistant Finance Manager Civil Engineer Procurement Program Assistant – Finance Assistant/Community Development Officer ESMF Coordinator Institutional Specialist Program Assistant - Finance Program Assistant – (Institutions and M&E) Procurement Data Keeper Social Protection Specialist Community Development Program Assistant- CDD Officer – Environment Operations Firms (MIS, IEC, SIA and IEC Specialist Community Development Audits) Officer - Social Procurement Specialist Community Development Office – M&E Data Keeper Highlighted positions are locally hired

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Annex 7: Financial Management and Disbursement Arrangements SRI LANKA: NORTH EAST LOCAL SERVICES IMPROVEMENT PROJECT

Country Issues

1. The project is designed to operate within the public financial management systems of Sri Lanka at the national, provincial and local levels. The Country Financial Accountability Assessment (CFAA) for Sri Lanka published in June 2003, highlighted gaps and weaknesses in the institutional framework for public financial management. The assessment covered a wide range of processes including financial management and reporting practices at the three levels of government, public audit, and parliamentary control of public funds. Though the GoSL has initiated some steps to address some of these weaknesses through the Bank financed Public Sector Capacity Building project, significant gaps remain in the functioning of the institutional framework relating to financial management. Specifically financial reporting and internal auditing within Government require substantial strengthening. Currently there is no institution in Sri Lanka providing comprehensive training in government internal audit. Overall, fixed asset management within the public sector is inadequate. A program has been initiated to strengthen & improve the overall fixed asset management system but the results of this would be long term. Keeping in mind the above country issues, the task team has carried out an assessment of the financial management systems and processes of the implementing entities at the national, provincial and local level to identify the fiduciary risks involved and have devised the project financial management arrangements and risk mitigation steps based on that assessment.

Brief Project Description, Implementing entities and arrangements

2. The project is a Specific Investment Loan (SIL) proposed to be financed through an IDA credit of US$ 50 million with duration of five years. The proposed project components and their outlays are: (a) Infrastructure Service Delivery (US$ 76 million) (b) Institutionalizing Accountabilities (US$ 2 million) (c) Building Capacities (US$ 4 million) (d) Assessments and Evaluation (US$ 1 million) and (e) Project Management (US$ 3 million).

3. The Ministry Economic Development (MED) will be the principal implementing entity for the project and it is responsible for the day to day project management. The project implementation will be subject to the oversight and supervision of a National Project Steering Committee, co-chaired by the Secretary of MED and the Secretary, Ministry of Local Governments and Provincial Councils (MLGPC). A Project Coordination Unit (PCU) has been established in MED to handle the project management activities. The PCU will be responsible for day to day project management and to ensure coordination among the various departments and agencies involved in the project. The PCU will be responsible for project financial management arrangements and for coordinating the project financial management activities at the PC and LA levels.

4. At the provincial level, the project activities will be subject to the oversight of the provincial council. The Provincial Planning Committee (PPC) headed by the Chief Secretary, which exists at present, will provide the necessary oversight of project activities and will be responsible for deciding on the initial eligibility of participating LAs into the program as well as on continued eligibility. The Commissioner of Local Government (CLG), of the respective 54

provinces, who is the administrative Head of Department of the controlling department for local governments at the provincial level, will be responsible for the coordination and supervision of the project activities and will be responsible for financial management of the project activities at provincial level. The CLG will coordinate the project FM activities including funds flow to the participating LAs, obtaining the periodical progress and financial reports from the LAs and conveying them to the PCU, liaise with the Auditor General regarding the annual audit of LAs. A Fiscal Analysis Cell (FAC) to be created as part of the Office of the Deputy Chief Secretary Finance will be responsible for review of financial reports and audit reports of the participating Local Governments. The CLG through the ACLGs at the district level will provide the administrative supervision of the project activities at the LA level. At the LA level, the Secretary will be responsible for satisfactory financial management arrangements in the activities implemented by the LAs under the project, subject to the supervision and oversight of the LA council wherever elected councils are in place. The Finance and Planning Committees of the LA council will provide oversight regarding the implementation of the block-grant financed activities as well as their financial management.

5. Financial Management Framework for Component #1 (Infrastructure Service Delivery) : The project follows the Community Driven Development (CDD) model of project design which aims to provide resources to the local government for undertaking local development works based on community consultation and participation. Since the local governments will be the implementing entities for the subprojects financed out of the capital grants, the financial management arrangements for component #1 of the project relating to capital grants will rely on the government systems to the extent possible. Where such systems and capacities are found inadequate they will be (a) strengthened through focused technical assistance and capacity building efforts and (b) supplemented through the use of consultants. The emphasis will be to enable the participating local governments to learn the skills and practices of efficient financial management through a “learning by doing” mode by providing them with the necessary incentives for doing so. Thus the project will provide technical assistance to the participating local governments to improve their FM systems and at the same time insist on a higher level of standards in terms of FM practices to be part of the project, as is evidenced through the eligibility criteria prescribed. The capital grants provided to the participating local governments will be disbursed on a lump-sum basis (in two installments) based on the compliance with a set of eligibility conditions. These eligibility conditions will be verified annually to decide on continued eligibility. The capital grant funds will be used to finance local development activities that are included in the participatory plans prepared by the LA in consultation with the community. The participating local governments will be required to enter into an agreement with the MED that will specify the roles and responsibilities of the MED/Ministry of Finance (representing the National Government), the two Provincial Councils and the local governments. The LAs will be required to provide reports on the physical and financial progress of the activities undertaken and will be subject to an annual audit by the Auditor General. In addition, the project will be supported by the Provincial Internal Audit Department to carry out specialized audits including a Management Audit and a Value for Money Audit at least twice during the course of the project. The project will rely on the existing institutional systems of oversight of the Provincial and National Government and will supplement them with additional measures, as required.

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Overall FM Risk Rating

6. Overall project FM risk is initially rated as High. Though several mitigating measures are built into the project, the impact of these measures will depend on the quality of their implementation once the project starts. Hence the residual risk for the project is also rated as “High” initially. The risk rating will be reviewed on an annual basis to reflect the impact of the mitigation measures and the capacity building activities included in the project.

FM Risk Assessment Table

Initial Residual Risk Risk Risk Remarks/Description Mitigating Measures. of risks INHERENT RISK Country level Quality of PFM H Risk associated with PFM strengthening H institutions governance and programs (eg Capacity oversight building of the Auditor General’s office) are being implemented. However the results will be long term. Lack of clarity in H Risk associated with Specific institutional S the roles and governance, public arrangements like the responsibilities of financial management Provincial Planning various tiers of and oversight Committee and the FAC governments at the provincial level, and the National Steering Committee and the PCU at the national level will ensure coordination. Entity level – MED Post conflict H H situation resulting Project specific in fragile arrangements put in place government to provide the necessary systems and incentives to build the public sector basic institutional systems and practices. However management the success of these arrangements will depend on the quality of implementation Project level

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Complexity of the H Risks associated with i)FM capacity of the PCU H project due to the management of a will be strengthened by number of project of this nature hiring quality staff government levels where the project involved funds will flow to a ii)Preparation of a large number of LAs comprehensive FM at dispersed locations Manual by an FM consultant hired by the MED

iii) Funds will only be given to LAs with up to date qualifying audit reports. Several of the LAs have large audit back logs that are still in the process of being cleared Overall Inherent H H Risks Control Risks

Planning and H Local level Plans Annual plans and S Budgeting and Budgets are not Budgets prepared in prepared in a accordance to revised participatory and Planning and Budgeting realistic manner and Guidelines. LG staff not linked to annual trained in participatory work plans Planning and Budgeting methods. Capacity Building Component will enable the strengthening of existing systems and procedures. Staffing H Inadequate staff The eligibility criterion S skills and capacities requires that participating LGs have adequately trained FM Staff. The project provides upfront capacity building for FM Staff Funds Flow H Delays in transfer of Funds transferred H funds through the directly to the Bank various layers of Accounts of LGs. The Governments CLG will monitor specifically the duration of fund flows.

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Accounting and H Gaps between rules Annual eligibility H Reporting prescribed and criteria will insist on actual practices. preparation of quarterly and annual financial statements on time Technical Assistance to be provided for the preparation of financial reports of acceptable quality Internal Controls H Weaknesses in the The project will H system of internal procure the services of controls at the LG internal auditors who level raises the risk will carry out random of project funds checks. The Provincial being used for audit department will unintended purposes be provided technical assistance to carry out Value for Money Audits Auditing H Back log of audits in The project will H some LAs provide technical Follow up of audit assistance for the recommendations clearing of existing not done in a timely audit backlogs before and regular manner acceptance to the program Eligibility criteria insists on acceptable audit reports of the previous financial year The DCS (Finance) through the Fiscal Analysis Cell will be responsible for monitoring the follow up of audit recommendations Overall Control H H Risks

Financial Management Assessment – MED

7. The MED was established to formulate and implement policies, programs and projects for rehabilitation, reconstruction and development of areas affected by the conflict and Tsunami. In accordance with the Government’s Special Gazette Notification No: 1482/9 of January 29, 58

2007, all foreign funded projects relating to Northern and Eastern Provinces are initiated and coordinated by MED. The Ministry has project implementation units of various projects such as Re-awakening Project, Emergency Northern Recovery Project, North East Community Restoration & Development Project, Conflict Affected Areas Rehabilitation Project, North East Coastal Community Development Project and Pro-Poor Economic Advancement and Community Enhancement Project. All these projects and activities carried out by MED are subject to the oversight of the Secretary to the Ministry. The Ministry has employed finance officers who are from the government accounting service to handle the FM activities of these projects. The Ministry is subject to annual audits by the Auditor General of Sri Lanka. As the present FM staffs of the Ministry are involved in many projects, specific responsibilities will have to be assigned to selected staff within the Ministry to handle the project financial management tasks of NELSIP.

Financial Management Assessment – Provincial and Local Governments

8. As part of project preparation, a financial management assessment of the existing systems and practices of LAs in the North and Eastern Provinces was carried out with the help of consultants. The findings of the assessment indicate that while the basic elements of a functioning public financial management system are in place in both the North and Eastern Province, there are deficiencies in practice. Also being a post conflict situation, especially in the Northern Province, the public financial management system is not quite functional in many of the areas and will require time and effort to be able to get back to their normal functioning. The public financial management framework for PSs is defined by the Pradeshiya Sabha (Financial and Administrative) Rules 1989. These include books/records to be maintained and the budgeting, accounting and reporting procedures. PSs follow a double entry system of book keeping and the chart of accounts under which the financial transactions are classified have been stipulated and the reporting formats prescribed. Timelines have also been prescribed for the submission of the annual financial statements for annual audit after the close of the financial year. In addition, the Finance Regulations (FR) and the Administrative Regulations of the GoSL are followed. The Eastern Provincial Council has now published a FR applicable to the public institutions functioning in the province, which is an adaptation of the FR of GoSL Annual audits are conducted by the Auditor General and the audits are conducted in accordance with the Sri Lanka Auditing Standards which are based on the International Standards. The CLG is required to exercise oversight responsibilities through periodic investigations and intermittent review of books and records of the LAs through their Internal Audit Department. Governance and transparency arrangements at the LAs are mandated through detailed provisions stipulated in the PS by laws (Procedure for the conduct of Business at Meetings) Rules, 1988 and establish the accountability of the Chairman, members and officers of the local governments.

9. The Urban Councils (UCs) has been established under Urban Councils Ordinance. The UC has an elected council and it consists with the Chairperson and Vice Chairperson with other members. The term of the UCs is 4 years. The chairperson is responsible for managing the council. The Secretary of the Urban Council shall be the chief administrative officer and the chief accounting officer. The duties and functions of the UC are similar to those of Pradeshiya Sabha. The FM capacity of the UCs in the East was assessed by a FM consultant during project preparation and concluded that UCs have the capacity to handle the FM aspects of the project funds allocated to them. The Municipal Councils are governed and administered under the MC 59

Ordinance of 1956 (subsequently revised in 1987). The MC Ordinance provides for the rates and limits on revenue collection though these have not been updated on a timely basis. Books, records and accounts are maintained by the MC according to the Wickramanayake accounting system developed and implemented in local governments in 1974. In addition, the day to day business of the MC also is conducted in accordance with the Finance Regulations and Administrative Regulations of GoSL.

10. As mentioned before, though there exists a framework for public financial management at the provincial and local level, there are gaps in their actual practice. This is due to deficiencies in skills and capacities as well as due to inadequate oversight of public financial management at various levels. The budgeting process remains fairly limited and fragmented and there are no visible linkages between the annual budget and the long/medium term strategic plans. Though the LAs are required to submit quarterly financial reports to the CLG, few LAs do so. While most of the LAs prepare and submit their annual financial statements and annual reports within a reasonable period after the close of the financial year, there are some PSs (in the Eastern Province) whose accounts are outstanding for many years. As a result the annual audits of these PSs have a back log which in certain instances extends to more than ten years. However the Ministry of Local Government and Provincial Governments (MLGPC) has initiated a program to clear the audit back logs which is expected to enable all LAs to have up-to-date audited annual financial statements. This effort is currently in progress and it is understood that half of the backlogs have already been cleared. The accounting of transactions at the LA is carried out generally by a Program Assistant/Management Assistant who works under the supervision of the Secretary of the PS. There are capacity deficiencies in many PSs both in terms of availability of technically skilled staff and the level of skills in financial management.

Project Financial Management arrangements:

11. Based on the weaknesses in the PFM system described above and the assessment of the fiduciary risks arising from such weaknesses, the project intends to put in place the necessary financial management arrangements that will provide the necessary fiduciary risk mitigation as described in the following paragraphs.

Financial Management arrangements at MED

12. The PCU will be responsible for the overall project financial management of the project. A Senior Assistant Director of the MED has been appointed as the Coordinator for NELSIP who shall be the primary contact person for the Bank on all matters concerning the project. The Project Coordinator will be responsible for the day-today management of the activities implemented under the project. The Senior Assistant Secretary will be supported by a full time Finance Manager (FM) who will be responsible for carrying out allprojects financial management activities and recruited under Management Circular 33. The FM will be supported by three FM staff that will be seconded from the Government.

13. It has been agreed with the GoSL that all finance staff will be seconded to the PCU on a fulltime basis by project effectiveness. The two CLG offices will maintain financial records of disbursements made to LAs and the project level books of accounts will be maintained by the PCU encompassing the two provincial level financial reports. 60

14. The FM will be responsible for all project financial management activities including project budgeting, disbursement planning and forecasting, operation of the Designated Account (DAs) including claiming replenishments, financial administration of contracts for supply of goods and services for the project, disbursement of project funds, monitoring , maintaining books and records for project financial transactions, submission of quarterly FMRs to World Bank for the project, preparation of annual project financial statements and interact with project auditors on the audit issues and their follow up.

15. The PCU of MED will open a current account in the Bank of Ceylon to which funds are credited from the designated Account (DA) in the Central Bank of Sri Lanka. The payments at national level relating to Components 2, 3, 4 and 5 will be made from this LKR account. The fund transfer to CLGs relating to capital grants under Component 1 will be transferred from this account to the CLGs through a LKR account maintained by the MOF.

16. The PCU will be responsible for preparing and submitting the Interim Unaudited Financial Reports (IUFRs) to the Bank. PCU shall ensure that IUFRs of the project are prepared and submitted to the World Bank not later than forty five days after the end of each calendar quarter, covering the quarter. The PCU will follow the GOSL Financial Regulations (FRs). The internal controls stated in the FRs are considered to be adequate for accounting and reporting the utilization of the project funds. The external audit of the NELSIP will be carried out by the Auditor General as a part of the NELSIP project audit.

17. The PCU is in the process of completing a comprehensive financial management manual that will include among other things procedures for selecting LAs for project funding, the utilization of project funds, disbursement, financial reporting, internal audit and performance monitoring. The Manual is expected to be ready by project effectiveness. Financial Management arrangements at the Provincial and Local levels

18. The responsibility for financial management of the project funds within each of the two provinces will be shared between the CLG at the Provincial Level as well as the participating local governments. The finance unit in the office of the CLG will be responsible for the project financial management activities at the provincial level. The CLG through the ACLG and the Investigation Officers will be responsible for monitoring that the project funds have reached the participating local governments on time and that the expenditure on of the projects funds are carried out in accordance with the objectives and norms of the program as well as in accordance with the financial rules of the Government. The CLG will ensure that the participating local governments submit the financial reports on time, coordinate with the office of the Auditor General to ensure that the annual audits of the participating local governments are carried out on a timely basis and make sure that the recommendations and follow up actions arising from the external audits, internal audits and inspections are carried out diligently. The finance section will prepare summary financial reports regarding the utilization of the project funds and submit to the PCU and will work in close coordination with the PCU to ensure smooth implementation of project financial management.

19. As part of the project design to strengthen transparency and accountability within the local government system and for providing the right incentives to local governments for doing 61 so, the project prescribes certain eligibility conditions for participating local governments (for details please see Annex 4), which include the following criteria relating to financial management :

1. Completion of annual accounts up to and including the immediately past financial year; 2. Receipt of an acceptable audit opinion from the Auditor General on the Annual Accounts for the past two financial years. Acceptable audit opinions are defined as those audit opinions that are not (a) an adverse opinion and (b) a disclaimer of opinion. For those local governments where the audit opinion is a qualified one, it will be the responsibility of the concerned local government to take remedial actions to remove the audit qualification within a period of two years; and 3. Presence of adequately trained staff for financial management.

20. The PPC will be responsible for deciding on the eligibility of local governments into the project after verifying that the eligibility conditions have been satisfied. The Deputy Chief Secretary (Finance) of the respective Provincial Councils will be responsible for the verification of the eligibility conditions and for recommending the list of eligible LAs to the PPC. The fiscal analysis cell (FAC) being constituted in the office of the Deputy Chief Secretary (Finance) will assist the DCS (Finance) in verifying the eligibility conditions. The FAC will also be responsible for the financial monitoring of local governments and will review the annual financial reports and audit reports of local governments on a regular basis. The Fiscal Analysis Cell will also monitor the follow up of audit observations with the objective of ensuring diligent audit follow up.

21. The local governments who obtain eligibility into the program will be required to open a separate bank account for the receipt and custody of the project funds. The local governments will account for the project funds within their books of accounts in accordance with the existing local government accounting systems and procedures. The participating local governments will be required to submit quarterly financial reports to the CLG which will report on the receipt and utilization of project funds as a separate line item. In addition the participating local governments will include the details of the activities undertaken using the project funds in the annual report that they prepare and submit to the CLG. The external audit of the receipts and expenditure of the project funds will be carried out by the Auditor General as part of the annual audit of the local government. The project will provide the necessary incentives and technical assistance to ensure that the annual financial statements of the local governments are prepared within three months after the close of the financial year and the annual external audit of the local government is carried out within six months after the close of the financial year. As part of the project objectives of strengthening the transparency and accountability of local governments, the participating local governments will be required to publish the annual audited financial statements and discuss the annual audit report findings in an open meeting.

Training and Capacity Building

22. In accordance with the project objective of strengthening the institutional systems of local governments, the project will provide extensive support for building up the systems and capacities of local governments in the area of financial management. The public financial 62

management systems of local governments will be reviewed periodically during the course of the project to identify areas in which such systems can be modernized or strengthened. Technical assistance and advisory support will be provided for the introduction of modern procedures and systems in the areas of budgeting, accounting, financial reporting and auditing of local governments. Local Government staff will be provided regular training in various aspects of financial management through short and long term courses. A public financial management specialist will be recruited and placed at the PCU to ensure coordination of the capacity building activities as well as to ensure the necessary quality assurance of the capacity building program.

Disbursement Arrangements

23. The proceeds of the Credit would be disbursed against eligible expenditures, including taxes in the following categories:

Category Amount of the Percentage of Financing Allocated Expenditures to be (expressed in SDR) Financed (inclusive of Taxes) (1) Goods, works, consultants’ services, 5,270,000 100% Incremental Operating Costs, training and workshops (2) Grants under Part 1 of the Project 27,000,000 100% of amounts disbursed from the proceeds of the Financing Agreement Amount payable pursuant to Section (3) Refund of Preparation Advance 730,000 2.07 of the General Conditions Total Amount 33,000,000

24. The bulk of the project funds (through component 1) will be expensed at LA level on various subprojects determined by the local government based on community preferences. Since these subprojects are not known in advance and since the project follows the CDD model of project design, the disbursement of the capital grants will be made on a lump sum basis (in two installments) and the actual end use of the project funds for each and every subproject at the local government level will not be tracked by the Bank. At the same time, the project will rely on the systems of the provincial Council, including the quarterly and annual financial statements, audit reports and the inspection reports by the CLG to ensure that the project funds are utilized for their intended purpose. IDA will only track expenditures for IUFR reporting up to the point the funds are disbursed from provincial level to LAs. The Bank will monitor the functioning of the Government oversight systems intensively during supervision visits. In additional the Bank will review the expenditure at LA level during FM supervision visits on a sample basis.

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25. Project funds will be disbursed by IDA on the basis of periodic interim unaudited financial reports (IUFRs) incorporating financial & physical progress reports in agreed formats (including component wise and activity wise progress), submitted by the PCU on a quarterly basis. IDA will advance a sum as forecasted for the next six months by the PCU into the Designated Account opened by the MED at the Central Bank of Sri Lanka. Supporting documentation, including completion reports, financial reports sent by LAs and PCs at provincial level will be retained by the PCU and will be made available to the IDA during project supervision. IUFRs will be used by IDA to reimburse/replenish moneys to the Designated Account. The IUFRs and the withdrawal application will be prepared by the PCU and forwarded to Treasury for approval.

Fund flows

26. A Designated Account in US Dollar will be maintained at the Central Bank of Sri Lanka. Project funds will be advanced to the DA based on the projected expenditures for two calendar quarters. The DA will be operated by the MED. Withdrawal applications will be prepared and processed by the MED and replenishments to the DA will be based on IUFRs.

27. A LKR DA for the project will be maintained at the Bank of Ceylon by the MED. The MED will transfer the funds under Component 1 to the two CLGs through a pass-through LKR account maintained at the MoF. This arrangement has been made with the intention of switching to a uniform mode of funds flow (that will not distinguish between the GoSL transfers and the Bank financed capital grants) that is expected to start subsequent to the mid-term review of the project. When funds are transferred through the LKR account maintained by the MoF, MED will inform the MoF on the amounts that need to be transferred to the two accounts maintained by the CLGs at provincial level. During project preparation stage this arrangement was discussed and agreed with the MOF. The Treasury Operations Department (TOD) will be responsible for the operation of the pass-through account. The department will identify an officer to assign the responsibility of operating the pass-through account by negotiations. As agreed with the TOD, funds will be transferred under the Component 1 to the CLGs based on the instructions given by the PCU within three working days. Until the project switches to a uniform mode of funds flow, the only responsibility of the TOD is to promptly transfer the funds under Component 1 to the two CLGs based on the instructions given by the PCU. Separate LKR project bank accounts will be maintained for the project at provincial level for the North and East Provinces by the two CLGs. The purpose of these two accounts is to facilitate the transfer of project funds from national level to LA level. No payments other than the transfers to LAs shall be made from the LKR project bank account at provincial level maintained by the CLG. The MoF will transfer the capital grant funds to the project bank accounts maintained by the CLGs based on the information provided by the Finance Manager of the PCU. The two CLGs will in turn transfer the funds to the respective local governments eligible for the grants. The LKR DA maintained by the MED will also be used for payments made to suppliers, vendors and to consultants under components 2-5 of the project.

28. Separate LKR project accounts will be maintained at all selected LAs. This will ensure transparency in the project fund flows and will facilitate the tracking of project expenditure during supervision. No project funds will flow to any LA unless that LA opens a separate LKR bank account for the project and submit the details of that account to the respective CLGs. Upon 64

receiving this information, the CLG will authorize the first transfer of project funds from provincial project bank account to LA project account.

29. IDA will advance an amount to the designated account, to meet estimated expenditures for next 6 months, as forecasted within the interim unaudited financial reports (IUFRs). In addition PCU will have the option of requesting IDA to make direct payments to any foreign consultant or supplier.

30. The project is intentionally adopting a ring-fenced approach on disbursement of project funds due to the capacity constraints at the provincial and local levels at the start of the project. However, it is the intention of GoSL to merge the capital grants financed by the Bank with the fiscal transfers that it provides to the provincial and local governments currently. This will require a better understanding of the procedures and systems of fund transfers being utilized for fiscal transfers at present as well as the risks arising from mingling of funds. The Task Team will undertake an in-depth analysis of the above and will explore the possibility to switch to a uniform mode of funds flow (that will not distinguish between the GoSL transfers and the Bank financed capital grants) starting from the mid-term review of the project.

Accounting Policies and Procedures

31. Project will maintain accounts on the cash basis of accounting and will also comply with the government finance regulation. The project specific accounting and reporting procedures will be laid down in financial management manual that will be prepared by the PCU. The FM manuals will ensure compliance with all existing public financial reporting regulations and circulars of the Government.

Staffing

32. The MED has approved the NELSIP PCU cadre including a Finance Manager and three management assistants for project financial management. The finance staff has been identified by the MED and will be seconded to the PCU on a fulltime basis by project effectiveness. The finance unit of the CLGs in the two provinces is well staffed and has an accounts officer and a management assistant who will be responsible for the project financial management activities at the provincial level. The finance unit will be supported using short term consultants to cope up with the increased work load.

33. The participating local governments will be required to have adequately trained FM staff for gaining eligibility to join the program. At the local government level, the Secretary of the LA will be primarily responsible for the financial management of the project funds. The Secretary will be assisted by a management assistant who will be responsible for financial management. The FM staff at the local level will be provided training at periodical intervals.

34. The training and capacity building activities of the project relating to strengthening the public financial management systems of local governments will be coordinated by a Local Government Financial Management Specialist who will be on board by project approval will based at the PCU. The Local Government Financial Management Specialist will be responsible to work with the participating local governments to identify their training and technical

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assistance requirements, coordinate with the supply side to ensure that the design and content of the training programs match with the requirements of the local governments and oversee the quality of the implementation of the training programs. TOR for the Local Government Financial Management Specialist will be cleared with IDA by Project Approval.

Internal Controls

35. The NELSIP PCU will follow the government financial regulations and circulars. These regulations address all aspects of procedures and controls necessary for authorizing, approving, executing, recording, and reporting expenditure. These procedures/controls are considered to be adequate and any additional internal control procedures will be specified in the financial management manual to bridge any gaps and to promote outcome/output focused accountability. In addition, the FM manual will also contain disbursement and reporting procedures required by IDA.

36. The LAs presently operate within their regular internal control framework as stipulated by the rules applicable to LAs. These rules prove adequate controls necessary to authorize, approve, execute, record, and report expenditures.

Budgeting

37. The provincial councils will submit their cash budgets on a quarterly basis to PCU. The PCU will use these budgets to prepare the six months cash forecast stated in IUFRs. The project will be included as part of the national/provincial budget with a separate line item. The participating local governments obtaining eligibility into the program will be provided indicative figures in advance regarding the grant allocations to them which will enable them to include the grants into their annual budgets.

Financial Reporting

38. The PCU will be responsible for the overall financial reporting of the project including the fund transfers made under the Component 1. The PCU will use IUFRs to report to IDA on a quarterly basis. The formats of IUFRs, designed in accordance with the guidelines issued by IDA will be agreed during negotiations. For expenditures incurred in both provinces, one consolidated IUFR will be prepared by the PCU. For component 1, since IDA will treat the block grant disbursements from the CLG to the eligible LAs as project expenditures, IUFRs are based on the capital grants disbursed from the CLG to the eligible LAs. The PCU will prepare and submit single IUFR to the IDA consolidating disbursement reports sent by provincial councils.

39. For project activities carried out by LAs, accounting records will be kept by the respective LAs. LAs will account for the project funds transferred from the provincial council using books of accounts as defined in the financial and administrative rules applicable to LAs. Format of such books/records has also been prescribed in these rules. The LA secretary will be responsible for financial management for the funds.

40. In addition, the LAs will report periodically to the CLG on the Financial and Physical Progress of the Project. The CLG will consolidate the financial and performance reports and

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send them to the PCU. The FAC will also monitor the expenditures at the LA level by reviewing the financial reports.

41. The Secretary, MED will be responsible for the appropriate and diligent use of project funds. The Project Coordinator and the Finance Manager of the PCU in turn will be answerable to the Secretary for the use of project funds.

Safeguarding project fixed assets

42. The PCU will use a simple excel based system to safeguard the fixed assets of the project. The system used would ensure that records of fixed assets and stocks are kept up to date and reconciled with control accounts. The project assets will be adequately insured.

Internal Audit and Value for Money Audits

43. Internal Audit is an important part of the overall governance and financial management arrangements for the project. Internal audit will be carried out at two levels. At the national level, the PCU will engage an independent audit firm to carry out internal audits of the project activities on a periodical basis. The internal audit will be carried out on an ongoing basis starting from the second year of the project and will cover the entire project. The internal auditor will report to the Chief Secretaries and Secretary of MED with a copy to the Project Coordinator, NELSIP to initiate necessary follow up actions. The internal audit report and the follow up action taken will be presented to National Project Steering committee and shared with the Bank. The overall scope of internal audit services will (i) evaluate the internal control systems of LGs and the integrity of project financial information produced by LAs; (ii) assess whether the projects funds have been used for the purpose intended and whether the funds have reached the intended recipients, (iii) assess the internal controls over payments made from the project account (iv) verify the existence of project assets; (v) appraise the economy and efficiency of resource utilization in accordance with the credit agreement; and (vi) determine whether LAs have complied with the FM manual, Local Authority Project Implementation Manual and other existing laws and regulations.

44. The TOR of the internal audit assignment cleared by IDA will be included in the Financial Management Manual.

45. At the Provincial level, the Provincial Internal Audit Department will carry out management audits and value for money (VFM) audits at least twice during the duration of the project with the objective of improving implementation effectiveness. The VFM audits will be focused on the utilization of the block grant funds by the participating LAs. These audits will be distinct from the financial and internal audits done from a fiduciary perspective and instead will be aimed at assessing the impact and effectiveness of the program at the local level. Though the provincial audit department has the mandate to carry out such audits, capacity constraints both in terms of staff strength and staff skills have prevented them from fulfilling their mandate. The Project will help the Provincial audit department to develop the necessary skills in internal audit by adopting a “learning by doing” by providing technical assistance to the provincial audit department to carry out Program Audits and Value for Money Audits. A firm of chartered accountants will be procured by the MED to work along with the Provincial audit departments and conduct the management/VFM audits and at the same time build up the skills of the 67

provincial audit department.

External Audit

46. The external audit of the project will be carried out annually by the Auditor General of Sri Lanka. As a part of the project external audit, the Auditor General will audit the LKR account maintained by the MoF used to route the funds under Component 1 to the two CLGs. In addition the Project Accounts and FM arrangements at Provincial level and LA level will also be covered when conducting the annual external audit. The project external audit reports will be submitted to IDA within six months from the financial year end.

47. The Local Governments participating in the project will be required to get themselves audited annually as part of the continuing eligibility conditions for the project. The Auditor General’s Department will carry out the annual audits and the project will provide the necessary technical assistance to enable the AG to carry out the audits within a reasonable time after the close of the financial year. The CLG will coordinate with the AG to make sure that the audit process goes on smoothly. The FAC at the provincial level will review the audit reports and monitor the follow up actions taken. The FAC will prepare a consolidated report and submit to the PCU on the annual audit process every year which will also include the status of the follow up on the action taken by the LA to respond to the AG’s audit observations. IDA will review only the consolidated project audit report prepared by the AG regarding the project which covers project activities at provincial and LA level. There is no outstanding audit report or material audit findings for Bank financed projects being implemented by MED.

Audit Reports

48. The following audit reports will be monitored in Audit Reports Compliance System (ARCS).

Implementing Audit Report Auditor Date Agency PCU Project Annual Financial Statements Auditor General June 30

49. Financial Covenants

. Audited annual financial statements to be submitted to IDA no later than six months of the following fiscal year.

. IUFRs to be submitted to IDA no later than 45 days following the end of the reporting quarter. Supervision Plan

50. The proposed project has a High financial management risk rating. The project is implemented by entities with capacity constraints and weak public financial management systems. Hence, consistent with the risk based approach to supervision, a substantial portion of 68 the supervision activities will consist of intensive field visits, supplemented by desk reviews of internal & external audit reports, quarterly financial reports, fixed asset physical verification reports and dialogue with the project staff as needed, especially in the initial years. The Bank will carry out a field level FM supervision mission at least once every three months for the first two years of the project and depending on the progress of the implementation efforts will carry out a supervision mission once every six months thereafter. The FM Supervision Missions will assess the adequacy of the FM arrangements at the national, provincial and local levels. As and when required, other financial management supervision tools such as SOE reviews and joint missions with procurement will be used in an effort to periodically monitor the adequacy of financial management arrangements.

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North East Local Services Improvement Project (NELSIP)

Funds Flow Diagram

Account Ownership IDA Component 1 Transfers

Component 2-5 Payments Designated Central Bank US$ IDA Fund Flow (CB)

PCU at MED LKR DA

MoF LKR Account MoF

CLG - Eastern Project Project CLG - Northern Province LKR LKR Province

Separate LA 1 in Separate LA 2 in LA 1 in Separate Separate LA 2 in LKR East LKR East North LKR LKR Account North Account Account Account

Suppliers, consultants & training

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Annex 8: Procurement Arrangements SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. Country Procurement Environment. Current expenditure for public procurement in Sri Lanka is expected to increase exponentially, with the cessation of the conflict in the North and East. The country is currently going through a dual transition phase – from a country in conflict (CIC) to one in peace (CIP); and from LIC to MIC status. While Sri Lanka does not have a procurement law in place, the government’s procurement guidelines are on par with internationally accepted practices, and are legally binding in a court of law. 2. Despite this advancement, there is no system in place for procurement performance and compliance monitoring, and this is a major cause for not moving to the full use of country systems in Bank-financed projects. Consulting firms, contractors and suppliers do not have an adequate understanding of their roles and responsibilities in public procurement and opportunities for training are minimal. External and internal procurement auditing, expected to be carried out by the Auditor General’s Department and the line Ministries’ internal auditors respectively, is inadequate as the auditors have a limited understanding of procurement procedures and practices. 3. Given its imminent graduation to middle income status and the concomitant need for a more robust and reliable procurement system, the Government of Sri Lanka (GOSL) has expressed interest in speeding up the capacity building process and taking procurement legislation to the next level, i.e. developing and enacting a public procurement law. The Bank is currently in dialogue with the Government to help develop a procurement capacity strengthening program. There are also initiatives underway to promote e-government procurement (eGP), in collaboration with the Bank-financed e-Sri Lanka Development project. A. General

4. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. 5. The demand-driven nature of the project does not allow for upfront preparation of procurement plans. Local Authorities (LAs) will develop medium-term rolling implementation plans covering all sources of funding. Procurement plans will be prepared based on the implementation plans, and reviewed by and agreed with the CLGs. Specific activities in the procurement plans will be earmarked for IDA financing under the project. The LA Operational Manual will provide thresholds and guiding principles on methods and timing for each contract to be financed by the Loan/Credit, which will be agreed between the Borrower and the Bank. Procurement Plans and thresholds will be updated at least annually or as required to reflect the actual implementation needs and improvements in institutional capacity. 6. Procurement of Works: Works to be procured under this project will include small civil works such as road rehabilitation, water supply, sanitation and solid waste disposal systems, and other community infrastructure, over widely dispersed sites. No ICB procurement of civil works 71

is expected under the project. Labor intensive works estimated to cost less than US$50,000 per contract will be procured in accordance with the procedures of Community Participation, or under National Shopping procedures, as detailed in the LA Operational Manual. Works estimated to cost US$50,000 equivalent or more and less than US$ 6 million per contract will be procured following National Competitive Bidding (NCB) procedures acceptable to the Bank. The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank for procurement under NCB and shopping. Works to be carried out under force account may be permitted provided there is a clear justification. 7. Procurement of Goods: Goods to be procured under this project would include office equipment and furniture, audio visual equipment, educational material, vehicles, information systems, networking and website software, and printing of IEC material, training material, manuals etc. Goods estimated to cost US$50,000 equivalent or less per contract may be procured on the basis of National Shopping; goods estimated to cost more than US$50,000 and less than US$600,000 equivalent per contract may be procured following NCB procedures acceptable to the Bank; and goods estimated to cost US$600,000 equivalent or more per contract will be procured following ICB procedures. The procurement of goods will be done using the Bank’s standard bidding documents (SBD) for all ICB and National SBD satisfactory to the Bank for all NCB and shopping. 8. Procurement of goods by Local Authorities will include materials for works implemented under community participation, and office, IT machinery and infrastructure maintenance equipment for the Local Authorities, and will follow procedures set out in the LA Operational Manual, as agreed with the Bank. Direct Contracting will be used for items of a proprietary nature and small value items costing less than US$100. 9. Procurement of Non-Consulting Services: Non-consulting services required under the project including website maintenance, vehicle hiring, and janitorial services, will be procured under NCB or National Shopping procedures, following the same thresholds as for goods.

10. The following methods will be applicable for Goods and Works, consistent with the relevant sections of the Bank’s Procurement Guidelines: (a) International Competitive Bidding (ICB) (b) National Competitive Bidding (NCB) (c) Shopping (d) Direct Contracting (DC) (e) Community Contracting (CC) (f) Force Account.

11. Requirements under National Competitive Bidding (NCB): In order to ensure economy, efficiency, transparency and broad consistency with the provisions of the Bank’s Procurement Guidelines, goods, works, and non consulting services procured under the NCB procedures shall be subject to the following requirements:

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 The Bank’s standard bidding documents (SBD) for small works and/or the Sri Lanka– specific SBD as agreed with the Bank (and as amended from time to time and agreed with the Bank) will be used.  Invitations for bids will be advertised in at least one widely circulated national newspaper, and bidding documents will be made available at least twenty-one (21) days before, and issued up to, the deadline for submission of bids.  Bidding documents will be issued by mail or in person to all who are willing to pay the required fee.  Qualification criteria will be stated in the bidding documents, and if a registration process is required, a foreign firm declared as the lowest evaluated responsive bidder shall be given a reasonable time for registering, without let or hindrance.  There will not be any restrictions on the means of delivery of the bids, which shall be either through post or hand-delivered. Electronic submissions will not be permitted.  Foreign bidders will not be precluded from bidding and no preference of any kind shall be given to national bidders (including state-owned enterprises or small-scale enterprises) in the bidding process. No special preferences will be accorded to any enterprises or bodies.  Bids will be opened in public in one location, immediately after the deadline for the submission of bids, as stipulated in the bidding documents (the bidding documents will indicate the date, time and place of bid opening).  Evaluation of bids will be carried out in strict adherence to the criteria disclosed in the bidding documents, in a format and within the specified period agreed with the Bank, and within the bid validity period specified in the bidding documents.  Contracts will be awarded to the lowest evaluated responsive bidder.  Bids will not be rejected merely on the basis of a comparison with an official estimate, without the prior concurrence of the Bank.  Except with the prior concurrence of the Bank, there will be no negotiation of price with bidders, even with the lowest evaluated bidder.  Re-invitation of bids will not be carried out without the prior concurrence of the Bank.  Except in cases of force majeure or exceptional situations beyond the control of the implementing agency, the extension of bid validity will not be allowed without the prior concurrence of the Bank: (i) for the first request for extension if it is beyond eight weeks, and (ii) for all subsequent requests for extension irrespective of the period.  All bidders and contractors shall provide bid and performance securities as required in the bidding and contract documents.  A bidder's bid security will apply only to the specific bid, and a contractor’s performance security will apply only to the specific contract under which they are furnished.  Bids will not be invited on the basis of percentage premium or discount over the estimated cost, unless agreed with the Bank.

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12. Selection of Consultants: LAs would contract private firms, NGOs and other service providers including social, technical, accounting, procurement and environmental specialists, for supporting project implementation. In addition, consultants will be hired for conducting special studies; developing and implementing monitoring, learning and evaluation (ML&E) systems; conducting audits; and capacity building. Short lists of consultants (firms) for services estimated to cost less than US$200,000 equivalent per contract may comprise entirely of national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. For consultant services estimated to cost less than US$100,000 equivalent per contract, the method of Selection Based on Consultant’s Qualifications (CQS) may be used, in accordance with the provisions of paragraph 3.7 of the Consultant Guidelines. 13. The following methods will be applicable for selection of consultants, consistent with the relevant sections of the Bank’s Consultant Guidelines:  Quality- and Cost- Based Selection (QCBS)  Quality-Based Selection (QBS)  Least Cost Selection (LCS)  Fixed Budget Selection (FBS)  Selection based on Consultants’ Qualifications (CQS): for services estimated to cost less than US$100,000 equivalent per contract  Single-Source Selection (SSS)  Individual Consultants (IC) 14. The Bank’s standard request for proposal (RFP) document will be used for all consultant service contracting. 15. Training: Staff training plans will be developed by each LA, prior to any training being availed of. The plans will be reviewed by the CLGs and revised/updated, as necessary. While most of the training will be provided by the SLILG, LAs may additionally arrange customized programs and exposure visits for Local Authority members and others with selected single sourced organizations/institutions. 16. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the LA Operational Manual.

B. Assessment of the agency’s capacity to implement procurement 17. Procurement activities under the project will be carried out primarily by the Local Authorities, while the MED PCU and SLILG will be involved mainly in selection of consultants. 18. A fiduciary capacity assessment of a sample of Local and Provincial Authorities (outside the North and East) was carried out by consultants during the preparation of the 2nd Community Development & Livelihood Improvement project in 2008/2009, followed by an assessment in the North and East by an individual consultant in 2009. The findings indicate widespread and similar shortcomings across the board, primarily being the absence of an effective and efficient procurement system at the LA level, and the absence of dedicated staff for carrying out procurement activities. The assessments also provided detail recommendations for improving capacity at the LA level. 74

19. While LAs apparently do not have financial thresholds for goods and works contracting, contracts currently awarded by LAs are generally below LKR 2 million. This is primarily because LAs receive limited funding for capital works which is thinly distributed across their constituencies. Major capital works are directly implemented by centrally-managed projects. The proposed project would finance larger value works (around LKR 10 to 20 million) which would be contracted by the LAs. 20. Works contracting are managed by technical officers while goods contracting are managed by the accounting staff. Procurement recommendations are made by either a Technical or a Financial Committee, which reports to the LA council. LAs have degree-qualified staff appointed as Management, Program or Development Assistants, who have the potential to manage large value procurement. There is a general understanding at the LA level that goods should be procured competitively (through shopping) while works are directly contracted to community-based societies. The lack of a set of defined procurement systems and procedures however, has led to procurement ambiguities across LAs. 21. Provincial level staff (CLGs & ACLGs) is better informed on procurement procedures and follows the national procurement guidelines, which are consistent with the Bank’s guidelines. However, few staff at the LA level is aware of the existence of such guidelines and a few refer the old government financial regulations for procurement guidance. Internal audits carried out by the provincial authorities apparently do oversee procurement activities (checking existence of quotations etc) but there are no written reports. The CLGs additionally have investigating officers who carry out random checks. LAs in the North and East have expressed a high willingness and enthusiasm to undertake large-scale development works, and associated procurement activities. 22. An assessment of the MED’s and SLILG’s procurement capacities was carried out by the Bank’s designated procurement specialist in June/July, 2009. These agencies have adequate capacity to manage their procurement activities. MED has an in-house procurement division which provides assistance to all departments under the ministry in procurement planning, processing and monitoring. 23. Overall, the procurement risk is rated substantial, based on the above findings. 24. The key issues and risks concerning procurement for implementation of the project have been identified and include the following: i. Limited awareness of procurement rules and the absence of dedicated staff for procurement at the LA level limit their capacity to undertake large value procurement. ii Limited experience in the selection of consultants. iii Poor record-keeping and filing. iv Limited experience in dealing with complaints, and fraud and corruption issues. v. Given the fragmented nature of the newly resettled communities in the north and east, while it may be possible for communities to be involved in the decision-making process, it is unlikely they would be able to undertake community contracting in the initial years of implementation. 25. The corrective measures which have been agreed are:

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1. MED will hire a consultant to help prepare a procurement manual, specifically for use at the provincial and LA levels, which will be based on the national guidelines. It is expected that all PCs and LAs would adopt this manual in the future for all procurement activities carried out by the PCs and the LAs, irrespective of the source of funding. The procurement manual would provide details on procurement method options, thresholds, rules and procedures, and documents to be used, consistent with the Bank’s and GOSL’s guidelines. Procurement staffing and job descriptions will also be included in the manual. Model bidding documents and forms of contract as agreed with the Bank (mainly for shopping) would be translated for use at the LA level. 2. LAs will be selected for block grant funding only once they have assigned dedicated staff to manage procurement activities, which will be trained by the procurement consultant hired by MED. 3. Procurement capacity building plans will be developed in consultation with the ACLGs, CLGs and the SLILG. 4. LAs will be trained on the rules and procedures for community contracting, and will in turn train the communities. 5. The CLGs and ACLGs will be responsible for procurement monitoring. 6. Staff will be trained by the Bank’s staff on record-keeping, monitoring and reporting, fraud and corruption flags, and addressing of complaints. 7. Procurement post reviews will be conducted annually by the MED procurement division, on a sample agreed with the Bank. 8. MED will prepare and forward to the Bank, a collated annual procurement progress report, which will include inter alia, procurement plan updates and post review reports. 9. The Bank will carry out its own procurement post reviews annually, discuss the findings, and agree with MED and project implementing staff on corrective actions to address deficiencies. 10. The following key indicators will be used for assessing procurement performance and risk rating:  Percentage of procurement activities which have more than 25% delay in bid/proposal evaluation.  Percentage of contracts which have been extended and/or have more than 15% modifications by value.  Percentage of post reviewed contracts with notable irregularities.  Percentage of procurement activities which had complaints.

C. Procurement Plans 26. The Borrower, at appraisal, developed a procurement plan for initial project implementation activities which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on [date] and is available at [provide the office name and location]. It will also be available in the project’s database and in the Bank’s external website.

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27. As mentioned under paragraph 5 above, procurement plans for the LA activities will be developed together with the medium-term implementation plans. The Bank’s Project Team will review procurement plans annually, on a sample basis (not less than 50% initially). 28. Procurement Plans will be updated in agreement with the Bank’s Project Team annually, or as required, to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision 29. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessments have recommended supervision missions every six months to visit the field to carry out post review of procurement actions. E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

(a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. No. Contract Estimated Procurement P-Q Domestic Review Expected Comments (Description) Cost Method Preference by Bank Bid- (yes/no) (Prior / Opening Post) Date

(b) ICB contracts for goods and non-consulting services estimated to cost above US$ 600,000 per contract, for works estimated to cost above US$ 4 million per contract, the first NCB contract each for goods and works processed by each implementing agency, and all direct contracting above US$ 1,000 will be subject to prior review by the Bank.

2. Consulting Services

(a) List of consulting assignments with short-list of international firms.

1 2 3 4 5 6 7

Ref. No. Description of Estimated Selection Review Expected Comments Assignment Cost Method by Bank Proposals (Prior / Post) Submission Date

(b) Consultant services provided by firms estimated to cost above US$ 500,000 per contract, by individuals estimated to cost above US$ 200,000, and single source selection of consultants (firms) for assignments estimated to cost above US$ 10,000 will be subject to prior review by the Bank. Additionally, selections and contract awards to PIU managers, procurement consultants, inspection agents and legal advisors are subject to prior review, irrespective of the contract value and risk rating.

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(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$ 200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 30. A summary of procurement method and review thresholds is provided in Table 8.1 below.

Table 8.1: Thresholds for Procurement Methods and Prior Review a/

Expenditure Contract Value Procurement Contracts Subject to Prior Review Category (Threshold) Method Works >= US$6,000,000 ICB All contracts

<=US$50,000 Shopping All contracts subject to post review <=US$50,000 Community-based contracting All contracts subject to post review Goods >=US$600, 000 ICB All contracts

<=US$50,000 Shopping All contracts subject to post review DC As agreed in the procurement plan, with justification provided Consultant >=US$500,000 All competitive methods All contracts Services >=US$200,000 All competitive methods; First contract awarded by each implementing agency Advertize internationally =US$200,000 IC ( (Section V of Consultant All contracts Guidelines)

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Annex 9: Economic and Financial Analysis SRI LANKA: North East Local Services Improvement Project (NELSIP)

I. Introduction

1. The Government of Sri Lanka places high priority to achieving the Millennium Development Goals (MDGs). Improving basic service delivery, particularly in the lagging regions of the North and East is a priority. The NELSIP is one of the programmes expected to contribute to the faster rehabilitation and reconstruction of the northern and eastern regions of Sri Lanka. This annex provides the economic rationale of the project’s investments by analyzing the possible short term and long term benefits and costs expected from a project of this nature. The annex covers the justification for public sector intervention, the benefits and costs and sustainability of the project.

2. Justification of public sector intervention. Recent analysis of poverty based on the 2006/2007 household income and expenditure survey in Sri Lanka demonstrates that the national level poverty head count was estimated at 15.2 percent. In the Eastern and Northern provinces the poverty head count was estimated at around 10.8 percent and 14.4 percent respectively. While Sri Lanka’s economy expanded, on average, from over 6 percent in 2003 to 7.7 percent in 2006 and about 6.8 percent in 2007, growth projections in 2008 suggested a slowdown in growth to levels similar to 2003 and further decline to 2.5 percent in 2009.6 Although growth is expected to pick up in 2010 and 2011 with estimates about 5 percent and 6 percent respectively, the short term slowdown is a cause of concern at a time when the Government is undertaking reconstruction and rehabilitation of the north and east. Furthermore, with an estimated fiscal deficit of about 7.7 percent of GDP in 2008 and a projected slowdown in revenue collections, NELSIP support will be utilized to support the reconstruction and rehabilitation efforts in the northern and eastern regions without having to put a significant burden on the country’s short term recovery efforts. The IDA resources would be financed at lower rates over a long term period.

3. NELSIP support is consistent with the CAS objectives of creating opportunities for equitable growth and economic development, especially in lagging regions of the country and to help the country ensure that service delivery is effective and accountable to citizens. The recent restoration of calm in the northern and eastern parts is expected to boost prospects for economic growth and regional opportunities across the country. The justification for public sector intervention is explained by the post conflict situation in the north and east. These regions are sparsely and thinly populated with limited social service networks. The regions have just come from a prolonged civil conflict that destroyed physical and human capital. In addition, the regions are also characterized with weak governance—constrained by weak information systems due to lack of basic data. With almost all the basic local public goods destroyed and with weak accountability systems, NELSIP investments will provide such basic services (e.g. water supply) to the most disadvantaged groups (e.g. the poorest, those returning from the IDPs estimated conservatively at around 150,000).

II. Benefits and Costs

6 The Central Bank of Sri Lanka. 79

4. Efforts to compute the economic rate of return for the expected project benefits is constrained by two factors, the lack of basic service delivery data, particularly for some of the districts in the north and east, and secondly, the nature of project investments are mostly in form of supporting institutions that create a conducive environment for better delivery of basic services. However, where possible—under plausible assumptions, efforts are made to quantify the expected return or to draw from evidence elsewhere.

5. Institutions and incentives. The project will contribute to physical investments that have a positive economic rate of return. By strengthening local institutional capacity through improved capacity to plan and execute the budget in a transparent, predictable and participatory manner, the project will build incentives for improved Local Authorities (LAs) performance to support operations and maintenance of existing physical investments as well as creating new physical investments to meet local needs. The accumulated managerial skills and the associated decline in transaction costs accruing from increased local autonomy will contribute to the realization of positive economic rates of return on the chosen physical investments. Equally important, there will be ownership of the program at the local level, since the choices of the type of physical investments are driven by community participatory processes guided by the local governments as well as implementation support from the project unit. The project enhances the capacity of the LAs through support to accountability mechanisms established by the government and improving local capacities at the LAs, provinces and central government. The project would support systems such as the local planning process, procurement, and financial management. The project would support improvements in the revenue and expenditure assignments and the intergovernmental transfer system.

6. The project will support establishment of a better fiscal system by providing discretionary funds in the amount of US $ 74 million to finance basic local public goods and services that are prioritized by the citizens in the northern and eastern parts of Sri Lanka. Estimates based on a 2008 Annual report by the Central Bank of Sri Lanka indicate an estimated 2,084,000 million people in the project districts of Ampara, Batticaloa, Trincomalee, Mulativu, Killinochchi, Vavuniya, and Mannar (excludes Jaffna). A total of 65 Pradeshiya Sabhas (PSs) will be reached by the project. Assume the distribution of the basic block grant shown in table 1 above and adjusting for the estimated population to be covered in a phased manner (over the number of PSs to be covered during the project life) the estimated per-capita allocation of the basic capital grant (in nominal terms) will increase from about 312 LK rupees in 2010 to 364 LK rupees in 2011 and 429 LK rupees in 2012—an increase of about 17 percent per year over that period. In 2014 the per capita basic block grant is estimated at about 627 LK rupees.

7. Investment in physical investments. As noted above the project will increase citizen involvement in the design, implementation and ownership of local physical investments. There could be potential savings and greater efficiency in the provision of local public goods than probably when other options such as central public sector agencies are involved. Elsewhere, projects of this nature have contributed to establishment of better local government capacity and the rates of return on realized investments have been estimated in range of 12 percent and 20 percent in Uganda and Tanzania respectively. As indicated above, qualified PSs would receive an average allocation of LKR 14 million in 2010 and increase to about LKR 30 million by 2014. The capital grant, to be allocated on the basis of population and degree of conflict damage, will 80

be untied in nature—thereby providing the PSs with the discretion in allocating the funds according to local needs. Suppose one of the identified local needs is water supply. Part of the PSs’ project funds could be used to finance improved access to water supply. Presently out of roughly 2 million people, 46 percent of the population in the north and east has access to safe drinking water. This compares to 62 percent in the rest of the country. Although it is difficult to a priori determine the exact return from such investment, establishment of water supply will have improvements on health of the people, and will increase time savings due to improved access to water.

8. Revenue mobilization: As noted above, the basic capital grant will be distributed based on a formula that takes into account need and a factor to take into reconstruction efforts. Using revenue data of provincial councils 2002-2004 the estimated correlation between grants from central government and revenue for the North and East is positive and approximately 0.91. Grants may contribute to improved revenue; however, this relationship will depend on whether a conducive environment is in place to support revenue mobilization. In a region recovering from conflict, capacity support on basic revenue administration principles will be very important. Generally, however, each local government will have a significant amount of grant resources for improving local tax revenue performance and physical investments.

Costs

9. Costs associated with the program include operation and maintenance costs borne throughout the life of the project. As noted above the state fiscal deficit is about 7.7 percent of GDP. Do the project costs impose significant risks to the Government of Sri Lanka’s fiscal position? The project costs are small and will not have significant negative impact on the state’s fiscal position, but still are an additional burden to the Government. Using conventional economic analysis, it is not easy to justify a cost of US 86 million, given that many of the benefits are not quantifiable as these relate to strengthening systems that support the way local institutions perform. As noted above, the benefits from the project will include capacity support to local governments to better manage public resources and supporting local planning processes in selection of local public goods that the people prioritize. The realized investments from the local planning process could carry a higher economic return; however, it is difficult to determine a priori.

III. Sustainability

10. There are two key issues related to the future sustainability of the improvements achieved under the project. The first relates to maintenance of physical infrastructure and the continued use and upkeep of systems built under the project. The second relates to the continuation of the capital grants beyond the completion of the project.

11. In terms of maintenance and systems upkeep, by making LAs more accountable to their citizens and investments more in line with local preferences, the project strengthens incentives for LAs to improve the maintenance of local assets. Moreover, with respect to the maintenance of physical assets, the project will aim to align asset creation with O&M capabilities. Further, it will provide long term institutional development support to enhance the capability of LAs in the areas such as local level planning, budgeting, revenue generation, financial management and 81

procurement, project and office management, etc. The emphasis will be on creating sustainable local institutions that can effectively coordinate local development and manage service delivery.

12. In terms of future fund-flows to LAs, the project has been carefully designed to enhance sustainability. Three particular features of the project help in this regard. The first is that the IDA-financed Capital Grants would be disbursed in full parallel with existing Government grants for LA, thereby building expectation and precedence for their payment. The second is the gradual increase in the Government’s share of the average transfer, which is scheduled to increase from 29 percent in the first year to 67 percent in the last year, thereby reducing the impact on average transfers of the eventual ending of the IDA contribution, and establishing a new “base-line” for the Government’s budgetary allocations for LA grants. Finally, the project’s capacity building efforts to institutionalize accountability, improve transparency and enhancing monitoring and evaluation would also help to sustain grants to LAs in the future at a higher level than today.

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Annex 10: Safeguard Policy Issues SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. The main purpose of the Environmental and Social Management Framework (ESMF) is to identify potential environmental and social impacts early in the project cycle and to provide broad guidelines outlining measures, processes, institutional arrangements, procedures tools and instruments that need to be adopted by the project and integrated into project implementation to mitigate any adverse environmental or social impacts.

2. The investments in connective infrastructure will comprise a number of specific investments/sub-projects, the details and specific location of which would not be known at appraisal. Hence, in preparation of the proposed project the implementing agency has developed this Environmental and Social Safeguards Management Framework. Consistent with existing national legislation, the objective of the Framework is to help ensure that activities under the proposed project will: (i) Protect human health; (ii) Prevent or compensate any loss of livelihood; (iii) Prevent environmental degradation as a result of either individual subprojects or their cumulative effects; (iv). Enhance positive environmental and social outcomes; and (v) Ensure compliance with World Bank safeguard policies.

3. The ESMF has been developed to ensure compliance with the World Bank’s environmental and social safeguard policies and the relevant provisions under the National Environmental Act (NEA), the Land Acquisition Act and the National Involuntary Resettlement Policy (NIRP) and associated regulations. The ESMF was disclosed to the World Bank InfoShop on January 29, 2010. The document provides the necessary background for environmental and social dimensions to be built into the design of the project in order to ensure that project implementation will take place in an environmentally and socially sustainable manner. To aid this process, the ESMF sets a framework of guidelines and procedures, which is intended to direct the process of planning and managing environmental and social concerns of project activities. The ESMF will serve as a template document, identifying potential risks and based on which specific social and environmental impact assessments will be conducted for specific project components or sub-components later in the project cycle.

4. The selection, design, contracting, monitoring and evaluation of subprojects will be consistent with the following guidelines, codes of practices and requirements:  A negative list of characteristics that would make a proposed subproject ineligible for support, as indicated in ESMF, Annex 1;  Guidelines for land and asset acquisition, entitlements and compensation, presented in ESMF, Annex 2;  Procedures for the protection of cultural property, including the chance discovery of archaeological artifacts, and unrecorded graveyards and burial sites, provided in ESMF, Annex 3;  Relevant elements of the codes of practice for the mitigation of potential environmental impacts, , presented in ESMF, Annex 4;

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 The requirement that confirmation is received through the Regional Mine Action Center that areas to be accessed during reconstruction and rehabilitation activities have been demined, presented in ESMF, Annex 5;  Relevant contractual clauses to be incorporated into contract documents presented in ESMF, Annex 6; and  Sample terms of reference to be used for independent environmental audit for environmental safeguards compliance, provided in ESMF, Annex 7.

OP 4.12 Involuntary Resettlement

5. The potential adverse social safeguard related impacts, as anticipated at appraisal, would largely result from land acquisition and involuntary resettlement which may be required in connection with the PS investments in rural infrastructure such as rural access, rural water, sanitation, street lighting, rural markets, and intra & inter village infrastructure. Since the exact location of project interventions are not know at appraisal, and will be determined on a continuous basis according to the annual grants received by the PS, the GOSL has prepared an Environmental and Social Safeguards (ESMF), which comprises a Framework for Land Acquisition and Involuntary Resettlement, consistent with the requirements of the National Involuntary Resettlement Policy (NIRP) and OP/BP 4.12. In the event that land acquisition is unavoidable, the land acquisition process, consultation and compensation procedures and principles will be as per Sri Lankan Governmental policies and compliant with OP 4.12 (ESMF, Annex 1 for Guidelines).

6. General Guidelines: (a) Resettlement and land acquisition will be kept to a minimum, and will be carried out in accordance with these guidelines. Subproject proposals that would require demolishing houses or acquiring productive land should be carefully reviewed to minimize or avoid their impacts through alternative alignments. (b) These guidelines provide principles and instructions to compensate negatively affected persons to ensure that they will be assisted to improve, or at least to restore, their living standards, income earning or production capacity to pre-project levels regardless of their land tenure status. (c) No sub-project affecting more than 200 people will be allowed. In compliance of the Bank’s Operational Policy 4.12, in case of less than 200 Project Affected People (PAPs), an abbreviated Resettlement Framework shall be followed in order to restore housing and issue economic compensation for loss of land and livelihood through a consultative and mutually agreeable process (see Guidelines in Annex 2, Attachment i). 7. Consultation Process: The implementing agencies will ensure that all occupants of land and owners of assets located in a proposed subproject area are consulted. Community meetings will be held in each affected district and village to inform the local population of their rights to compensation and options available in accordance with these Guidelines. Stakeholder consultations will be an on-going activity during the planning and implementation stages of the project/sub project. Stakeholder consultation will be inclusive of all groups (particularly women, vulnerable groups and local minority groups), participatory and transparent. The Minutes of the community meetings shall reflect the discussions held, agreements reached, and include details of the agreement. 8. The project executing agency will ensure that all stakeholders are consulted and informed about the project’s expected impacts, proposed impact mitigation policies, and implementing 84 process that would be followed. The implementing agency shall provide a copy of the Minutes to affected people and confirm in discussions with each of them, their requests and preferences for compensation, agreements reached, and any eventual complaint. Copies will be recorded in the posted project documentation and be available for inspection during implementation support missions.

9. Compensation Payment: NELSIP, with financial support from GOSL and implemented through PS will pay all non land compensations/entitlements as laid out in the entitlement framework to all eligible affected persons/households. Furthermore, all compensations and assistance to PAPs must be paid in full prior to dispossession of affected assets in the project. For any land related impact (although not envisaged) compensation will be paid under the Land Acquisition Act and payments be made at market rates.

10. For addressing potential impact/loss categories, entitlement and entitled persons, a Compensation Entitlement Policy Matrix has been developed and included in ESMF, Annex 1.

OP/BP 4.11 Physical Cultural Resources

11. The proposed operations pose limited risks of damaging physical cultural resources since subprojects will largely consist of small investments in community infrastructure and minor public works. Further, the list of negative subproject attributes, which would make a subproject ineligible for support (Annex 2), includes any activity that would adversely impact cultural property. Nevertheless, the following procedures for identification, protection from theft, and treatment of discovered artifacts should be followed and included in standard bidding documents as provided in ESMF, Annex 3.

OP/BP 4.10 Indigenous People

12. Most communities of Indigenous People(Veddah ) in Sri Lanka live in remote locations in the East, such as in Muraththanai, Akkuranai, Minuminuththaveli, Paalchenai and Kathiraveli in the Batticaloa district and in Muthur East in Trincomalee, as well as in bordering villages of the East. While OP/BP 4.10 does apply to these reasonably well defined groups in the interior of Sri Lanka, the issue of ethnic and religious affiliation is a larger factor in determining vulnerability at national and local level in the present Sri Lankan context. It is not expected that stand-alone Indigenous Peoples Development Plans (IPDP) will be justifiable, as the main investments in the NELSIP goes to small-scale rural connectivity infrastructure through the PS. In the present post- conflict environment special attention should be paid to avoid confounding inter-group conflict and animosities.

13. Since identification of subprojects will be an ongoing process, it is not yet known whether indigenous communities will be involved in the project as beneficiaries or affected in any way. If it seems likely that any of these communities are to be directly impacted by any NELSIP sub-project, a diagnostic consultation will be undertaken at that point with the communities in question. The consultation will be undertaken by a qualified social scientist/institution, with knowledge of the traditions and culture of the Indigenous people, to ascertain their specific wishes and to minimize the possibility that interventions by the program and/or its contractors inadvertently create adverse effects within the communities. Based on the consultation report, 85

NELSIP will decide the specific implementation modalities vis-à-vis these communities and will prepare a brief (1-2 page) written plan describing the consultative steps taken and the actions agreed upon and the reasons for these actions. The document will be shared with the WB and made available to the public.

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Annex 10 (a): Social Issues SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. Population: The Northern Province covers the five districts of Jaffna, Kilinochchi, Mullaitivu, Mannar and Vavuniya with a population of 1.3 million which is almost entirely Tamil. However, before the conflict there were small Muslim and Sinhalese minorities, each below 5%. With the end of the armed conflict, these long-time displaced people are slowly beginning to return to the North, reclaiming their land and properties.

2. The Eastern Province covers the three districts of Trincomalee, Batticaloa and Amparaha and has a population of 1.5 million where Tamils account for just over 40% of the population, Muslims just below 40% and Sinhalese just over 20%. The variation in ethnic composition varies considerable between the three districts and also within the districts, with Tamil majority areas primarily being in the coastal zone while Muslim and Sinhala are more predominant in the interior areas. In the Ampara district, Muslims are the largest group (41%), with Tamils (20%) settled particularly along the coast. The Sinhala population lives almost exclusively in the interior and includes many settlers from colonization schemes in the 1970s and 80s. The Batticaloa district is largely Tamil (71%), though some Muslims towns along the coast. In Trincomalee district, the three communities are of almost equal size, with Muslims and Sinhalese concentrated in and around Trincomalee town, and Kantale (Sinhalese) and Muthur and Kinniya (Muslims). The settlement pattern is primarily ethnically disintegrated in the sense, that most settlements are mono-ethnic. The population in both the North and East have suffered heavily from the armed conflict with loss of lives, outmigration of several hundred thousand particularly Tamils and large scale short term and large displacement. A preliminary Social Assessment has been conducted for the North and east with regard to the functioning of the LAs.

3. Impact of conflict on LAs: In Batticaloa district, Pattipalai, Vavunathivu, Vellaveli, and Vaharai are severely affected as both physical structures, vehicles and documentations maintained by these LAs have been destroyed by the war. The Chenkaladi and Valahchenai PS were also impacted by the conflict but have been able to maintain some level of services. These PSs need reconstruction support to revive their normal functions. In the Northern Province, LAs in Jaffna and Vavuniya (excluding Vavuniya North and Venagala Chettikulam PS) were able to provide basic services during the conflict to locations where freedom of movement was assured. The situation in Kilinochchi and Mullaitivu is more serious and Kilinochchi LAs have started functioning in temporary buildings, while proper residence facilities for staff is lacking. The Pachchcila Palai PS office started functioning on 23rd February 2010 and lack office space, furniture and toilet facilities. The original PS building is currently occupied by the security forces, but the PS has made a request to the relevant security officials to hand over the building. This particular PS is serving for 18 GN divisions. Out of total 52 staff, only half of them reported to work because of lack of transport facilities and poor working conditions in the present building. Despite these hardships, the LA staffs in the North are working hard to cater to the needs of the returning IDPs who are in desperate need of basic services such as drinking water, toilets and temporary shelter.

4. Inclusion and participation: The political life of both provinces have been heavily influenced by the decades of conflict, with the East in particular suffering from inter-community tensions and factional strife among armed groups and shifting alliances and competition over 87

land. The most recent election to PC and LA took place in the East in 2008 with a voter turn-out of almost 66%, and in May 2009, elections were conducted for the Jaffna and Vavuniya Urban Councils. The latter were the first local elections held in the Northern Province for more than 11 years. Turnout was very low in Jaffna (22%) but it was better in Vavuniya (52%). Both the 2008 and the 2009 elections have been criticized for being flawed, and the outcome in the East potentially divisive.

5. For most of the population of the North and East, the local authorities are less known and less engaged with than is the case for the deconcentrated government bodies. In most LAs, their full potential in reaching the local population has not yet been reached as all the mandatory five Standing Committees are not formed, and neither are the Advisory Committees, both of are mechanism meant to channel the engagement and participation of local citizens, CSOs and other local non-governmental stakeholder into the local governance process. The performance and capacity of LAs in the Eastern province reportedly enjoy limited public confidence as community responses and perceptions include complaints of LAs for being incompetent and abusive of institutional mechanisms. However, a few LAs in urbanized areas and areas less affected by the conflict have made efforts to involve citizens in decision makings. Although the armed conflict has come to an end, safety and security remain important concerns in the North and East. The high presence of military and paramilitary forces in the Eastern Province and high security zones (HSZ) in the North (although on reclining scale) continue to act as an impediment to the strengthening of a people-centered local governance structure in these areas.

6. In the North, the lack of elections, the recent end to the conflict along with major resettlement effort of the displaced people, are equally challenging. During the years of conflict, only Cooperative Societies and LAs continued functioning at local level, which may be the reason that the various stakeholders such GAs, DSs and community representatives express positively on the performance of the LAs and expect they will be able to deliver services. The LAs are working closely with state agencies in Jaffna and Vavuniya and are trying to vitalize mechanisms such as Community Centres and Advisory Committees as a means to involve the community members in service delivery and decision making. LAs in Kilinochchi and Mullaitivu, where resettlement has only just started, are still struggling to re-establish public service delivery as they could not function properly during the most recent years of conflict. Community Centres established under the guidance of CDOs of LG department are participating in LA activities such as conducting Pre-Schools, Libraries etc. Community Centres also played an active role in the recent dengue mosquito eradication campaign organized by the LAs (MC Jaffna, UC Vavuniya and PSs). Advisory Committees consisting of reputed social leaders have been formed in all PS divisions in Vavuniya and Jaffna, but the level of community participation is weak in certain LAs (Vavuniya South-Sinhala Division) because of lack of trust in the LA officials including the elected members. In areas where IDPs are resettling now, the LG departments are trying to encourage community members to re-establish Community Centres to ensure a level of citizen involvement in their service delivery and decision making process. However, it will be a special challenge to ensure that returning Muslim, Sinhalese IDPs and Tamil refugees from India to Jaffna and Mannar districts be represented and able to articulate their concerns, problems and grievances.

7. The major challenge in the East is to ensure equitable participation, representation and cooperation across the three main communities, which in many localities are also spatially 88

segregated, following year of conflict. In most LAs in the East, different ethnic communities are represented fairly well, but in certain LAs in Batticaloa and Ampara districts, local minority groups, be they Tamil or Muslim, do not get their needs and views adequately represented. In spite of elections to LAs in 2008, in the Eastern province the population appears to have limited knowledge of the LA activities. In PSs which were particularly affected by the conflict, the functioning of the LAs seems to be negatively affected by external interference from political groups and where Advisory Committees have been established, these do function very effectively. In particular, lack of cooperation among government agencies and LG authorities is a cause of complaint.

8. Gender: While the percentage of female civil servants at DS and PS level is comparatively high, women’s representation in elected bodies in Sri Lanka is dismal and there has been no substantial change in the number of women representatives since independence in 1948. Following the Parliament election in 2004, only 4.8% of MPs are women, with less representation at Provincial Councils- and 3% in Municipal Councils, 2% in Urban Councils and in Pradeshiya Sabhas 1%. Women also have a very limited, if any, representation on the Standing Committees and Advisory Committees. However, studies indicate that main vehicle for women to have their voices heard at district or local level is through complaints, where they tend to reach parity with men, except in Muslim dominated areas. Even though there is a shift in traditional gender roles in the absence of male family members, as women move out of domestic sphere to earn money, such transformation is limited to the basic livelihood activities and community level actions. Reasons for women’s withdrawn role may be the comparative lack of social safety for women under the earlier military and para-military presence in the public space, and cultural barriers for both Tamil and Muslim women to participate in local governance. Likewise, Ex-combatants, youth who were largely ignored in the local development planning in the past, and IDPs who are still in the state of transition to reestablish their lives in the resettled locations need to be included and strategies to be found to make them visible in local government planning and decision making.

9. Indigenous People: Most communities of Indigenous People(Veddah ) in Sri Lanka live in remote locations in the East, such as in Muraththanai, Akkuranai, Minuminuththaveli, Paalchenai and Kathiraveli in the Batticaloa district and in Muthur East in Trincomalee, as well as in bordering villages of the East. While OP/BP 4.10 does apply to these reasonably well defined groups in the interior of Sri Lanka, it is not expected that stand-alone Indigenous Peoples Development Plans (IPDP) will be necessary, as the project-funded investments are targeted at fairly small-scale rural connectivity infrastructure mandated to LAs.

10. A more detailed Social Impact Assessment is being conducted to assess (i) the overall direct and indirect social impact of the planned project activities on the different communities in the North and East, and on their internal relationship with a particular view to the past history of conflict, (ii) how local authorities have been placed and functioning during the recent years of armed conflict, and (iii) the perception of the role and function of the local authorities by the various stakeholder groups and their expectations thereof for the future.

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Annex 11: Project Preparation and Supervision SRI LANKA: North East Local Services Improvement Project (NELSIP)

Planned Actual PCN review 10/10/2008 10/10/2008 Initial PID to PIC 08/19/2009 08/19/2009 Initial ISDS to PIC 08/24/2009 08/19/2009 Appraisal 11/29/2009 01/28/2010 Negotiations 12/20/2009 04/05/2010 Board/RVP approval 02/14/2010 05/13/2010 Planned date of effectiveness 03/15/2010 07/15/2010 Planned date of mid-term review 03/12/2012 09/15/2010 Planned closing date 12/31/2014 12/31/2015

Key institutions responsible for preparation of the project:

Ministry of Economic Development Provincial Councils, North and East Ministry of Local Governments and Provincial Councils Sri Lanka Local Government Institute

Bank staff and consultants who worked on the project included:

Name Title Unit Seenithamby Manoharan Task Team Leader SASDA Miriam Witana Procurement Spec. SARPS Supul Wijesinghe Fin. Management Spec. SARFM Samantha de Silva Sr. Social Protection Spec. HDNSP Minneh M. Kane Lead Counsel LEGES Sumith Pillapitiya Lead Environmental Spec. SASDI B. Menon Parameswaran Sr. Urban Spec. SASDU Chau-Ching Shen Senior Finance Officer CTRFC Asta Olesen Sr. Social Development Spec. SASDI Rama Krishnan Venkiteswaran Sr. Fin. Management Spec. SARFM Kirsten Hommann Sr. Economist SASDU Rohan Selvaratnam Operations Analyst SASDU Darshani de Silva ET consultant SASDI Claus Pram Astrup Senior Economist SASEP Shane Ferdinandus Team Assistant SASDO Sarath Wickramaratne Participatory Planning (Cons.) SASDU A. Skanda Raj Financial Management (Cons.) SASDI Abdu Muwonge Economist SASDU Sunethra Chandrika Samarakoon Procurement Specialist SARPS Razaak M Ghani Social Development Specialist SASDU (Cons.) 90

Bank funds expended to date on project preparation: 1. Bank resources: US$ 176,934.19 2. Trust funds: US$ 4,585.79 3. Total: US$ 181,519.98

Estimated Approval and Supervision costs: 4. Remaining costs to approval: US$ 100,000 5. Estimated annual supervision cost: US$ 150,000

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Annex 12: Governance and Accountability Action Plan (GAAP) SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. The overall development effectiveness, reputational risk and fiduciary risk to the Bank financed projects in Sri Lanka are considerable and are relevant for this project as well. The country context has been taken into account when doing the risk assessment and mitigation for this project. Out of all the fiduciary risks facing the Bank in Sri Lanka, the ones relevant to this proposed project are: political interferences may undermine the effectiveness of implementing the project by the LAs as well as professional project management by the provincial government; weaknesses in both financial management and public procurement that give rise to corruption; and limited implementation capacity and governance systems at the local government system in handling the project.

2. A fiduciary Assessment study undertaken in the ten selected Local Authorities (LA) in North and East indicates that the accountability framework is considerably weak. While the systems of accounting, audit etc, are reasonably sound and have been institutionalized, these are essentially designed to provide upward accountability and oversight by the higher tiers of government. The lack of defined procurement systems and procedures has led to procurement ambiguities among LAs. On the overall, the accountability remains limited by the dependence on PC/ GOSL for capital and revenue (reimbursement of salary) grants. The mitigation measures as have been incorporated into the project design have been calibrated to provide greater opportunities to the village communities for participating effectively in all activities relating to the social and economic development of the Local Authority area. The measures of mitigation include: inclusion of the community representatives in the Local Authority standing committees to be the decision makers at the key stages e.g. investment selection, implementation, procurement, social audit etc. An important element will be an agreed Local Authority Capacity Building Plan, which is expected to strengthen its fiduciary capacity and improve governance, and social accountability measures. These measures are based on the principles of both upward and downward accountability, transparency, participation and equity.

3. A project specific assessment of the governance and accountability risks identified five risk areas:

a. malfunctions in governance systems; b. financial management weaknesses; c. irregularities in procurement and assets management; d. weaknesses in disclosure policies and procedures as well as poor communications; and e. ineffective complaint and grievance redressal mechanism.

The assessment of risks as well as mitigation measures was carried out in a participatory manner with more than 100 participants from the state, provincial, district and local government staff as well as LA members and citizens during three workshops in LA in June and August 2009.

4. To address the risks identified a three level accountability framework has been developed. 92

a. The beneficiaries are empowered through LA standing committees to hold themselves, government officials as well as the project implementing agencies accountable through the use of social accountability mechanisms;

b. The LAs are held accountable, for compliance with the governance and accountability provisions in the Local Authority Implementation Manual;

c. Independent monitors, provide an additional measure of accountability, by independently monitoring and reporting on the extent to which the LAs and local government staff are adhering to the governance systems and procedures; and

d. The Bank’s Implementation Support Missions and fiduciary post reviews would test check whether all the systems set up under the framework are functioning.

Taken together, these arrangements would provide reasonable assurance that the funds are being used for intended purposes and corruption is minimized. The key measures to ensure oversight and accountability at each level are briefly described below.

5. Embedding good governance and accountability systems at Local Authority level: The downward accountability approach will be applied for ensuring good governance and accountability. The approach involves vesting most powers in the hand of citizens (as opposed to civil servants and elected officials) through their majority in key decision making bodies. This will involve: a. Local Authority (LA) standing committees, consisting of 70% community leaders from PMs and 30% LA members, to guide the participatory planning process to identify, prepare and implement investments and make final decisions. b. Setting up Procurement and Audit Committees from LA membership to carry out procurement and accountability tasks, in compliance with agreed rules and procedures detailed in the LA Implementation Manual. c. Funds will be transferred to the LA on basis of guidelines and rules described in the PIP and will be disbursed upon compliance certification by the ACLG, CLG and PC. d. Key information on subprojects will be publicly displayed. e. LA activities will be subject to social accountability review using tools to be defined. f. A capacity building plan for LA will be supported by the project and include capacity building for the procurement, financial management and participatory planning.

6. Holding the Local Authorities Accountable: A number of tool and procedures will be used for this purpose. These include: a. Local Authority Implementation Manual and Project Implementation Plan specify rules and checklist for eligibility, record keeping, financial management, benchmarks for disbursements, social accountability, procurement, disclosure, and external audit. b. The Appraisal and Monitoring Teams comprising staff skilled in the areas of financial management, engineering, community participation and rural development will be set up at each ACLG office to ensure compliance with prescribed rules and 93

procedures. They will certify achievement of physical and other milestones during implementation of development activities. c. Internal Auditor employed by the Provincial Councils will be responsible for ascertaining whether the financial rules and procedures as laid down in the Manuals are followed. d. External Auditors - Audit of LA is responsibility of the Auditor General and audit scope is defined by the LA act. Competencies and capacity building needs of the Auditor General are being assessed and, if necessary, would be supported under the project. e. Independent Monitors- one of the proposed Credit conditions is that the Ministry will, beginning not later than December 31, 2010, have regular social and process audits undertaken on a regular basis by external independent agencies. f. The enhanced Complaints and Grievances Redress Mechanism would be another tool for downward accountability of community based organizations.

7. Recommended Implementation Arrangements for the GAAP: a. The Social Audit Committees at the LA level will have primary responsibility for ensuring compliance with the GAAP measures at the LA level. b. The existing LA Teams include a full time Program Assistant; the title and TOR of this position may be modified to Governance and Accountability Officer. c. The Regional ACLG Team will include a Governance and Accountability Officer (Job description and TOR should be included in the PIP). d. At the CLG Level three arrangements are recommended to ensure implementation of GAAP: (i) the checklist used by the Appraisal and Monitoring Team should include relevant benchmarks from the GAAP; (ii) the Process Monitors should report on compliance with GAAP; and (iii) the CLG will be responsible for overall implementation of the GAAP. He/she would be supported by the Project Coordinator at the national level and will ensure that the GAAP is implemented at all levels, emerging GAAP issues are handled by the relevant levels in the project and lessons are drawn. e. 8. Recommendations for the Bank Supervision Missions: The Bank supervision mission would focus on ensuring that the three levels of checks and balances systems are working properly. The mission would focus on the following aspects: a. Summary of Social Audit Committee Findings b. Independent Evaluator (Process Monitor) Reports c. Award System for Good Performers d. Data from the Complaint Handling System e. Mid-term Evaluation f. Internal Audit Report g. External Audit Reports

9. The following information has been requested prior to the appraisal mission and will help complete the appraisal and finalize the attached draft Governance and Accountability Plan: a. Changes in the Local Authority Implementation Manual that need to be made to reflect the GAAP measures and responsibilities; in particular the roles and responsibilities of the standing committees of the LAs.

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Annex 13: Reconciliation and Conflict Filter SRI LANKA: North East Local Services Improvement Project (NELSIP Based on the application of the Reconciliation and Conflict Filter Assessment Guidance7

Key Issues Description of Issues Risk Measures to address the Issues Rating Rati of ng residual risk

I. Project Context Main social and political risks H S and conflict generated needs: 1. Continuation of ethnic and Both the North and East have recently Progress toward tackling the underlying regional tensions in the come out of armed conflict and have been political reasons for the long standing ethnic North and East through years of instability. Resettlement tensions will need to move forward at national of displaced people is ongoing in the level. While the successful implementation of North, while inter-communal tensions the project would likely help to improve the remain a risk in the East. trust between citizen and government, political developments in both North and East should be closely monitored to watch out for any escalation of tensions. Regular project implementation support missions and continuous social impact assessments would provide opportunities to interact with communities and authorities to reduce the tension.

2. Tensions between civilian Continued predominance of the military in District and provincial coordinating committees and military authorities in the North constraints the functions of the would play a major role in solving some of the the North and continued civilian authorities and hamper attempts to issues and reducing tension existence of para-military increase participation, equity and groups in the East. transparency in the development effort. In the East, paramilitary groups operate and negatively impact on the peace- and confidence building measures across communities. Both scenarios impact negatively on the relationship between citizens and state.

3. Frictions between Central The project is placed in the MED (rather The arrangement of both ministry secretaries Government and its than in MLGPC) and may fall victim to being co-chairs of the National Project Steering deconcentrated agencies frictions between the Central Government Committee and MOF being involved in transfer and the elected Local and its deconcentrated agencies and of grants to LAs will mitigate this risk to some Authorities. elected provincial/ local authorities. extent

Risks & opportunities relating to H S reconciliation and inter-ethnic trust:

1. Perceived exclusion of In some areas in the East, local minority local minorities from The participatory project design and communities do not find representation implementation with local communities would LAs in different parts of and voice in the LAs. This constitutes a the East. ensure inclusion and equity to a reasonable potential threat to the project and to any extent. long term ethnic reconciliation.

The project cannot mitigate this risk 2. Reintegrating returning Reintegration of both the long time other than bringing all fractions of the IDPs in the North, both displaced Muslims and Sinhalese, and the

7 Refer to Reconciliation and Conflict Assessment Guidance: Sri Lanka, Application of Reconciliation and Conflict Filter to Operations 95

short term displaced and IDPs from the former LTTE-controlled returnees into the project implementation long term displaced. areas will constitute a major challenge in mechanism. terms of ethnic and political reconciliation in the North. Issues of equity, participation and restoration of property rights are major issues in this context. Concerns raised by stake-holders H S and non-stakeholders: 1. Lack of transparency and Local authorities are reportedly viewed as NELSIP is premised upon a political culture accountability of local particularly lacking in respect of which allows open dialogue and the ability of authorities transparency and participation. citizens to engage in local level political Discriminatory practices including planning and decision-making without fear for favoritism is reported as moderate to high. repercussions from the authorities or from Local authorities are seen as lacking in fellow citizens. The project design and the performance, responsiveness and involvement of Praja Mandalayas would accountability, with minimal public promote transparency and accountability on participation and engagement, and both ways. practices favoring the rich and powerful. Rent seeking behavior is reported across the local administration and in most areas extortion money still has to be paid by local businesses, albeit on a declining scale.

2. Security The continuation of High Security Zones Parts of HSZs in Vavuniya and Jaffna and prominence of the military in the have been released in the recent past to North and of the continued existence of settle returnees. But, the militaty para-military groups in the East constitute activities will still continue. a considerable impediment to inclusive, transparent and participatory local

governance structures. The political

security concerns vary greatly across districts in the two provinces.

3. Social exclusion Women are hardly represented in LAs in Project design allows for equal North and east, and in some areas of the participation of women in committees East local minorities feel excluded. and this aspect would be closely monitored during the missions. Issues in project management and H S administration: 1. Weak local accountability Local accountability is currently weak due The project will have limited control on the to: (i) the extent of the executive powers of Government’s policy decisions on these issues. centrally-appointed civil servants in the However, technical audits and social audit North operating from Colombo; (ii) weak mechanisms are key components of the project. capacity and democratic processes at the These will reduce some political distortions at LA level; and (iii) non existence of elected local level, but the overall risks at provincial local government in North. Variation in level remain substantial during the next few population density and size of area make years. some LAs less effective in service delivery

2. Lack of representation of Most local authorities have not fully Project design provides for satisfactory local minority groups and implemented local government reforms functioning of standing and advisory women in committees and regarding standing and advisory committees and those LAs that fulfill this consultative forums. committees and means of communicating criteria would be only participating in the with the general public. Existing project implementation. committees are not representative, particularly of more marginal/ vulnerable groups – and public awareness of these is very low. Key Design Features aiming at E.g. Consultations, grievance redressal mechanism, Inclusion and Transparency: social audits: 1. Social accountability Citizens’ scorecards to track, over time, 96

mechanisms citizens’ perceptions of and satisfaction with 2. Assurance audits the local services 3. Grievance Redress Assurance audits will evaluate the overall Mechanism performance of the LAs; assess the quality and quantity of public expenditures and development work carried out. The LAs already have a Grievance Redressal Mechanism and it will be strengthened. II. Outcome level Project impact on equity in access H H and outcome across different communities:

1. Project may be perceived The project both a provincial and PS level The project preparation involves all levels of as being captured by Center or may be perceived as being captured by the governments including politicians, bureaucrats, by local interest groups Center, ie. devolution may not be seen as civil society organizations and the citizens from real. At local level, different communities the inception and this consultation will continue may perceive their interests as not being till project completion. A preliminary Social represented in a balanced manner. The Assessments has been conducted and a more 2008 local elections in the East and the comprehensive Social Assessment is ongoing 2009 to municipal councils in Jaffna and with a focus to identify issues of exclusion and Vavuniya have been criticized for not social risk. being entirely free and fair – and the elected LAs in the East enjoy limited confidence in the population at large. Other social and political risks, H S incl. public perceptions of project:

1. Government commitment to The Sri Lankan Government has reiterated The project management will work with devolution, as per the 13th its commitment to address political issues national, provincial and local level stakeholders Amendment to the related to the conflict. The general political in implementing the project within the Constitution, remains consensus is that strengthening LAs is framework of the national policy for local uncertain important for addressing service delivery government. Systematic IEC campaigning,

issues, and strengthening local government dissemination of information and regular

institutions is a precondition for any consultation would mitigate the risk to a

durable settlement of minority concerns. reasonable extent.

Whether and how such realization will

translate into real devolution remains to be

seen.

Devolution may result in sharpening the The PCs of North and East have commenced a 2. Party politics and patronage tensions across communities as a result of program of participatory planning exercise with structures may influence their increased ability to influence local LAs and DSs. This process would provide elected LAs and undermine planning. Party politics and patronage opportunities for elected and deconcentrated citizen confidence in LAs. structures may influence elected LAs and agencies to work together in the project area. It

undermine citizen confidence in LAs as is expected that this arrangement would reduce seems to be the case in places in the East. potential tension between these agencies. The different committees aimed at ensuring community participation comprise appointed persons (not elected). The LAs will work with the Praja Mandalaya, endorsed by MLGPC, and composed of elected representatives from village organizations, and led by an appointed Secretary. Hence, even at grassroots level there is thus a potential for friction between elected and deconcentrated agencies.

III. Overall Conflict and Reconciliation Rating H

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Annex 14: Youth and Gender Strategy SRI LANKA: North East Local Services Improvement Project (NELSIP)

A - Youth Strategy

1. Today, there are 1.5 billion people between the ages of 12 and 24 worldwide, with 1.3 billion of them living in developing countries—making the young the largest segment of developing country population in recorded history. More important, young people constitute a disproportionately large part of the world’s poor. Young people can be a source of growth and development for their countries, but a subset of young people—those known as youth at risk— are a source of the inequality, poverty, exclusion, and much of the crime and violence that plagues every region in the world, thereby imposing enormous costs on themselves, their families, and society at large.

2. Youth represent over 30 percent of the total population of Sri Lanka. As such successive governments have made youth a priority in their efforts to promote an inclusive development agenda. Going beyond many developing countries, Sri Lanka’s national social welfare policies provide youth with free primary, secondary and tertiary education as well as free healthcare. However, Sri Lankan youth face many problems similar to other developing countries including: high secondary school dropout rates among rural youth, unemployment, lack of access to markets, lack of up to date technical vocational training programs with links to global markets, lack of employment, social exclusion including ethnic violence in the North and East. All these youth related problems represent significant economic and social costs to society. Yet youth have little voice in strategies for development, leaving them susceptible to politically and economically disruptive activities. Vulnerable youth constitute a priority target group for the project. NELSIP programs will make a concerted effort to actively engage rural and urban youth in the development of their own communities. The project will ensure that youth will represent at least 30 percent of Praja Mandalaya and Local Authority standing committees. They will also be actively involved in the preparation of Local Authority Development Plans and in the implementation of projects at local level. Furthermore, through the “Other Grants Window” of the LA which focuses on Social Protection issues, funding for projects of high relevance to youth will be given priority.

B - Gender Strategy

3. Sri Lankan women are better situated than women in many other economically developing countries, but they have yet to achieve gender equality or empowerment according to international norms. The confluence of positive social policies, slow economic growth, and consequent persistent poverty among segments of the population, armed conflict and gendered social norms, have contributed to uneven development that affects women’s quality of life.

4. A gender strategy will be formulated as part of the NELSIP operation ensuring support for the equal participation of women in project planning, implementation, and monitoring of Local Authority development programs. Gender-specific indicators will measure level of participation of women in the program - inclusion of women in the decision-making process (community leaders etc.), as well as the extent to which they receive economic benefits from the project. Towards this effort, the project will ensure that women constitute at least 30 percent of 98 those in decision-making roles and at least 50 percent of participants at village assemblies. Furthermore, the project will track whether at least 50 percent of project benefits will accrue to women. Supporting particularly vulnerable groups of women such as elderly women without resources, women affected by armed conflict, including war widows and other female heads of households will be supported directly from the Other Grants Window of NELSIP.

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Annex 15: Documents in the Project File SRI LANKA: North East Local Services Improvement Project (NELSIP)

1. Updated Project Information Document – Also filed in the info shop.

2. Project Implementation Plan of the Government (cleared with the Bank).

3. Environmental Assessment and Management Framework (submitted by the Government and cleared with the Bank).

4. Integrated Safeguards Data Sheet (ISDS) – Also filed in the Info shop.

5. Social Assessments with Sinhalese and Tamil translations of the Public Information Brochure submitted by the Government – Also filed in the info shop.

6. Detailed Environmental Assessments and Environmental Management Plans.

7. Detailed Cost Estimates (Cost Tables).

8. Draft Financial Management Manual (submitted by the Government and cleared with the Bank).

9. Draft Procurement Plans

10. Detailed Terms of Reference for Implementation Support Consultants

11. Local Authority Operations Manual (LAOM)

12. Governance and Accountability Plan (GAAP)

13. Project Appraisal Documents and Project Papers of recently approved projects

14. Assessment Reports of Bank Consultants on Local Authorities in North and East

15. Citizen perception Report of GTZ on Local Authorities

16. National Policy on Local Government (Gazette dated December 18, 2009)

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Annex 16: Statement of Loans and Credits SRI LANKA: North East Local Services Improvement Project (NELSIP)

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P097329 2008 Public Sector Capacity Building 0.00 22.60 0.00 0.00 0.00 19.90 -0.72 0.00 P093132 2008 Dam Safety and Water Resources Planning 0.00 65.33 0.00 0.00 0.00 66.78 0.00 0.00 P100390 2007 Sri Lanka: Puttalam Housing Project 0.00 32.00 0.00 0.00 0.00 25.45 5.40 0.00 P086411 2006 Sri Lanka - Road Sector Assistance 0.00 198.10 0.00 0.00 0.00 112.78 1.34 0.00 P084580 2006 Education Sector Development Project 0.00 70.00 0.00 0.00 0.00 36.51 1.33 -0.59 P083932 2005 North East Housing Reconstruction 0.00 118.00 0.00 0.00 0.00 44.29 2.28 0.00 Program P081771 2005 E-Sri Lanka Development 0.00 53.00 0.00 0.00 0.00 29.64 27.40 0.00 P086747 2004 Community Livelihoods in Conflict Areas 0.00 64.70 0.00 0.00 0.00 45.82 30.33 20.27 P074872 2004 Community Development & Livelihood 0.00 51.00 0.00 0.00 0.00 3.58 2.58 0.00 "Gemi P050740 2004 HEALTH SECTOR DEVELOPMENT 0.00 60.00 0.00 0.00 0.00 6.29 3.28 0.00 P058067 2003 Second Community Water 0.00 39.80 0.00 0.00 0.00 8.47 4.49 3.29 P050741 2003 Relevance and Quality of Undergrad. Educ 0.00 40.30 0.00 0.00 0.00 10.55 5.86 -3.22 P076702 2002 Renewable Energy for Rural Economic 0.00 115.00 0.00 0.00 0.00 30.75 -20.22 0.96 Dev. Total: 0.00 929.83 0.00 0.00 0.00 440.81 63.35 20.71

SRI LANKA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1998 Apollo Lanka 3.88 0.00 0.00 0.00 3.88 0.00 0.00 0.00 1996 Asia Power 0.00 2.27 0.00 0.00 0.00 2.27 0.00 0.00 2003 CBC 0.00 9.96 0.00 0.00 0.00 9.96 0.00 0.00 2004 CBC 0.00 2.89 0.00 0.00 0.00 2.89 0.00 0.00 2003 Dialog 48.75 0.00 0.00 0.00 13.75 0.00 0.00 0.00 1999 Fitch Sri Lanka 0.00 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1997 Packages Lanka 0.00 0.17 0.00 0.00 0.00 0.17 0.00 0.00 1999 SAGT 12.65 3.62 0.00 0.00 12.65 3.62 0.00 0.00 2000 Suntel 1.18 4.20 0.00 0.00 1.18 4.20 0.00 0.00 Total portfolio: 66.46 23.18 0.00 0.00 31.46 23.18 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00 101

Annex 17: Country at a Glance SRI LANKA: North East Local Services Improvement Project (NELSIP)

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Annex 18: Maps SRI LANKA: North East Local Services Improvement Project (NELSIP)

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