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					                                       March 18, 2013February 9, 2006November 23, 2005


                               Local Investment Grants (LIG)
                                    Preparation Mission
                               October 17 – November 4, 2005

                                        Aide Memoire

I.     Introduction

1.      The second preparation mission for the proposed Local Investment Grants (LIG)
program was conducted between October 17 and November 5, 2005. The mission consisted
of Larry Hannah (Lead Economist and Task Team Leader), Dave DeGroot and Rumana
Huque (Senior Urban Specialists), Abebaw Alemayehu (Senior Operations Officer-Urban
Development), Ken Green (Environment and Safeguards Consultant) and Eshetu Yimer
(Senior Financial Management Specialist). The mission met with H.E. Ato Mekonen
Manyazewal, State Minister of Finance and Economic Development (MOFED), members of
the LIG Task Force, regional and local officials, and donors (a list of people met is provided
in Annex 1). This Aide Memoire summarizes discussions and reflects agreements reached
with the government during the mission. The mission would like to thank the government and
other officials met for their hospitality and assistance.

II.    Objectives and Principles of LIG

2.       Development objectives. The mission held extensive discussions with the LIG Task
Force and regions and confirmed the understandings reached with the State Minister of
MOFED. It was agreed that the development objectives of the LIG project are fully aligned
with the Government’s decentralization objectives, targeted at the woreda and municipal
level, to:
            a. increase capital investment at the local government level for more efficient
               and effective service delivery; and
            b. strengthen the decentralization process to local government through existing
               government financing channels for an array of sectoral investments based on
               local needs and priorities

3.      To achieve these objectives, it was further agreed that LIG would be a specific
purpose grant (SPG), funded by the Federal Government, and transferred, via Channel One
through the regions, to local governments. LIG would be available to all local governments
(woredas and municipalities). Although designated an SPG, the only restriction on LIG funds
would be that they must be used only for capital investment purposes in any sector within the
jurisdiction of local governments. Better delivery of local services is understood to depend on
more efficient and effective use of a significantly increased volume of investment funds.
Therefore, the incorporation of incentives for good performance is a fundamental principle
underpinning LIG. This means than rather than an entitlement, like the block grant, that LIG
access would depend on how capable and how effective local governments were in using
these resources. In order to introduce and sustain this principle in the public finance system of
Ethiopia, LIG is conceived as a government program built upon existing channels, systems
and procedures that will attract the financial support of government and donors in the near

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4.      Principles regarding allocation from federal to regional level. The following were
agreed: i) LIG funds would be additional to the Block Grant, and would not offset any Block
Grant allocation to the regions; ii) allocation of all LIG funds from the federal to regional
level would follow the equalization formula currently used for the Block Grant; and iii) in
order to ensure efficient use of funds, on an annual basis unused funds from the previous year
would be added to the following year’s pool and reallocated according to the Block Grant
formula. During the project preparation process, the following assessments will be carried
out to ensure effective implementation at the regional level: i) clarification of what capital
investments fall within the jurisdiction of local governments (woredas and municipalities) in
each sector; ii) capacity of BOFEDs to manage LIG in terms of human resources and
financial management; and iii) mechanisms at the BOFED level to ensure that local
governments’ are using an appropriate process for investment planning and implementation.

5.      Principles regarding allocation from regional to local level. The application of the
basic principles for the LIG program to the regional to local level transfer was discussed with
federal and regional authorities. It was agreed that LIG would be a program for all local
governments and that their eligibility for LIG funding would be known as a “drawing right
(DR)”. Further, it was affirmed that the right of a local government to draw funds under LIG
would be a function of their ability to meet the criteria established for the program, known as
“conditions of access (CoA)”. In order for LIG to function smoothly it was understood that
the criteria both for DR and CoA would need to be unambiguous, objective and transparently
applied so that no one could allege manipulation or favoritism in the process.

6.      Since not all local governments will be able to meet the CoA at the same time, access
to LIG funding would become a process of “self-selection” by local governments. In
establishing the details of the CoA, the precise requirements can be calibrated in a way that
LIG is phased in over a period of time. This will allow for scaling-up of LIG in an organized
manner. The allocation of DRs to all local governments should also not result in allocations
that are too small to be useful because local governments will be allowed to draw their entire
three-year DR, as quickly as they are able. An annual reallocation of unused funds, as
discussed, should also serve to direct resources to those ready and able to make effective

7.      The fundamental principle for distributing DRs would be to use a formula most likely
based on the one presently applied to distribute the block grant to local governments. A
number of issues need to be worked out during project preparation. For example, can the
same formula be used to establish DRs for rural woredas and urban local governments? In
addition there may be a need for regional variations in the formula if issues such as how to
treat local governments already receiving earmarked capital funding are to be considered.
Although such differences may exist across regions LIG should be conceived as a national
program adhering to common basic principles.

8.      Following the issuance of DRs for all local governments, LIG principles will need to
be translated into specific regional CoA. The following factors should be considered:
            a. The capacity of local governments to effectively use LIG funds would need to
                be confirmed. A minimum mandatory capacity standard for local governments
                could be based on PSCAP, augmented by some specific LIG requirements,
                such as adequate technical and financial capacity related to undertaking capital

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           b. Each participating local government would need to have a multi-year strategic
              plan that includes a capital investment program. The selection of projects
              would need to be carried out using a consultative process. In addition
              technical, environmental, social and economic aspects of the projects would
              need to be appraised and verified.
           c. Future operations and maintenance (O&M) requirements would need to be
              explicitly identified and each local government would be required to plan for
              and commit to financing these O&M costs.
           d. Criteria, such as past performance in implementing investments and the
              readiness of projects to be implemented with LIG funds, were also discussed
              but no specific mechanisms to use these measures to release funds have yet
              been developed.

9.     Regional variations in the conditions of access would not violate the basic principles
of LIG but rather would allow for some regional calibration of the criteria. This calibration is
deemed necessary in order to phase the introduction of LIG and to confirm that the
application of the conditions of access is leading to effective implementation of the program.
Regions would be asked to consider how the LIG principles could best be reflected in
regional conditions of access and the results of the various proposals should be discussed at a
workshop early in 2006 in order to reach final agreement on operational rules for the project.

III.   Institutional Arrangements for Implementation

10.     The LIG would transfers funds from MOFED to regional BOFEDs who would
transfer funds to municipal treasury offices and WOFEDs. MOFED would have overall
responsibility for the program.

11.     MOFED’s key tasks would include transferring funds to regions based on the block
grant formula; ensuring that regions follow the Operational Manual (to be developed during
project preparation); financial management; consolidation of monitoring and evaluation
reports from regions and reporting to the World Bank.

12.    The responsibilities of regional BOFEDs would include applying the agreed formula
to award local governments drawing rights and transferring funds to the local governments
who have met the conditions of access and who are proceeding with an eligible investment
with funds from LIG. BOFEDs would also ensure that local governments follow the
Operational Manual in selecting and implementing projects; assist local governments as
necessary in LIG implementation through capacity building, arrange for technical support
through regional sector bureaus, and other means; monitor and evaluate local government
performance and report to MOFED.

13.     The responsibilities of WOFEDs and municipal treasury offices would include
preparing multi-year capital investment plans and annual investment plans; assuring funding
for O&M for the investments; acquiring/building up capacity for implementation through
PSCAP and other means; selecting and implementing projects according to the Operational
Manual; ensuring technical, environmental, social and economic aspects are adequately
addressed through the involvement of the appropriate sector representatives/officers at the
local level; procurement and financial management; and monitoring and reporting to
BOFEDs on the use of funds.

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14.    The full responsibilities for each level will be worked out in more detail during the
preparation process and clearly described in the Operational Manual.

IV.    Timetable for Project Preparation and Action Plan

15.     The proposed IDA credit for the LIG program is scheduled for consideration in FY06
which ends June 30, 2006. This schedule implies a pre-appraisal mission around the end of
February 2006 at which time draft reports from all consultants would need to be available
for review. Based on the readiness of these inputs, the Bank and Government will need to
agree that an appraisal mission, possibly combined with negotiations in Ethiopia, could start
on or about April 10, 2006. The satisfactory completion of preparation inputs and
negotiations following this schedule are essential for the IDA credit to be presented to the
Board of the World Bank in late June. The key documents required for review at appraisal
are: (1) the draft Operational Manual; (2) the draft Project Implementation Plan; and (3)
Safeguard products including the Environmental and Social Management Framework and the
Resettlement Action Framework.

       Bank pre-appraisal mission                    February 27-March 10, 2006
       Safeguard Disclosure and Consultation         Early April, 2006
       Appraisal and Negotiations                    April 10-21, 2006
       Submission of WB board documents              May 15, 2006
       Board presentation                            June 20, 2006

16.     Actions to be taken by MOFED. The most urgent action to assure timely preparation
of the project is for MOFED to designate personnel to manage LIG. It was understood that
adequate staffing would require some fulltime assignments. Preparation activities will include
extensive dialogue with the regions and local governments on the design of the program,
including organizing/facilitating a number of workshops; periodic meetings with the LIG
Task Force for sectoral input into program design; coordinating the preparation of the
Operational Manual and other required project documents; working closely with the World
Bank team; and liaising with donors who may be interested in joining the LIG program.

17.      It was agreed that MOFED would use the approved PHRD project preparation grant
(US$495,000, Grant Agreement signed in September 2005) to finance the following
consultancy contracts:
    i) PHRD Coordinator: a technical expert (individual) to assist in managing the PHRD
         funds, including procurement of consultants and managing contracts, and providing
         technical input for the coordination of the project preparation process. The
         Coordinator could be a local consultant, and would be required for approximately 12
         months. (Draft terms of reference attached as Annex 2)
    ii) Preparation of the Operational Manual: this would require an international consultant
         (individual) with experience in preparing projects, particularly World Bank projects,
         with expertise in decentralization and local government reform. (Terms of reference
         under preparation)
    iii) Additional consultancies to provide input for the Operational Manual including the
         following: (terms of reference under preparation)
             a. An individual consultant to review the variety of local investment planning
                 processes that currently exist (Strategic Plans for the Block Grant; Woreda
                 Development Plans under ESRDF; Integrated Woreda Development Plans

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               under ERTTP; Integrated Development Plans following the South Africa IDP
               model; etc), and provide recommendations for standardizing and/or providing
               guidelines for the minimum requirements of a multi-year integrated capital
               investment plan for LIG.
           b. An individual consultant to determine the level of additional effort that will be
               required at each level (MOFED, BOFED, and WOFED) to implement LIG,
               including personnel, hardware/software and logistics needs and cost estimates.
           c. An individual local consultant to compile all legislation (including regional
               constitutions, proclamations, directives, etc) regarding the assignment of
               expenditures and revenues for woredas and urban local governments in each
               region, and prepare a summary in English, including indication of any
               differences that may exist between regions.
   iv) Preparation of documentation required for environmental and social safeguards. It
       was agreed that there is no need to develop new safeguards information since these
       procedures have been developed for Bank supported projects for numerous sectors
       under the LIG list of eligible projects. Consequently, initial analysis identified several
       key existing products that would serve as the foundation for the LIG Environmental
       and Social Management Framework and the Resettlement Policy Framework. An
       international consulting firm will be required to (i) prepare the two frameworks, (ii)
       provide input to the Operational Manual, and (iii) a set of practical guidelines and
       checklists for sector safeguard procedures to be used at the local government level.
   v) Additional local consultants may need to be hired on a short term basis to work with
       any individual international consultant working under the PHRD grant.

18.    In order to have inputs ready for the anticipated pre-appraisal mission in February, the
schedule for hiring the PHRD consultants will need to be the following, and procurement will
have to be carried out by MOFED on a fast track:

       PHRD Coordinator on board                      November 30, 2005
       Other PHRD consultants on board                December 31, 2005
       Consultants draft reports available            February 24, 2006

19.     Actions to be taken by the regions. As indicated above, regions will need to prepare
the following: i) a formula for allocating drawing rights that is consistent with LIG principles
and ii) conditions of access that taking into account capacity for implementation, the planning
and capital investment decision-making process, the eligibility of investments selected and
their conformity with sound technical and sectoral standards, the commitment to O&M and
possibly the readiness of projects to be implemented. The regions will also need mechanisms
to reallocate funds from year to year in order to reward performance and effective fund use.
While the consultants hired using the PHRD funds will assist the regions in coming to final
positions on these issues, it is critical that regions begin a discussion immediately so that they
can have proposals ready for discussion when the consultants come on board at the end of
December 2005.

20.      In addition to the above, regions should do a quick assessment of the investment
planning process of their local governments and their capacity for implementing LIG in order
to: i) calibrate their criteria for selecting local governments; ii) determine any capacity
building needs that could be met in the coming year; and iii) provide input to the program
design. BOFEDs should also do a quick assessment of their own capacity and needs (human
resource, hardware/software, etc) to manage LIG in order to provide input to the consultants.

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                                     Annex 1
                                List of People Met
                                [not complete yet]

Ministry of Finance and Economic Development (MOFED)
H.E.Ato Mekonen Manyazewal       State Minister
Berhanu Legesse                  Department Head, Regional Affairs Department

Ethiopia Social Rehabilitation and Development Fund

Ethiopia Roads Authority
Mulugeta Demissie                 ERTTP Coordinator

Ministry of Education
Tenaye Assefa                     Expert

Amhara Region

Regional Food Security Coordination Office
Food Security Programme
Addisu Tadege                    Monitoring and Evaluation Officer

SNNP Region

World Food Programme
Nasiba Nabi,                      Head
Yohannes Desta                    Program Assistant

Rural Development Coordination Bureau
Temesgeh Kedir                  Head
Bureau for Water Resources
                                Technical Coordinator

Bureau of Agriculture and Rural Development

Alaba Woreda
Woerda Agriculture and Natural Resource Office
Mesfin Tseqaye                     Head, Natural Resources Desk
Melese Teshome                     Safety Net Programme Co-ordinator

                                    March 18, 2013February 9, 2006November 23, 2005

                                          Annex 2

                   TERMS OF REFERENCE


The Ministry of Finance and Economic Development (MoFED) has obtained a grant of
US$495,000 from the Japanese government (a PHRD Grant) for the preparation of a
Local Investment Grant (LIG) operation. The objectives of this operation are to:
             a. increase capital investment at the local government level for more efficient
                 and effective service delivery; and
             b. strengthen the decentralization process to local government through
                 existing government financing channels for an array of sectoral
                 investments based on local needs and priorities
LIG is being designed as a specific purpose grant which would be transferred from the
Federal Government through the regions to local governments, to finance capital
investments in eligible woredas and municipalities. Investments would include all
activities that are within the jurisdiction of local governments, e.g. health posts, primary
schools, water supply, rural roads, drainage, etc.

The LIG operation is currently being designed by MoFED, with the collaboration of an
interministerial Task Force (the LIG Task Force) and the World Bank. It is expected that
project preparation activities will be largely completed by April-May 2006. The PHRD
Grant has been obtained to provide consulting and other services to assist in the
preparation of LIG.

The services of an individual (local) consultant are now required to provide support in
managing the PHRD grant funds, including the procurement of additional consultants,
managing contracts, and providing technical input for the coordination of the LIG
preparation process.


The duties and responsibilities of the PHRD Grant Coordinator are described below;

      1. Under the supervision of the head of the department of Regional Affairs in
         MoFED, plan and coordinate the timely implementation of PHRD activities.
      2. Prepare a procurement/implementation plan for activities to be financed by the
         grant, in consultation with MoFED and World Bank procurement specialists.

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       3. Ensure that the PHRD contracts are procured and implemented in a way that is
          consistent with the provisions in the Grant Agreement and with World Bank
          guidelines for the selection and employment of consultants and procurement of
          goods published by the Bank in May 2004.
       4. Assist the head of the Regional Affairs Department in monitoring and reviewing
          the delivery and quality of studies to be carried out by PHRD consultants.
       5. Assist in the establishment and maintenance of a financial management system
          for the grant resources, to ensure effective implementation of the grant resources.
       6. Establish an effective contract management and monitoring system and assist in
          monitoring and effective disbursement of funds.
       7. Assist in the preparation of a final report on the results and impact of the
          activities, and any other reports on grant activities as may be required.
       8. Provide technical input, as required, to the overall project preparation activities of
       9. Perform other tasks that may be assigned by the head of the Regional Affairs
          Department in MoFED related to the preparation of LIG.


The PHRD Grant Coordinator would be required for 12 months, with the possibility of an
extension based on satisfactory performance

The PHRD Grant Coordinator will report to the head of the Regional Affairs Department
in MoFED and he/she will collaborate closely with the LIG Taskforce and other
departments in MoFED, as well as with regions and local governments as necessary, to
ensure the timely implementation of project activities.


       (i)       University degree in the field of Economics, Finance, Civil engineering,
                 Infrastructure Planning or related fields.
       (ii)      At least five years experience working in project management, including
                 procurement and/or contract management
       (iii)     Excellent interpersonal and communication skills
       (iv)      Excellent written and spoken English skills
       (v)       Familiarity with decentralization and investment planning would be an
       (vi)      Familiarity with Bank procurement and employment of consultant procedures
                 would be an advantage


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