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					                                             Document of
                                            The World Bank


                                   FOR OFFICIAL USE ONLY

                                                                                  Report No: 28191-ET




                            PROJECT APPRAISAL DOCUMENT

                                                  ON A

                                       PROPOSED CREDIT

                         IN THE AMOUNT OF SDR 66.9 MILLION
                            (US$ 100 MILLION EQUIVALENT)

                                                TO THE

                 FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

                                                 FOR A

  PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT



                                            March 25, 2004




Public Sector Reform and Capacity Building Unit
Country Department 2
Africa Region



This document has a restricted distribution and may be used by recipients only in the performance of their
official duties. Its contents may not be otherwise disclosed without World Bank authorization.
                CURRENCY EQUIVALENTS
           (Exchange Rate Effective as March 25, 2004)

                 Currency Unit: = Ethiopian Birr
                       ETB 1.0 = US$ 0.11696
                       US$ 1.0 = ETB 8.63

                        FISCAL YEAR
                        July 8 – July 7


             ABBREVIATIONS AND ACRONYMS

AfDB     African Development Bank
BCB      Regional Bureau of Capacity Building
BOFED    Regional Bureau of Finance and Economic Development
CAS      Country Assistance Strategy
CAD      Central Accounts Department
CFU      Counterpart Funds Unit
CIDA     Canadian International Development Agency
CPR      Council of Peoples’ Representatives
COMESA   Community of Eastern and South Africa
CSRP     Civil Service Reform Program
DCI      Development Corporation of Ireland
DCA      Development Credit Agreement
DLDP     District Level Decentralization Program
DfID     Department for International Development
EA       Executing Agency
EC       European Commission
ECuA     Ethiopian Customs Authority
EMCP     Expenditure Management and Control Activities
FIRA     Federal Inland Revenue Authority
ICB      International Competitive Bidding
ICT      Information and Communication Technologies
IDA      International Development Association
IEC      Information, Education and Communication
IMF      International Monetary Fund
IT       Information Technology
JSRP     Justice System Reform Program
KfW      Kreditanstalt fuer Wiederaufbau
GOE      Government of Ethiopia
LIG      Proposed Local Investment Grant Program
GTZ      German Technical Cooperation
MAB      Ministries, Agencies, and Bureaus
MDG      Millennium Development Goals
M&E      Monitoring and Evaluation
MFA      Ministry of Federal Affairs
MOFED    Ministry of Finance and Economic Development
MOJ      Ministry of Justice
MOR      Ministry of Revenue
NCB      National Competitive Bidding
         NCBP            National Capacity Building Program
         OFAG            Office of the Federal Auditor General
         PPD             Planning and Programming Directorate
         PRSC            Poverty Reduction Support Credit
         PSCAP           Public Sector Capacity Building Program
         PIP             Program Implementation Plan
         SDP             Sector Development Program
         SIDA            Swedish International Development Agency
         SIL             Sector Investment Loan
         SDPRP           Ethiopia’s Sustainable Development and Poverty Reduction Program
         TA              Technical Assistance
         TD              Treasury Department
         TSRP            Tax Systems Reform Program
         UMCBP           Urban Management Capacity Building Program
         UNDP            United Nations Development Program
         USAID           United States Agency for International Development
         WTO             World Trade Organization




                              Vice President       :   Callisto Madavo
                           Country Director        :   Ishac Diwan
                      Acting Sector Manager        :   Guenter Heidenhof
                          Task Team Leader         :   Navin Girishankar




The core World Bank team involved in the preparation of the operation was led by Navin Girishankar (Sr.
Public Sector Specialist) and included Shenaz Ahmed (Program Assistant), Elsa Araya (Operations
Analyst), Deepak Bhatia (Manager), Reynaldo Castro (Consultant), David DeGroot (Sr. Local Government
Specialist), Steve Gaginis (Financial Officer), Prasad C. Mohan (Sr. Communications Specialist), Brighton
Musungwa (Sr. Financial Management Specialist), Edith Ruguru Mwenda (Sr. Counsel), Samuel Haile
Selassie (Sr. Procurement Specialist), David Savage (Sr. Municipal Development Specialist), Vivek
Srivastava (Sr. Public Sector Specialist), Eshetu Yimer (Sr. Financial Management Specialist). In addition, a
larger World Bank and multi-donor team contributed during the preparation of this multi-sector operation.
A complete list of these team members is provided in Annex 7. The Quality Assurance/Peer Review Team
for the operation (including participants in the Quality Enhancement Review) included Herbert Acquay,
Arvil Van Adams, Vidoje Brajovic, Michael Engelshalk, Larry Hannah, Jim Hicks, Rogati Kayani, Junaid
Ahmad, Ali Hashim, and Anand Rajaram.

                The team would like to dedicate its efforts to the memory of Jit Bahadur Gill,
                Sector Manager (AFTPR), who passed suddenly during project preparation.
                 Mr. Gill’s guidance, support, and appreciation of the client’s needs proved
                 invaluable to preparation. His presence as a colleague and friend will be
                             sorely missed by the Bank and Government teams.
                                                           ETHIOPIA
     PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT

                                                            CONTENTS

A. Project Development Objective ................................................................................................. 2
  1. Project development objective ........................................................................................... 2
  2. Key performance indicators ............................................................................................... 2

B. Strategic Context ....................................................................................................................... 3
  1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ............ 3
  2. Main sector issues and Government strategy ..................................................................... 5
  3. Sector issues to be addressed by the project and strategic choices................................... 12

C. Project Description Summary .................................................................................................. 15
  1. Project components .......................................................................................................... 15
  2. Key policy and institutional reforms supported by the project ........................................ 19
  3. Benefits and target population .......................................................................................... 20
  4. Institutional and implementation arrangements ............................................................... 21

D. Project Rationale ..................................................................................................................... 28
  1. Project alternatives considered and reasons for rejection ................................................. 28
  2. Major related projects financed by the Bank and/or other development agencies ........... 29
  3. Lessons learned and reflected in the project design ......................................................... 30
  4. Indications of borrower commitment and ownership ....................................................... 32
  5. Value added of Bank support in this project .................................................................... 35

E. Summary Project Analysis ....................................................................................................... 35
  1. Economic .......................................................................................................................... 35
  2. Financial ........................................................................................................................... 36
  3. Technical .......................................................................................................................... 36
  4. Institutional....................................................................................................................... 36
  5. Environmental .................................................................................................................. 40
  6. Social ................................................................................................................................ 41
  7. Safeguard Policies ............................................................................................................ 42

F. Sustainability and Risks ........................................................................................................... 43
   1. Sustainability .................................................................................................................... 43
   2. Critical Risks .................................................................................................................... 44
   3. Possible Controversial Aspects ........................................................................................ 47

G. Main Credit Conditions ........................................................................................................... 47
  1. Effectiveness Conditions .................................................................................................. 47
  2. Financial and Other Dated Covenants .............................................................................. 48

H. Readiness of Implementation .................................................................................................. 49

I.    Compliance with Bank Policies .............................................................................................. 49
ANNEXES
  1. Project Design Summary .................................................................................................. 50
  2. Detailed Project Description ............................................................................................ 55
  3. Estimated Project Costs .................................................................................................... 62
  4. Cost Benefit Analysis Summary ...................................................................................... 63
  5. Financial Summary........................................................................................................... 64
  5a. Financial Management Assessment Technical Annex ..................................................... 65
  6. Procurement and Disbursement Arrangements ................................................................ 73
  7. Project Processing Schedule ............................................................................................. 81
  8. Documents in the Project File .......................................................................................... 83
  9. Key Features of Resource Allocation and Management under PSCAP ........................... 87
  10. “Harmonization Issues for Bilateral Donors”................................................................... 99
  11. Statement of Loans and Credits ........................................................................................ 99
  12. Country at a Glance ........................................................................................................ 101
  13. Letter of Sectoral Policy ................................................................................................. 102

MAP: IBRD NO. 31158
                                            ETHIOPIA
   PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORT PROJECT
                     Project Appraisal Document
                                     Africa Regional Office
                                            AFTPR
Date: March 25, 2004               Team Leader: Navin Girishankar
Country Director: Ishac Diwan      Acting Sector Manager/Director: Guenter Heidenhof
Project ID: P074020                Sector(s): BA-Civil Service Reform, BD-Decentralization, BF-Public
                                   Financial Management, BI-Institutional Development, BJ-Judicial Reform
Lending Instrument:                Theme(s): Public Sector
Specific Investment Loan (SIL)     Poverty Targeted Intervention: N
Program Financing Data
[ ] Loan       [X] Credit      [ ] Grant      [ ] Guarantee          [ ] Other:
For Loans/Credits/Others:
Total Project Cost (US$m): $397.8                                    Co-financing: None
Total Bank Financing (US$m): $100.00
Proposed Terms (IDA): Standard Credit
Commitment Fee: 0.00-0.50%
Grace Period (years): 10 years
Years To Maturity: 40 years
Commitment Fee: 0.50%
Service Charge: 0.75%
Financing Plan (US$m):    Source                 Local                  Foreign                  Total
BORROWER                                          137.5                      -                   137.5
IDA                                                  65.4                 34.6                   100.0
CIDA                                                 25.3                 13.4                    38.8
SIDA                                                  5.6                  3.0                     8.6
Other Donors                                         73.2                 39.8                   113.0
Total:                                            307.0                   90.8                   397.8
Borrower: GOVERNMENT OF ETHIOPIA
Responsible agency: Ministry of Capacity Building
Address: P.O. Box 1082, Addis Ababa, Ethiopia
Contact Person: H.E. Ato Hailemelekot T/Giorgis, State Minister of Capacity Building
Tel: 251-1-56-47-78        Fax: 251-1-55-33-88         Email: hailem@telecom.net.et

Other Agency(ies): Ministry of Finance and Economic Development, Ministry of Federal Affairs, Ministry of
Revenue, Regional States (Bureaus of Finance and Economic Development and Bureaus of Capacity Building)
Estimated Disbursements (Bank FY/US$ million)
                                            FY2005          FY2006      FY2007       FY2008         FY2009
Annual                                         9.9            22.2        30.0         21.4           16.5
Cumulative                                     9.9            32.1         62.1           83.5       100.0
Disbursement profile                          10%            22%           30%            21%            17%

Project implementation period: FY2005-2010

Expected effectiveness date: July 8, 2004             Expected closing date: July 7, 2009
                                                      -2-


A. Project Development Objective

1. Project development objective

The objective of the Public Sector Capacity Building Program (PSCAP) Support Project is to
improve the scale, efficiency, and responsiveness of public service delivery at the federal,
regional, and local level; to empower citizens to participate more effectively in shaping their own
development; and to promote good governance and accountability. This objective will be
achieved by scaling up Ethiopia’s ongoing capacity building and institutional transformation
efforts in six priority areas under PSCAP—(i) Civil Service Reform; (ii) District-Level
Decentralization; (iii) Urban Management Capacity Building; (iv) Tax Systems Reform; (v)
Justice System Reform; (vi) Information and Communications Technology.

2. Key performance indicators

While specific output indicators across contributing subprograms are provided in the logical
framework, the key performance indicators for PSCAP overall (and therefore, the Bank’s Support
Project) are provided below:

Expected impact on “institutional quality”                         Contributing PSCAP Subprograms
1. Increased predictability and adequacy of financial
resources flows (in-year and across years)                            Civil Service Reform
 Reduced budget variance                                             Tax Systems Reform
 Reduced federal-regional and regional-local fiscal gaps
2. Greater inclusiveness and transparency of planning
and prioritization processes                                          Civil Service Reform
 Established practice of participatory budgeting and                 District-Level Decentralization
     public reporting on budgets and performance at all levels        Urban Management Capacity Building
 Regular involvement of civil society in planning and                Tax Systems Reform
     policymaking, budgeting, and review processes
3. Enhanced revenue performance and fiscal autonomy                   District-Level Decentralization
 Increased own revenues and unconditional transfers as a             Urban Management Capacity Building
     share of total expenditures at sub-national levels               Tax Systems Reform
 Increased tax effort at all levels                                  ICT
4. Enhanced incentive environment for public servants
(gender disaggregated)
 Increased average civil service salary as percentage of             Civil Service Reform
    living wage                                                       District-Level Decentralization
 Private-public wage comparison                                      Urban Management Capacity Building
 Wage decompression ratios
5. Improved quality and efficiency of operations
 Improved service levels in terms of access,
    responsiveness and cost efficiency in priority sectors            All Subprograms
 Reduced unit costs and processing time for essential
    rural, urban, social, and legal services in priority sectors
6. Improved transparency and accountability
 Reduced incidence of corruption and arbitrariness in rule
    enforcement (as judged by economic agents)
 Increased access to justice, recourse and redress                   All Subprograms
 Enhanced independence of the judiciary
 Increased access to government information
                                                                     -3-


B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project
      Document number: IDA/R2003-0050                                    Date of latest CAS discussion: April 17, 2003
Capacity building across the public, private, civil society, and higher education sectors constitutes
a key pillar of Ethiopia’s poverty reduction strategy, the Sustainable Development and Poverty
Reduction Program (SDPRP). In supporting Ethiopia’s SDPRP, the Bank’s 2003-2005 Country
Assistance Strategy has designated public sector capacity building a “critical underpinning” to the
achievement of three high-level objectives:

     pro-poor growth through improved provision of productivity-enhancing services including
      rural and urban land development and management, agricultural extension, and infrastructure;
     improved human development outcomes through improved decentralized delivery of social
      services such as health, education, and water;
     good governance through strengthening of public financial management systems, deepening
      democratic decentralization in woredas and municipalities, and implementing comprehensive
      legal and judicial reform.

Accordingly, the Bank’s support for PSCAP serves as one of three multi-sectoral programmatic
instruments within the CAS (figure 1). The second instrument is the Poverty Reduction Support
Credit (PRSC) series, which provides annual balance of payments support for the Government’s
budget as a whole, including the general purpose transfers or subsidies that finance service
delivery in regions. The third is a Local Investment Grant (LIG) Program intended to help
finance the capital requirements of decentralized delivery across key sectors.

    Figure 1. The role of PSCAP and other multi-sectoral instruments in the 2003-2005 CAS



                                       Poverty Reduction Support Credits
                                       • Provides predictable budget support through serial credits
                                       • Finances inter alia the federal-regional revenue shares including the
                                       recurrent service delivery needs of regional and sub -regional authorities




             Public Sector Capacity Building Program
                                                                                                                    SDPRP




            • Specific-purpose program to improve institutional
            quality of federal, regional, and local levels
            • Follows Sector-Wide Approach to public sector
            capacity building across key reform subprograms
            • Scales up ongoing implementation
            • Supports inter alia implementation of CFAA and CPAR
            Action Plans, local government capacity building, as well
            as performance and service delivery improvement
            activities across sectors and tiers of government




                                            Local Investment Grant Program
                                            • Provides performance oriented transfers for multisectoral servi ce
                                            delivery investment needs at the local level
                                            • Based on successful PSCAP implementation
                                               -4-


The Bank’s PSCAP Support Project complements the budget and decentralized fiscal support
operations in three ways. First, the capacity building support under PSCAP is acknowledged as a
key requirement for effective implementation of the PRSCs and LIG inter alia by capacitating the
federal, regional, and local levels to better utilize additional fiscal resources provided to meet
their recurrent and capital needs. For the LIG in particular, access to investment support for
woredas and municipalities should be conditioned in part on satisfactory completion of basic
local level capacity building activities under PSCAP. Second, as noted in the CAS document,
support for PSCAP is based on IDA’s strategic decision to help the Government clarify the "rules
of the game" for large scale capacity building support, and thereby strengthen Ethiopia’s
intergovernmental fiscal system by introducing a performance-oriented capacity building transfer
alongside the equity-oriented federal-regional general purpose subsidy (enhanced year-to-year
through PRSCs). Third, the bottom-up PSCAP planning process—by which federal and regional
institutions make formal commitments to institutional reform and capacity building targets—
provides a robust mechanism to ensure that refinements to the SDPRP matrix constitute a realistic
aggregation of regional and local commitments. In so doing, the PSCAP planning and budgeting
processes helps provide the Government-Donor dialogue around PRSCs with an increasingly sub-
national perspective on public sector reform issues critical to poverty reduction (for example,
fiscal decentralization or urban land management).

Other operations in the CAS that are intended to complement the PSCAP Support Project are the
proposed Information and Communications Technologies Assisted Development Project
(ICTAD), which will inter alia help develop the regulatory and coordination framework for IT-
based applications, as well as the proposed Rural Capacity Building Project, which is intended to
help develop vocational and technical skills for the agricultural sector, improve the delivery of
agricultural services, and strengthen agricultural research systems.

Analytical underpinnings of PSCAP. A rich body of analytical work in the Bank’s country
program underpins support for PSCAP. These include a series of annual Public Expenditure
Reviews dating back to the mid-1990s that reviewed progress of expenditure management reforms
(especially the 2000, 2001, and 2002 reports); the 1999 Regionalization Study; the 2000 review of
the Civil Service Reform Program (CSRP); a 2001 Rapid Assessment of Municipalities; the 2001
Woreda Studies series. More recently, the Bank and several other donors jointly supported the
preparation of the 2003 Country Financial Accountability Assessment, and the 2003 Country
Procurement Assessment Report along with action plans. Regional visits during the FY2001-2002
contributed to three Regional PSCAP Technical Notes on civil service reform, municipal
development, and decentralization in Amhara, Oromiya, and Tigray. Background papers have
also been prepared on monitoring and evaluation methodology as well as options for the design of
intergovernmental fiscal transfers as inputs to PSCAP preparation. In addition to ongoing
analyses of performance management and information technology initiatives in Ethiopia, the
Bank’s forward looking analytical agenda includes a Legal and Judicial Assessment and a
flagship, multi-donor financed Institutional Governance Review on public sector transformation,
both of which are under preparation and should contribute to Government’s thinking on how best
to utilize PSCAP resources over the medium-run. Joint Budget and Aid Management Reviews as
well as Intergovernmental Fiduciary Assessments are also envisaged as part of the annual SDPRP
review cycle, and are designed to foster robust Government-donor and intergovernmental
dialogue on public expenditure analysis and fiscal management. Documentation on these reviews
are included in the project files and are posted, where appropriate, on the following website:
http://www.worldbank.org/ethiopia/pscap.htm.
                                                -5-




2. Main sector issues and Government strategy

Following the fall of the Derg regime in the early 1990s, the EPRDF-coalition Government
embarked on a long term strategy of “state transformation” characterized by bold attempts to
implement multiple reforms in parallel; the massive scale-up of institutional development efforts
across tiers of government; and the deliberate expansion of the scope of public sector capacity
building initiatives. Spanning nearly a decade, Ethiopia’s transformation agenda has evolved
over three phases in response to growing awareness that pervasive deficits in capacity have
hampered the ability of the state to secure the fundamentals of poverty reduction and democratic
development such as responsive service delivery, citizen empowerment, and good governance.

2.1 Regionalization and public sector modernization in the mid- to late-1990s

During the 1990s, Ethiopia embarked on a series of unprecedented institutional reforms designed
to establish a durable federal state system and further its democratic transition. The first phase of
the Government’s state transformation strategy, launched in 1995, involved the creation of a
federal state structure based on ethnically delineated regional states responsible for a broad range
of the country’s political, economic, and social objectives including the delivery of essential
public services. In accordance with the 1994 Constitution, the Government formally established
an intergovernmental fiscal system and initiated the annual transfer of a formula-driven general
purpose grant or subsidy to regions, consistent with its policy of “balanced regional progress.” It
also undertook a significant redeployment of civil service staff to newly empowered regional
executives. As a result, by the late 1990s, staffing levels in regional administrations reached over
320,000, while the size of the federal civil service reached 43,000.

Even as it established a radically new decentralized political and state system, the Government
acknowledged the deep institutional constraints on basic functions such as policymaking, service
delivery, and regulation. Core public management systems at the federal and regional levels were
hampered by outdated civil service legislation and working systems; the absence of a medium-
term planning and budgeting framework; ineffective financial and personnel management
controls; inadequate civil service wages and inappropriate grading systems; poor capacity for
strategic and cabinet-level decision-making; and insufficient focus on modern managerial
approaches to service delivery. In recognition of these constraints, the Government embarked on
a comprehensive Civil Service Reform Program (CSRP) in 1996. Indicative of Ethiopia’s “first
generation” capacity building efforts, the CSRP sought to build a fair, transparent, efficient,
effective, and ethical civil service primarily by creating enabling legislation, developing operating
systems, and training staff in five key areas: (i) Expenditure Control and Management, (ii)
Human Resource Management, (iii) Service Delivery, (iv) Top Management Systems, and (v)
Ethics. Successful efforts (for example, budgeting, planning, and accounting reforms) at the
federal level were intended to provide prototypes for regional authorities.

The first phase CSRP was implemented over the 1996-2000 period, albeit with intermittent lags
due to poor coordination, particularly during the Ethio-Eritrean border conflict. The results of
these efforts were mixed. Notable achievements included the development of new legislation (for
example, a financial management proclamation, a civil service law, a code of ethics, complaints-
handling procedures, and a service delivery policy) as well as operating systems for budgeting,
procurement, and some aspects of personnel management such as salary surveys and records
management. Development of prototypes for expenditure management including a new budget
                                                -6-


classification system, a macro-economic fiscal framework and medium-term planning system, a
double entry modified cash accounting system, and procurement reforms were also important
achievements. Diagnostic work in these areas also progressed. While commendable, these
initiatives have had only modest impact in relieving the institutional and capacity constraints
within the Ethiopian civil service. There was little evidence of sustained improvement in output
performance at the federal or regional levels. Core functions such as medium-term planning,
accounting and auditing, and personnel management remain weak. Attempts to develop an
affordable, medium-term public sector pay policy were also delayed, and civil servants—despite
an across-the-board salary increase in 2001—continued to receive low salaries. Operational
efficiency across federal ministries and regional bureaus remained poor. Furthermore, lags in the
prototyping phase at the federal level forestalled CSRP implementation in regions and woredas.
The considerable opportunity costs in terms of foregone improvements in institutional and service
delivery performance at the regional and local levels were widely acknowledged.

Complementary tax policy and administration reforms were also undertaken in line with the
Government’s objectives of improving revenue performance to reduce aid dependency and
adequately finance the expanding development agenda. The passage and implementation of a
Value-Added Tax, as well as the implementation of a Taxpayer Identification Number (TIN)
system proceeded. Early efforts in the justice system including the strengthening of court
administration and the reform of the penal code and family law sought to deepen implementation
of the 1994 Constitution.

Weaknesses in the design of reform initiatives such as an overly top-down approach, inexperience
with managing national and international consultants, and funding gaps limited the impact of this
first phase of transformation. Implementation delays resulted from the inordinate demands that
the border conflict placed on the time of senior officials. Nevertheless, the Government’s
generally pragmatic approach to implementing an ambitious regionalization and civil service
reform agenda established Ethiopia as a serious state reformer by the late 1990s

2.2 National capacity building during the post-conflict years

By late 1999, Ethiopia’s early public sector reform experience had significantly deepened its
leadership’s appreciation of the role of institutional capacity building in securing the economic
and political fundamentals of sustainable poverty reduction. During the conflict period and its
immediate aftermath, the Government undertook—in many cases, with the support of donors—a
range of in-depth diagnostics and reviews to systematically identify the factors that hindered
public sector efficiency, grassroots empowerment, and accountability. These factors, described
below, spanned all branches and tiers of government, and helped shaped the scope and scale of
the second phase of state transformation.

Inefficiencies resulted from unpredictable financial management, poor incentives, lack of a
strategic or performance orientation. Unpredictable resource flows have undermined the
allocative and operational efficiency the public sector at the federal, regional, and local levels in
Ethiopia. The 2003 CFAA identified many of the critical challenges in public financial
management that remain at all levels. At the federal level, there is a widely acknowledged need
to ensure compliance with the financial calendar; strengthen political ownership of the
macroeconomic fiscal framework and its indicative planning figures as a basis for integrated,
medium term planning; revitalize federal level efforts to develop a Public Expenditure Program
or Medium Term Expenditure Framework (including the proper integration of planning and
finance functions in the newly merged MOFED); strengthen internal and external audit systems;
improve budget monitoring and fiscal reporting; reconcile fiscal and monetary accounts; and
                                               -7-


reducing the federal accounts and audit backlogs. Continued leadership of MOFED and
coordination with the MCB on these issues will be a key factor in the success of Ethiopia's overall
public sector transformation program. Within regions, fiscal decentralization has placed
additional pressures on bureaus and woredas to bring their accounts up-to-date, roll out of the
new chart of accounts and accounting procedures, develop planning modalities, and strengthen
other critical functions such as procurement and auditing. Similar efforts in urban jurisdictions
remain part of the unfinished business of municipal reform across four major reforming regions
as well as Addis Ababa and Dire Dawa City Administrations. Revenue performance remained
weak across tiers of government in part due to insufficient tax autonomy and poor administration.

The incentive framework for personnel also needs to be reformed, given the current needs of the
civil service. In terms of modernizing personnel management, the Government has sought to
introduce a performance management system through the development of a Results-Oriented
Performance Evaluation or ROPE system that seeks to link individual performance with outputs
laid out in institution-wide strategic plans. However, the underlying problems of poor incentives
across levels of government remain. Attempts to develop an affordable, medium-term public
sector pay policy were also delayed, and civil servants at all levels—despite an across-the-board
salary increase in 2001—continue to receive low salaries. Personnel rules for woredas including
procedures for hiring, firing, transfer, and promotion remain unclear. In municipalities, which sit
outside the core civil service system, the Government has identified the need to develop a distinct
set of rules for setting wages, hiring and firing municipal workers. Of particular concern is the
sustainability of capacity building investments particularly in urban management and ICT,
without complementary efforts to retain workers through adequate pay. Anecdotal evidence
indicates increasing incidence of migrating talent to the private and NGO sectors, or abroad.

The functions, systems, structures, and work practices of ministries, agencies, and bureaus
(MABs) at the federal and regional levels were generally not aligned with Government’s
medium-term development priorities and resource constraints. The efficiency and quality of
government operations—particularly in strategically important areas such as business licensing,
investment promotion, customs, public procurement, and land management—were widely
acknowledged to be poor, with the exception of a few islands of performance. In many cases,
business processes and work organization were not appropriately automated to enable civil
servants to function in a client-oriented, efficient, or transparent manner.

Empowerment required greater fiscal and administrative autonomy for woredas and
municipalities. Despite the success of regionalization in the mid-1990s, woredas or districts
enjoyed little fiscal or administrative autonomy to respond to the local needs of their
constituencies.     For instance, local level planning and prioritization processes—while
consultative—were typically short-circuited by zonal officials, who would vet woreda levels
plans in line with regional priorities. Project and program implementation were also burdened by
overly centralized procedures for procurement of goods and services, and management of
frontline personnel. The resulting inefficiencies were further exacerbated by endemic staffing
and skills shortages, unclear accountability relationships, and inadequate organizational
structures. By 2001, woredas were still deconcentrated units of regions rather than genuine,
democratically elected executives in their own right.

In addition, municipal governments were not adequately integrated into the larger legal and
accountability framework of regional governance, and therefore, have been limited—in providing
essential services to their residents—by their ability to raise own-source revenues. Personnel
shortages have also hampered municipal performance. Ethiopia’s woredas share jurisdictions
                                                -8-


with municipalities, and require further harmonization of intergovernmental fiscal arrangements
to effectively meet service delivery needs of local communities.

Weak checks and balances on the executive limited accountability, recourse and redress. The
SDPRP emphasizes the centrality of the judiciary and legislative oversight institutions in ensuring
the effective implementation of the constitution including expanding the writ of democratic and
human rights, as well as the establishment of the legal and regulatory framework for private
sector development. Significant institutional weaknesses and capacity deficits are acknowledged
across Ethiopia’s justice system including in areas such as lawmaking, law execution and
enforcement, the functioning of courts, and the development of the legal professional.
Specifically, while progress has been made in reforming laws such as the family, penal, and
commercial codes, preparation of the federal administrative procedure, the stock market, the
notary public, and the vital events registration laws constitute elements of Ethiopia’s unfinished
law reform agenda in 2001. Institutional constraints continued to hinder the Ministry of Justice
and regional justice bureaus from carrying out their basic tasks as they relate to providing legal
advice and contributing to law execution and enforcement; ensuring the necessary incentives and
training for staff (lawyers and administrative staff); modernizing efficient filing and case
management systems; and establishing expectations in terms of operational performance.

Weaknesses in the vertical and horizontal independence of the judiciary resulted from lack of
transparency in the selection of judges, unclear organizational structures in the courts, outdated
systems and procedures, shortages in trained judges and support staff, and lack of basic
infrastructure and facilities. A lack of adequate budgetary resources have also hindered the
emergence of a well-functioning judiciary, particularly in first instance courts in the federal
system and woreda courts in the regions. Access to justice continues to be limited by supply-side
constraints (for example, increasing representation and legal aid, reducing the costs of access,
simplifying court documents, establishing alternative dispute resolution mechanisms), and
demand-side constraints (for example, increased awareness of constitutional and legal rights,
education of the poor about options for recourse and redress). The legal profession remains weak
with few qualified lawyers and judges across tiers of government.

Ethiopia’s homegrown response of national capacity building. Following political reforms in
2001, the Government responded with the launch of a comprehensive homegrown National
Capacity Building Program (NCBP) as a multi-sectoral, intergovernmental program response to
the capacity building demands of rapid transformation. The national capacity building
framework envisages as capacity building system that (i) ensures efficiency and sustainability;
(ii) supports the comprehensive development of human resources, organizations, systems and
processes as a means of achieving the country's development goals; (iii) affords flexible
implementation modalities in order to accommodate the dynamics of institutional change. A
super-ministry, the Ministry of Capacity Building, was established in 2001 to provide policy
direction, coordination amongst other partner institutions (for example, the Ministries of Finance
and Economic Development, Revenue, and Federal Affairs), as well as monitoring and oversight
of capacity building efforts. The Ministry, along with its counterpart regional bureaus and
woreda offices, is tasked with programming and financing fourteen capacity building
subprograms that support the dual SDPRP goals of state and structural transformation (see box 1).

Six of these fourteen subprograms directly involve the public sector and comprise (i) a woreda
(district level) decentralization program that rapidly transferred delivery responsibilities with
substantial fiscal and administrative authority to rural jurisdictions; (ii) municipal reform efforts
designed to restructure and empower urban centers; (iii) reformulated civil service reforms
focused increasingly on strengthening the public sector fiduciary framework and service delivery
                                                       -9-



    Box 1: Ethiopia’s National Capacity Building Program (NCBP)

       1.    Civil service reform
       2.    Justice reform
       3.    Tax reform
       4.    District-level decentralization
       5.    Urban management
       6.    Information and communication technology
       7.    Cooperatives
       8.    Private sector
       9.    Textiles and garments
       10.   Construction sector
       11.   Agricultural training of vocational and technical levels
       12.   Industrial training of vocational and technical levels
       13.   Higher education
       14.   Civil Society

results on the ground; (iv) bold nation-wide initiatives to enhance connectivity and develop e-
government applications such as the woreda- and school-net projects; (v) efforts to strengthen
formal checks and balances and accountability mechanisms through reform of the justice system
including the courts, law making and law enforcement institutions, and the legislative process;
and (vi) an ongoing tax systems reform program that continues to align tax policy and
administration at the federal and regional level with the demands of Ethiopia’s evolving macro-
fiscal policies. In FY2002-03 and FY2003-04, the Government—through its Ministry of
Capacity Building, Bureaus of Capacity Building, and other lead institutions—advanced the
implementation of all six subprograms. Considerable domestic resources—ETB 108.4 million in
FY2002-03 alone—were mobilized through the federal budget to carry out public sector capacity
building activities. Progress-to-date is detailed in the first Annual Progress Report on the SDPRP
and summarized below along with the Government’s forward looking strategy in each area.

     Civil service reform. Since September 2001, a reorganization of Government and the launch
      of its NCBP has given new impetus to the CSRP. The Government has moved quickly to
      prepare the CSRP for its “full implementation” across regions and levels of government.
      Noteworthy initial steps include the establishment of focal points responsible for
      implementation of reforms across tiers of government; a series of workshops undertaken to
      sensitize the political leadership and civil servants across the country; and the launch of a
      “special program” of Performance and Service Delivery Improvement in priority Ministries,
      Agencies, and Bureaus (MABs) designed to deepen the implementation of performance
      management. In addition, the CSRP CO is strengthening coordination and change
      management (from line ministries, regional bureaus, woredas and municipalities); completing
      prototyping in human resource and expenditure management, and preparing the CSRP for
      nation-wide scale-up. This approach should promote civil service performance in terms of
      financial and human resource management, responsiveness to citizens’ needs, strategic
      prioritization of public resources, efficiency of program implementation, and enhanced
      accountability.

     Woreda or district level decentralization. Within the past year, the Government has moved
      quickly to remedy these constraints at the woreda level. A radical fiscal and administrative
      district level decentralization agenda—based on far-reaching constitutional reforms in four
      regions—has been pursued since the start of FY2001-2002. Decentralization has involved
      the transfer of a significant portion of the regional subsidies (in some cases, between 60 and
                                                - 10 -


    75 percent) to woredas in the form of formula-driven block grants. By implication, the
    devolution of fiscal management responsibilities requires a massive redeployment of skilled
    staff, typically from regional bureaus and zonal sections, to woredas to effectively carry out
    basic public management functions such as budgeting, planning, accounting, and service
    delivery implementation. Some regions have already taken bold steps towards rationalizing
    and restructuring what were top-heavy administrative structures. The District-Level
    Decentralization Program has sought to scale up these efforts through the systematic
    assignment of revenue and expenditure responsibilities within regions, role restructuring of
    regional bureaus, transfer of sector-specific functions to woredas, roll-out of basic financial
    and personnel management systems at the regional and woreda levels, development of fiscal
    transfer mechanisms and monitoring systems within regions, demarcation and harmonization
    of woreda and municipal structures, implementation of institutional structures for woredas,
    and bulk training of local officials, electorates, public servants, and other stakeholders, all of
    whom are critical to the success of this current wave of “democratic decentralization.”

   Urban management and development. Since 2001, Government has become increasingly
    concerned with the economic and social needs of Ethiopia’s rapidly growing urban
    population, as well as the role its cities and towns play in promoting rural development and
    growth more generally. Historically, municipal governments were not adequately integrated
    into the larger legal and accountability framework of regional governance, and therefore,
    have been limited—in providing essential services to their residents—by their ability to raise
    own-source revenues. Personnel shortages have also hampered municipal performance.
    Furthermore, the majority of Ethiopia’s woredas share jurisdictions with municipalities, and
    therefore require a more systematic approach to coordination and harmonization between
    these two forms of local government. In addressing the needs of municipal government, the
    Government has prepared an Urban Management Program in the context of the NCBP to
    establish an appropriate framework for urban government through the development of
    enabling legislation for municipalities within regions, restructuring and staffing of
    municipalities, strengthening of planning and management capacity, mobilization of fiscal
    support from own and other sources to meet investment and recurrent needs, and
    improvements in land management and basic service delivery. Such efforts in four reforming
    regions of Amhara, Oromiya, Tigray, and SNNP have been undertaken with assistance from
    the IDA-financed Capacity Building for Decentralized Service Delivery (CBDSD) Project.

   Tax systems reform. Following the Government reorganization in mid-2001, a separate
    Ministry of Revenues was created and the Tax Reform Taskforce strengthened to ramp up
    Government’s revenue performance. Efforts that followed under the Tax Systems Reform
    Program (TSRP) included strengthening of tax policy capacity of the Ministry of Finance and
    Economic Development (MOFED), overhaul and codification of the income tax law;
    introduction of presumptive and value-added taxes; adoption of a tax payers identification
    system; reorganization of the Federal Inland Revenue Authority (FIRA) and its various
    branches; development and implementation of operational manuals for tax officials and
    training manuals for taxpayers; and computerization of tax administration at the federal,
    regional, and local levels. Strengthening of customs administration is also envisaged in the
    future. Revenue performance since the end of the war (excluding grants) has increased to
    approximately 14% of GDP and is expected to increase following the recovery after the 2003
    drought year.
                                               - 11 -


   Justice system reform. While the comprehensive Justice Systems Reform Program is still
    under development, the Government continued to pursue reform efforts over the 2001-2003
    period including a nation-wide baseline assessment of the full range of justice systems
    institutions, law revision and law reform activities; a second phase of court administration
    reform including records and case management; the establishment of a judicial in-service
    training institution; and the roll-out of training for judges.

   Information technology solutions for e-government. Several PSCAP subprograms
    including CSRP, DLDP, UMCBP, and TSRP sought to implement IT-based applications as
    part of Ethiopia’s broader public sector modernization efforts. While these early applications
    development efforts continued during the 2001-2003 period, the major initiative of the
    Government in 2002-2003 was the design and implementation of large scale woreda- and
    school-based V-SAT networks to provide the backbone for a range of educational and public
    sector applications. As follow-up to these efforts, the Government has also continued with
    work on strategic and policy development; training of senior and technical personnel; and
    upgrading and improvement of facilities.

Despite their rapidly expanding scope and scale, Ethiopia’s public sector capacity building efforts
through 2003 have been largely supported by fragmented donor projects and financed in an ad
hoc manner. In many cases, direct capacity building support provided to regions has been offset
in the general purpose transfers. In addition, concerns related to the degree of transparency in the
implementation of capacity building, problems in effectively leveraging global knowledge, as
well as the bias towards intensive off-site training activities need to be addressed. Finally, the
financing requirements of scaling up each of these above-mentioned subprograms indicated that
Treasury resources alone would not suffice; significant external assistance would be required.
The 2001-2003 experience with multiple reform efforts undertaken in parallel demonstrated the
importance of exploiting the synergies between subprograms described above; using a flexible
mechanism of support that could respond to the rapidly evolving needs of various subprograms;
empowering regions and local authorities in setting priorities and achieving results; harmonizing
donor support around a single design; and improving coordination across branches and tiers of
government.

2.3 Scaling up “state transformation” in 2003 and beyond

In May 2003, the Government responded to above-mentioned challenges by launching the third
and most ambitious phase of its state transformation agenda. Specifically, the MCB announced
its intention to rapidly scale up support for the six core public sector reform programs as
subprograms under a consolidated five-year federal program called the Public Sector Capacity
Building Program or PSCAP. The Government’s vision, reflected in its national program
document for the PSCAP, was based on three pillars—(i) simultaneous, nation-wide
implementation of six subprograms, sequenced in line with regional and local priorities, (ii)
alignment of program support with Ethiopia’s public financial management and
intergovernmental system, and (iii) harmonization of the fiscal, fiduciary, and reporting
requirements of various donors around a Sector-Wide Approach (SWAP).

In the months that followed, several bilateral donors, in close collaboration with IDA, have
responded favorably with commitments to support the SWAP approach and the pooling of funds
around a single design solution including CIDA, SIDA, and EC along with anticipated support
from DCI, DfID, KfW, and the Netherlands. Non-pooling donors that have committed to
leverage support to the SWAP include AfDB, France, Germany, Italy, UNDP, and USAID. The
bilateral perspective on the Program was conveyed to the Government through an issues note on
                                                - 12 -


harmonization, which was prepared by representatives of donor agencies that participated in the
joint donor appraisal of the Government’s program (annex 10).

3. Sector issues to be addressed by the project and strategic choices

Sector-Wide Approach. In accordance with the requirements of a Sector-Wide Approach, Bank
support to the Government’s PSCAP will address the full range of “sector” issues across the six
public sector capacity building subprograms of PSCAP in a holistic and integrated manner. The
main exception involves activities precluded under the Bank’s Articles, such as police,
prosecutions, and prisons, which other participating bilateral donors will seek to support.

Salient Design Features. In line with its vision for PSCAP, Government has defined the
following features of program design:

   Designation of PSCAP as a federal specific purpose transfer program, appropriated at the
    federal level and therefore not subject to offsets in regional subsidies;
   Incorporation of donor commitments under PSCAP within the Government’s overall
    macroeconomic fiscal framework and therefore, the overall vertical division of revenues
    between federal and regional levels;
   Alignment of donor procedures with Government’s rolling medium-term planning, annual
    budgeting, and monthly SOE-based disbursement procedures;
   Explicit identification of rules of the game governing access, allocation, and execution
    including an established vertical division of resources between federal and regional levels,
    and a simple formula to horizontal division of time-bound drawing rights to PSCAP resources
    across regional states, followed by performance-based disbursements as well as mid- and
    end-year reallocation of a share of drawing rights to performers (see box 2 and annex 9);
   Regular bottom-up regional, and eventually woreda and municipal planning of capacity
    building activities within assigned medium-term and annualized resource envelopes;
   Pooling of donor resources around a single design in line with SWAP guidelines;
   Development of “matrix management” structure, in which federal subprograms provide the
    prototypes, technical advice, quality assurance, and technical recommendations on approvals
    of plans, and regions set prioritize resources and implementation activities based on a menu
    of subprogram activities through medium term and annual plans.

Implications for intergovernmental fiscal relations. Two broad intergovernmental issues
related to PSCAP design are worthy of special mention. First, the establishment of this program
marks an important step forward in the evolution of Ethiopia’s intergovernmental fiscal system.
As a federal specific-purpose program, it provides the legal basis for PSCAP transfers to be
appropriated federally, and therefore, enables regions to draw down external assistance without
being subject to “offsets” in their general purpose transfers. PSCAP also complements the
largely equity-oriented general purpose (or the “subsidy”) and food security transfers to regions
with a performance-oriented capacity building transfer to help sub-national authorities achieve
their institutional transformation goals.

Second, support provided under PSCAP is intended to rapidly build up the basic regional and
local capacities needed to effectively manage the fiscal additionality generated (i) at the regional
level, through the 22% p.a. average increase in subsidy transfers over the past three years, and at
the local level, through the regional-to-woreda block grants and lump sum, agency fee, and
project-based capital transfers to municipalities, instituted in the four largest regions over the past
                                             - 13 -


two years. In the current fiscal year, the woreda block grant constituted 45% of total regional
expenditures in Tigray, 51% in Amhara, 47% in Oromiya, and 81% in SNNP regions.

Even as capacity building “catches up” to Ethiopia’s fast moving fiscal decentralization agenda,
Government is planning to further develop capital funding mechanisms for local jurisdictions to
meet their investment service delivery needs. In order to provide additional incentives for
effective demand at the local government level for capacity building under PSCAP and to ensure
the sustainability of intergovernmental fiscal arrangements, Government should condition access
to fiscal support for investment on the completion of a specified sequence of capacity building
activities under PSCAP subprograms.            Such an approach is under implementation in
municipalities on a pilot basis under IDA’s ongoing Capacity Building for Decentralized Service
Delivery (CBDSD) Project and is planned for scale-up under the proposed LIG in the future.
                                               - 14 -




Box 2: “Drawing rights” and how they apply to Ethiopia’s PSCAP

To ensure that sub-national authorities participating in a specific purpose federal program are
sufficiently motivated to perform, access to program resources must be a fair and transparent,
predictable, and performance-oriented. An established approach to designing programs in this manner
is to provide regions with drawing rights. Elements of the approach are described below.

Understanding drawing rights. Drawing rights are typically assigned—on the basis of a formula—to
access a defined quantity of finance over a fixed period of time upon meeting key eligibility criteria
such as the submission and approval of relevant medium-term strategies and plans. Once assigned, an
initial disbursement against the plan is made, and then additional disbursements are made periodically
as each implementing agency submits progress reports. Such an approach provides implementing
agencies with assurance that predictable funding is available, but does not unnecessarily tie up funding
or cash balances with those agencies and sub-national authorities or regions that are not performing
per plan. Periodic redistribution of unutilized drawing rights provides further performance incentives.

Why drawing rights—additional to general purpose transfers—should be assigned within the
macro-fiscal envelope. Specific-purpose transfers that provide fiscal additionality to sub-national
authorities need to be placed within the context of macro-fiscal fundamentals. Planned expenditures
under such transfers should be reflected within the Government’s overall macroeconomic fiscal
framework, medium term expenditure plans, and proposed vertical division of revenues. For example,
in Ethiopia, this would require incorporation of external and Treasury commitments to PSCAP within
the Macro-Economic Fiscal Framework (MEFF), and alignment of PSCAP planning with the
Government’s financial calendar, budget classification system, and other financial regulations.

How funds flows can be effectively designed. The flow of funds under large federal specific purpose
programs should be simple. Based on the agreed allocation formula, the federal government releases
funding to regions (as a significant portion of the annual rights allocated), which in turn release funds
to local authorities (a portion upfront, and the balance as periodic reimbursement). Periodically the
regions should review local government implementation and expenditure performance, and the federal
government should similarly review state performance. In the event that any implementing agencies
are not performing, their unutilized rights should be subject to reallocation into a performance pool and
then to better performers in need of additional funding. Reallocation should be limited to a maximum
percentage—for example, 50% of the unutilized drawing rights—in order to provide a significant
incentive for good performance, but not unduly penalizing under-performers that may, due to
circumstances beyond their immediate control, encounter implementation hurdles.

How funds should be released against allocated rights. Once rights are allocated and eligibility
criteria met, periodic releases are made to regions by the federal government. All initial releases are
made against approved plans. Subsequent releases are made against documented performance and
satisfactory expenditures from two periods prior to disbursement. For example, disbursement in
Period 4 will depend on meeting output targets in Period 2.

How a mandatory minimum level of capacity building should be defined for eligible institutions.
All sub-national authorities receiving such transfers should commit to and complete the minimum
required capacity building activities—or the first in a sequence of basic human resource, systemic, and
logistical activities such as the establishment of local government structures or hiring of a core staff
complement—necessary to utilize these transfers in a responsible manner. For those regions or local
governments that do not have this minimum requirement in place at the outset, the first application of
transfers should be to acquire and implant that capacity. The minimum requirements will vary among
implementing agencies. For example, in decentralizing settings, most woredas in Ethiopia will
probably require less staff and systems than most urban centers, but these minimum mandatory
requirements need to be defined and met as a condition for resource utilization.
                                              - 15 -


C. Project Description Summary

1. Project components

1.1 How PSCAP’s two components work

The Bank’s Support Project is fully aligned with the basic design of the Government’s PSCAP.
As such, it supports the scale-up of ongoing institutional transformation and capacity building
activities through two components—one federal, and the other regional. Activities planned under
these two components will be drawn from a menu of eligible expenditures consisting of PSCAP’s
six subprograms and mandatory “program support” (Figure 2). Drawing on this menu, each
component is (i) planned based on annualized five-year drawing rights; (ii) adjusted semi-
annually and annually; and (iii) reflected in participation and performance agreements with
commitments to deliver on specific capacity building outputs.

   Component 1—Federal PSCAP: This component supports federal level activities across
    each of the six subprograms including those capacity building activities for which there are
    scale and network economies including those activities that require national level
    prototyping. The component is required to include basic program support activities to ensure
    effective implementation.

   Component 2—Regional PSCAP: This component constitutes the bulk of the Program and
    is designed to empower regions to adapt and implement national reform and capacity building
    priorities envisaged under PSCAP’s six subprograms in a manner that is efficient,
    accountable, and sustainable. Synergies and trade-offs between key subprograms will be
    fully leveraged through this component. Regions will also shift resources year-to-year and
    in-year from poor performing to higher performing subprogram activities. This component is
    also required to include basic program support activities to ensure effective implementation.

During the preparation process, a 20%-80% vertical division of PSCAP resources (including
Treasury and anticipated donor resources) was established between federal and regional
components over the five-year life of the program. Resources assigned for the regional
component were further divided horizontally across regional states on the basis of the equity-
oriented regional subsidy formula. Financing provided under the Bank’s Support Project shall be
fully aligned with this approach to allocating PSCAP resources in order to ensure predictability
and transparency of the drawing rights ceilings within which PSCAP component plans are
articulated. It is envisaged that refinement of this allocation methodology may be required—on
the basis of periodic reviews—over the course of program implementation.

1.2 Building PSCAP components from activity menus

The objectives and specific menus of activities that fall within each subprogram of PSCAP are
explained below. Selected and planned on an annual basis, these activity menus of capacity
building activities (comprising combinations of technical assistance and consultancy services,
goods and equipment, and training) are building blocks for the two components described above.

   Subprogram 1—Civil service reform. The objective of this subprogram is to promote the
    development of an efficient, effective, transparent, accountable, ethical, and performance-
    oriented civil service. Support under the subprogram includes (i) the strengthening of the
    Civil Service Reform Program coordinating structures; (ii) improving expenditure
    management and control through drafting of financial regulations and directives, roll-out of
                                                 - 16 -


      budgeting and accounts reforms, implementation of procurement reforms, development of
      medium-term planning systems, strengthening of internal and external audit, modernization
      of cash management, and the roll-out of financial management information systems; (iii)
      improving the governance of human resource management including the development of
      prototype policies on human resource development, time management, and remuneration, the
      implementation of the results-oriented appraisal system, the development of payroll and
      human resource information systems, and support for subsidiary regulations such as the code
      of ethics; (iv) improving performance and public service delivery through the roll-out of the
      Performance and Service Delivery Improvement Program (PSIP) in ministries, agencies, and
      bureaus; (v) improving accountability and transparency through a parliamentary oversight,
      anti-corruption, the strengthening of systems and development of innovative techniques for
      monitoring fiscal and output performance including expenditure tracking surveys, cost
      efficiency studies, service delivery report cards; (vi) strengthening of top management
      systems through training of senior managers and officials in strategic planning, performance
      measurement, top management development, and value for money management; and finally
      (vii) building the policy and institutional capacities of emerging regions through the
      development of basic civil service structures and systems. Linkages with the district-level
      decentralization, urban management, ICT, and tax systems reform subprograms will be
      reflected in federal and regional plans and coordinated during implementation.

     Subprogram 2—District-level decentralization.. The objective of the subprogram is to
      deepen the devolution of power to the lower tiers of regional government, to institutionalize
      decision-making processes at the grassroots level with a view to enhance local participation,
      to promote good governance, and to improve decentralized service delivery. Subprogram
      activities include support for (i) woreda manning and training including human resource
      policies, procedures, and plans as well as bulk training in areas critical to local government;


    Figure 2. Building PSCAP Components from Activity Menus
                                                                                                 Component 2. Regional PSCAP




                 Subprogram 1. Civil Service Reform
                 Subprogram 1. Civil Service Reform
                                                                    Component 1. Federal PSCAP




                 Subprogram 2. District Level Decentralization
                 Subprogram 2. District Level Decentralization

                 Subprogram 3. Urban Mgt Capacity Building
                 Subprogram 3. Urban Mgt Capacity Building

                 Subprogram 4. Tax Systems Reform
                 Subprogram 4. Tax Systems Reform

                 Subprogram 5. Justice Systems Reform
                 Subprogram 5. Justice Systems Reform

                 Subprogram 6. ICT
                 Subprogram 6. ICT

                 Program Support
                 Program Support
                                               - 17 -


    (ii) technical assistance and training for grassroots participation including the development of
    guidelines and monitoring mechanisms, and the strengthening of civil society involvement at
    the local level; (iii) woreda institutional and organization development including assessment
    of functional assignments and enabling legislation, assistance in establishing structures and
    restructuring existing arrangements including local level accountability relationships; (iv)
    capacity building for policy and program development including technical assistance for
    woreda decentralization strategy and policy development, benchmarking and review of plans;
    (v) development of woreda fiscal transfer mechanisms and revenue mobilization capacities
    through the review and design of various intergovernmental fiscal instruments; (vi)
    strengthening of the planning system & financial management at the woreda level; and (vii)
    the development of minimum service standards in priority sectors. Linkages with the civil
    service reform, urban management, and tax systems reform subprograms will be reflected in
    federal and regional plans and coordinated during implementation.

   Subprogram 3—Justice systems reform. This subprogram, currently a work-in-progress, is
    designed to promote the rule of law as well as the efficient and effective functions of the
    justice system as part of Ethiopia’s broader democratization and private sector development
    processes. Subprogram activities include (i) strengthening the Justice Systems Reform
    Program Office and regional equivalents; (ii) strengthening the courts by providing in-service
    training of judges and court clerks, court administration reform, development of records and
    case load management systems, and identification of measures to enhance access to justice;
    (iii) support for law reform including the development of systems and procedures for
    declaring income and property, identification of new areas for law development, compiling
    and preparation of laws and regulations, and drafting of stock exchange and other laws; and
    (iv) strengthening of legislative process including training, technical advisory services, and
    acquisition of equipment for staff of federal and regional standing committees on legislative
    drafting and analysis of legislative process and management, as well as training for members
    of standing committees on principles of federal grant and intergovernmental fiscal
    framework, monitoring and impact assessment, HIV/AIDS and gender issues, accountability
    and participation. Linkages with the civil service reform, urban management, ICT, and tax
    systems reform subprograms will be reflected in federal and regional plans and coordinated
    during implementation. It should be noted that IDA will not finance activities outside the
    remit of its Articles such as strengthening of police, prosecutions, and prisons.

   Subprogram 4—Urban management capacity building. This subprogram aims to enhance
    the capacity of municipalities in the delivery of services and enable urban centers to play a
    more effective role in social and economic development. The major activities envisaged
    under this subprogram include (i) technical assistance for the development of federal and
    regional policies related to urban development, housing, urban land, municipal structures, the
    formation of municipal associations; (ii) technical assistance for the deepening of municipal
    decentralization through the preparation of manuals governing resource management, review
    and organization of training and human resource needs, establishment of regional planning
    units, and development of fiscal transfer and revenue mobilization mechanisms; (iii) support
    for local government restructuring and capacity building including restructuring of water and
    sanitation, urban land, and other services, development and roll-out of financial, human
    resource, and land systems, and organizational and related reviews, as well as bulk training
    for municipal officials and staff. Linkages with the civil service reform, district-level
    decentralization, ICT, and tax systems reform subprograms will be reflected in federal and
    regional plans and coordinated during implementation.
                                               - 18 -


   Subprogram 5—Tax systems reform. The subprogram aims to encourage capital
    investment and development, increase tax revenues (through improved compliance and
    efficiency of collection), and ensure equity and fairness in the tax system through a
    comprehensive overall of the current legislation and tax administration system. These
    objectives are to be achieved through the following subprogram activities: (i) continued
    development of tax policy and legislation including amending the current income tax
    legislation to reflect the current business and investment environment, implementing
    presumptive and value-added taxes, strengthening enforcement powers of tax collection
    bodies, and sensitization of taxpayers inter alia through establishment of a Taxpayer office;
    (ii) roll-out of the computerized Tax Payers’ Identification Number (TIN) system in 74
    regional centers, improving information sharing between the Federal Inland Revenue
    Authority (FIRA), Ethiopia Customs Authority (ECuA), as well as regional and city
    administrations; (iii) customs reform and modernization including the review of legal
    framework, review and implementation of customs procedures in line with COMESA,
    deepening of ongoing implementation of performance improvement in ECuA, establishment
    of a customs laboratory and training center, roll-out of management and core staff training in
    areas such as human resource development, IT management, WTO valuation system,
    commodity classification, and application of international conventions on simplification of
    customs procedures. Linkages with the civil service reform (for examples, performance
    activities in ECuA), justice, ICT, and tax systems reform subprograms will be reflected in
    federal and regional plans, and coordinated during implementation. Over time, the tax
    systems reform program will be coordinated with plans to develop sub-national taxes as
    envisaged under the district level decentralization and urban management subprograms.

   Subprogram 6—Information & communications technologies (ICTs). The objective of
    this subprogram is to harness ICTs for the development of human resources, democratization,
    service delivery, and good governance. Several programs under PSCAP including CSRP,
    DLDP, Urban Management, and Tax Sector Reform are seeking to use ICTs in this manner.
    Successful implementation of ICT-based solutions across government will require support for
    (i) human resource development through the development of an ICT human resource strategy,
    ICT curricula for schools, vocational training centers, and universities, as well as the training
    of trainers, the establishment of distance learning centers, and the financing of research on the
    use of ICTs; (ii) ICT use for public service and good governance through the development of
    information systems strategies, development of service delivery applications, establishment
    of data centers and government portals, WAN and LANs, as well as the procurement of
    required hardware and software; and (iii) ICT for sector development including the
    installation of applications in the social and infrastructure sectors; and (iv) community-based
    ICT systems and services through the development of strategies, applications, and local
    content for community information centers to facilitate specific developmental activities.
    While the development of public sector applications such as financial, human resource, and
    land management systems will be procured under respective reform programs (for example,
    CSRP, UMCBP, TSRP), sector-specific applications(for example, agriculture) will be
    financed under the ICT subprogram. Plans for these applications will be coordinated
    between subprograms, regions, and ICTDA.

Mandatory activity—Program support. As a required activity at both the federal and regional
level, program support is designed to ensure speedy implementation of the six subprograms in a
holistic manner. It will finance incremental costs associated with operating requirements of
Planning and Programming Departments or equivalents in regions, the Budget and Finance
Directorate in the MCB, related subprogram offices that serve members of the federal and
                                               - 19 -


regional Technical Teams, and relevant offices in the Ministry and Bureaus of Finance and
Economic Development. Specific support activities will include the costs of program/project
coordination and planning, training management, IEC activities, monitoring and evaluation, basic
training, auditing, office supplies, equipment operation, transport, travel, and per diems.

Program (and support project) components
                                       Indicative                        Bank-
                                                                                     % of Bank-
    Component            Sector           Costs         % of Total     financing
                                                                                     financing
                                         (US$M)                         (US$M)
 1. Federal PSCAP      Multi-sectoral        80.0           20%            20.0           25%
 2. Regional PSCAP    Multi-sectoral        317.8           80%            80.0           25%
                 Total Program Cost         397.8          100%           100.0           25%


2. Key policy and institutional reforms supported by the program

The Bank’s Support Project will contribute—through the six public sector capacity building
subprograms of PSCAP—to a wide range of policy and institutional reforms at federal, regional,
and local levels. These can be categorized as follows:

   Development of expenditure, revenue, and civil service management systems. A variety
    of legal, institutional, and procedural changes related to expenditure, revenue, and human
    resource management envisaged under the CSRP and TSRP. These include proclamations,
    directives, regulations, and circulars governing the Government’s financial calendar;
    medium-term forward planning; strategic planning and performance improvement; budget
    classification; double entry, modified cash accounting; cash or liquidity management; modern
    internal and external audit (and legislative oversight); and professional standards for public
    sector accounting and auditing cadres. Revenue sector reforms include directives and
    guidelines related to various federal, regional, and local taxes such as the VAT, the
    presumptive tax, as well as local land and user fees. Procedural improvements are envisaged
    for the Tax Payer’s Identification Number as well as the administration of the various new
    federal and regional taxes and customs. Similarly, the legal and institutional reforms
    governing the civil service will be sought including a new code of conduct for civil servants;
    the establishment of institutional charters for public bodies; a remuneration policy inclusive
    of revised job grades; and a human resource policy.

   Strengthening the intergovernmental fiscal system and administrative structures. The
    DLDP and UMCBP subprograms will support the adoption of enabling legislation for
    woredas and municipalities within regions including the assignment of revenue and
    expenditure responsibilities and the corresponding transfer of functional responsibilities from
    regional bureaus (for example, of health and education) to local authorities. They will also
    support the development of new instruments for fiscal and administrative decentralization
    such as the design of capital funding mechanisms for local jurisdictions and the establishment
    of new structures for woredas and municipalities. Guidelines for ensuring vertical
    accountability (for example, service delivery standards) and horizontal accountability (for
    example, procedures for participatory budgeting) will also be supported.

    In addition to the above-mentioned reforms envisaged under the program, the creation of
    PSCAP as a federal specific purpose transfer itself represents an important step forward in the
    evolution of Ethiopia’s heretofore equity-oriented intergovernmental fiscal system. The
                                               - 20 -


    program’s design—based on equity-oriented allocations, followed by performance-based
    disbursements and reallocations—accommodates other proposed fiscal transfers such as the
    proposed Local Investment Grant (LIG) Program to meet the investment needs of local
    service delivery.

   Role restructuring and performance improvement. Across all the subprograms, the
    Program will support restructuring of the role, functions, and work organizations of
    ministries, agencies, bureaus, local governments, courts, and other institutions. These
    organization-specific efforts are also intended to establish the accountability framework,
    standard operating procedures, review mechanisms, and esprit de corps appropriate to
    performance- or results-oriented management.

   Completion of law reform and revision. In addition to the legal framework for various
    aspects of woreda and municipal decentralization, urban land, and public administration, the
    Program will support a broad agenda related to law reform and revision including revisions of
    the family, administrative, and commercial codes.

   Strengthening of courts and parliamentary oversight bodies: The JSRP will also support
    procedural reforms and new institutional arrangements design to improve the functioning of
    the judiciary and legislative oversight bodies such as budget and public accounts committees.

   Development of information systems and IT architecture: The ICT elements of PSCAP
    will support the development of information systems strategies and applications roadmaps to
    guide the roll-out of Government systems in areas such as financial, human resource, land
    management, as well as service delivery.

3. Benefits and target population

The benefits of PSCAP in terms of improving the overall quality of federal, regional, and local
institutions are expected to be as follows:

   Improved delivery of rural, urban, social, and legal services: Ultimately, the Program
    will enhance the scale, efficiency, and quality of service delivery across priority sectors
    including agricultural extension, health, education, urban land supply and management, a
    range of municipal services, business registration and licensing, and legal services.

   Increased predictability of resource flows: The roll out of planning, budgeting, and related
    financial management reforms under the CSRP will not only encourage adherence to the
    financial calendar but also improve the quality of fiscal data and the predictability of resource
    flows. The establishment of robust intergovernmental fiscal transfer systems within regions
    will also contribute to predictable and transparent flows of financial resources to regions,
    their bureaus, and local governments.

   Improved inclusiveness of planning and budgeting: By promoting open and transparent
    systems of planning and budgeting, particularly at the woreda and municipal levels, the
    Program will improve the efficiency of allocative decisions. More inclusive budgeting and
    planning processes tend to produce more demand-responsive spending patterns, particularly
    at the local level.
                                               - 21 -


   Enhanced motivation and incentives for staff: The roll out of the human resource reforms
    under the CSRP will include streamlined and less hierarchical grading systems that promote
    initiative and career advancement. In addition, the development of medium-term, affordable
    wage policies and improve staff performance evaluation systems will motivate staff and
    provide better incentives for them to perform at all levels of government.

   Increased fiscal autonomy of local governments: The assignment of expenditure and
    revenue responsibilities will enhance the fiscal autonomy of woredas and municipalities, i.e.,
    the inflow of unearmarked resources that can be allocated according to local priorities.
    Restructuring and capacity building for woredas and municipalities will also enhance their
    tax autonomy and revenue performance.

   Enhanced operational and cost efficiency: Through restructuring and performance
    improvement activities across sectors, the Program will improve the operational efficiency of
    sectoral MABs, other regional institutions, woredas and municipalities, as well as the courts.
    Specifically, the cost efficiency and demand-responsiveness urban, rural, social, and legal
    services would improve, as well as associated sectoral outcomes.

   Improved transparency of government institutions: Strengthening of evaluation capacity,
    anti-corruption bodies, statutory and legislative oversight institutions (such as the Human
    Rights Commission and the Public Accounts Committee) will increase the availability of
    information on the performance of state institutions to the public.

   Expanded opportunities for public sector in-service training: The Program will rapidly
    expand opportunities for civil servants at the federal, regional, and local levels to receive in-
    service training in critical areas such as planning, budgeting, tax administration, procurement,
    personnel management, monitoring and evaluation, economic management, the law, as well
    as computer literacy and IT maintenance. Public and private suppliers will in turn receive
    several opportunities to deliver training to a vast and diverse clientele.

   Utilization of new technologies: PSCAP will facilitate the transfer of appropriate
    information technologies to public institutions involved in service delivery. From basic
    computerization of manual processes to the implementation of complex integrated financial
    management systems, ICT-related benefits under the Program are expected to include
    efficiency gains in Government procedures and processes, and improved the quality and
    availability of information on government performance.

Ultimately, the Program will benefit citizens and their communities (particularly the poor) as well
as economic agents such as farmers and the urban private sector through improved service
delivery, empowerment, and greater transparency and accountability of government institutions.
Intermediate beneficiaries will include civil servants at the federal, regional, and local levels;
woreda and municipal officials; the judiciary and their staff; staff involved in basic legislative
processes; revenue and tax authorities; public, private, and non-profit training institutions; the
media; and service providers.

4. Institutional and implementation arrangements

As Ethiopia’s multi-sectoral capacity building platform, PSCAP represents an important
innovation and challenge in terms of inter-ministerial and intergovernmental coordination.
Overall, the Government is adopting a “risk aware” approach by building on established
                                              - 22 -


implementation modalities (for example, for planning and budgeting, funds flow and
disbursement, as well as procurement) developed under the Education and Health Sector
Development Programs. The following distinguishing features of PSCAP are worth noting in
terms of their implications for its underlying institutional and implementation framework:

   PSCAP is inherently multi-sectoral, comprising six cross-cutting subprograms. Successful
    implementation of these subprograms necessarily requires the active participation of several
    lead institutions at the federal and regional levels (for example, the Urban Development
    Capacity Building Office in the Ministry of Federal Affairs and its lead role in carrying out
    federal activities of the Urban Management Capacity Building Program and supporting
    regions on sub-national level activities).

   Unlike financing provided under the Education and Health Sector Development Programs,
    federal specific-purpose transfers under PSCAP are additional to the regional subsidy.
    Formula-driven “drawing rights” are not entitlements but commitments that may be
    reallocated—within parameters—if not properly and efficiently utilized. In other words,
    regions that access PSCAP are therefore subject to performance-oriented conditionality.
    Such an arrangement places a premium on timely financial and activity-based monitoring
    within year, and output-based monitoring across years.

   Third, several multilateral and bilateral donors have responded to the Government’s desire to
    pool resources around a Sector-Wide Approach to PSCAP in order to ensure that all regions
    and subprograms under the Program have access to predictable and adequate financing.
    These SWAP arrangements necessitate a transparent process of joint review, appropriately
    aligned with the overall SDPRP monitoring and annual budgeting cycles.

In response to these new challenges, the Government has developed a governance and
institutional framework that places a premium on four governance principles—(i) intensive
coordination across tiers and branches of government, (ii) compliance with clearly defined rules
of the game (for example, for allocation and reallocation); (iii) transparency and information
sharing (for example, on matters of performance) within the public sector and with the public at
large; and (iv) extensive support to implementing agencies in the design, execution, and quality
assurance of reform activities. These are described below and depicted in figure 3.

4.1 Governance and cabinet level accountability

A unique feature of Ethiopia’s capacity building system is the role of the Minister of Capacity
Building—as head of the “super-ministry”—within the framework of cabinet decision-making.
Specifically, (s)he is accountable to the Council of Ministers for the overall achievement of
agreed upon semi-annual and annual outputs and results for PSCAP. In order to deliver on these
results, the Minister—in coordination with other cabinet ministers for lead PSCAP institutions
including the Ministries of Federal Affairs, Finance and Economic Development, and
Revenues—will approve regional and federal plans, allocate federal and regional budgets for
PSCAP, and oversee program implementation. In addition, the Minister will ensure that the
PSCAP system of planning, resource allocation, execution, and re-allocation operates in a fair and
transparent manner on the basis of clearly defined rules. In supporting his/her final proposals to
cabinet (and eventually parliament) on resource (re)allocation within PSCAP, the Minister of
Capacity Building will rely on the recommendations of federal and regional Technical Teams
(see below) as well as technical experts in the Ministry of Finance and Economic Development.
                                               - 23 -


Similarly, at the regional level, the heads of bureaus of capacity building will be responsible for
endorsing PSCAP plans in coordination with bureau heads of other lead institutions; seeking
appropriation of regional contributions for infrastructure and recurrent costs of PSCAP activities
from regional parliaments; and achieving the agreed upon outputs and results of regional PSCAP,
as reflected in annual summary performance and participation agreements.

It is important to note that the JSRP is managed by a steering committee comprising a wide array
of stakeholders across branches of government at the federal and regional levels. At the federal
level, the steering committee consists of members from the Supreme Court and House of Peoples’
Representatives along with the Ministry of Justice and Ministry of Capacity Building. Similar
steering committee arrangements for JSRP exist at the regional level. These bodies will continue
to function, as established, within the overall governance framework for PSCAP.

4.2 Federal level implementation arrangements

Ministry of Capacity Building. The Ministry of Capacity Building (MCB) is responsible for
macro-level management of Ethiopia’s national capacity building efforts such as PSCAP
including establishing policies, designing national strategies, ensuring their integration with
sectoral strategies, developing guidelines for programming capacity building, providing technical
support to regions, and evaluating ongoing program implementation. The Ministry, and
specifically, the State Minister of Capacity Building is responsible for the overall coordination of
PSCAP; serves as co-chair of the Joint Government-Donor PSCAP Working Group; and
coordinates Government participation in regular formal reviews of implementation progress.

For purposes of day-to-day management of PSCAP, the Ministry coordinates an inter-ministerial
Federal Technical Team (FTT), and houses a Planning and Program Directorate (PPD) as well as
a Budget and Finance Directorate (BFD). Roles and responsibilities of each are described below.

   Federal technical team. The FTT comprises inter alia the director of MCB’s Planning and
    Programming Directorate as well as PSCAP’s six subprogram directors, as well as
    representatives from MOFED and MFA is a critical quality assurance and coordination body.
    As such, the FTT is responsible for reviewing, appraising, and recommending approval of
    annual plans submitted by federal lead institutions and regions in line with technical criteria
    delineated in the PIP (for example, completion of the “mandatory minimum” capacity
    building activities, sequencing of reform activities, provision of regional financing for upfront
    civil works and ongoing recurrent costs of IT investments). It is also responsible for
    reviewing in-year and annual performance and recommending re-allocations of five-year
    drawing rights between non-performing and performing regions. During implementation, the
    FTT—with the support of the PPD and BFD—supports the development of content of
    reform programs, provides quality control and review of outputs produced by consultants
    prior to approving payment; defines equipment specification and undertake acceptance tests
    of equipment procured; develops communication and change management strategies; and
    ensures the quality and consistency of reform efforts. If needed, additional technical expertise
    will be recruited on a temporary basis to assist FTT in appraising applications of a specialized
    nature (for example, those under the ICT component).

   Planning and programming directorate. A planning and programming directorate (PPD),
    housed in MCB, serves as the secretariat for the Program, and specifically for the State
    Minister responsible for PSCAP and the federal technical team. The PPD issues and enforces
    operating guidelines; assists the FTT in the vetting of annual plans for quality and
    completeness; ensures participatory planning processes are undertaken; facilitates
                                              - 24 -


    coordination between members of the federal and regional technical teams; assists in
    consolidating, managing, and organizing the supply of training across six subprograms; helps
    the FTT provide detail follow-up and quality assurance during implementation; implements
    communication and change management strategies; and consolidates quarterly, semi-annual,
    and annual progress reports. The PPD also serves as the counterpart institution to the Joint
    Government-Donor PSCAP Working Group and shall therefore facilitate review and
    supervision missions, as well as information sharing such as disclosure of annual and other
    related reports, survey data, and other occasional papers.

   Budget and finance directorate. The budget and finance directorate (BFD) of the MCB is
    responsible for overall monitoring of procurement under the Program. It is also tasked with
    procurement and financial management of the three federal level subprograms that fall within
    the Ministry’s mandate—namely CSRP (except “expenditure management and control”
    activities), DLDP, and JSRP (except “strengthening the judiciary’ activities). The directorate
    is also responsible for carrying out international competitive procurement of goods under the
    Program. Supported by a full complement of local procurement specialists and international
    advisers, the directorate will work closely with subprogram directors and staff in the CSRP,
    DLDP and JSRP Offices in the MCB to vet and finalize TORs, undertake equipment
    specification, technical evaluation, drafting and negotiation of contracts, and contract
    management. It will work with regions and other lead institutions for international
    competitive procurement of goods. The directorate will commit to service standards in terms
    of efficiency and timeliness of financial management and procurement activities.

Ministry of Finance and Economic Development. The Ministry of Finance and Economic
Development (MOFED) is responsible for enforcing the rules of allocation and access for this
flagship intergovernmental transfer program. The Ministry (and specifically, the Regional
Affairs Department), in collaboration with the MCB, is responsible for effecting vertical and
horizontal divisions of PSCAP resources; issuing formula-based medium-term drawing rights or
notional envelopes to govern medium-term planning and annual budgeting; and recommending
mid-year and annual reallocations of five-year drawing rights. Both the Central Accounts
Department (CAD) and Counterpart Funds Unit (CFU) are responsible for the overall financial
management under the Program including recording for budgetary support grants and loans.
While the CFU manages the various special accounts (including requesting replenishments), the
CAD will focus on closing of local currency accounts and the consolidation of financial reports.
Opening and closing the special account, transfer of funds to the local currency accounts, and the
replenishment of funds are the responsibility of the Treasury Department (TD).

Subprogram offices in lead institutions. The mandate for supporting the implementation of the
six subprograms of PSCAP rests with subprogram offices in lead institutions. Overall, the role of
lead institutions responsible for subprograms at the federal level is to ensure that this large
constituency of eligible institutions are informed and consulted in the preparation of medium-
term and annual plans. Specifically, the MCB houses the subprogram offices responsible for the
Civil Service Reform, District-Level Decentralization, and Justice Systems Reform Subprograms.
The newly created ICT Development Authority holds the mandate for the ICT Subprogram. For
purposes of day-to-day management, the Expenditure Management and Control Program (EMCP)
Coordinating Office within MOFED is responsible for “expenditure management and control”
activities under the CSRP. The Ministry of Revenue manages the Tax Systems Reform Program,
and the Ministry of Federal Affairs has the responsibility for the Urban Management Capacity
Building Program. The Supreme Court is responsible for day-to-day management of federal
PSCAP activities related to “strengthening the judiciary.” As lead institutions, these ministries
                                               - 25 -


and authorities with subprogram offices are delegated the financial management and procurement
autonomy to carry out activities relevant to their reform mandates. In addition, the Ministry of
Federal Affairs has established a taskforce to provide additional technical support to emerging
regions such as Afar, Benishangul-Gumuz, Gambella, and Somali to carry out PSCAP-related
activities.

Other eligible institutions at the federal level. Several other federal institutions are eligible to
receive support—in-kind including through asset transfer—under PSCAP and its six
subprograms. These include sector ministries (for example, for health, education, and
infrastructure), authorities and agencies (for example, the Environmental Protection Agency), and
other offices within the executive branch; public sector training institutions such as the Ethiopian
Civil Service College; the judiciary or the courts; as well as supreme audit and oversight bodies
such as the Office of the Federal Auditor General and the public accounts committee.

4.3 Regional level arrangements

Bureaus of Capacity Building. In each of Ethiopia’s eleven regions (including Addis Ababa
and Dire Dawa), the Bureaus of Capacity Building (BCBs) are responsible for program
coordination. For purposes of day-to-day management of PSCAP, the BCBs coordinate Regional
Technical Teams (RTTs), and house Planning and Program Directorates (PPDs) or equivalents
including Procurement Desks. Roles and responsibilities for each are described below.

   Regional technical teams. In each region, an RTT comprising inter alia the director of the
    regional Planning and Programming Directorate as well as subprogram directors from lead
    institutions such as the Bureau of Finance and Economic Development, the Bureau of Trade,
    Industry, and Urban Development, the Bureau of Capacity Building, and the Bureau of
    Justice serves as the quality assurance and coordination body for PSCAP. As such, the RTTs
    are tasked with ensuring the consolidated regional plans meet eligibility, appraisal, and other
    criteria prior to their endorsement by regional cabinets and submission to the FTT. If needed,
    additional technical expertise will be recruited on a temporary basis to assist RTTs in
    appraising applications of a specialized nature (for example, those under the ICT component).
    During implementation, regional technical teams—with the support of PPDs—support the
    development of content of reform programs, provide quality control and review of outputs
    produced by consultants prior to approving payment; define equipment specification and
    undertake acceptance tests of equipment procured; develop communication and change
    management strategies; and ensure the quality and consistency of reform efforts.

   Planning and programming directorates or equivalents. Planning and programming
    directorates (PPDs) or equivalents, housed in BCBs, serve as secretariats for PSCAP in
    regions and will maintain close links with the federal PPD. Each regional PPD enforces
    nation-wide PSCAP operating guidelines and relevant regional guidelines; assists the RTT in
    the vetting of annual plans for quality and completeness; ensures participatory planning
    processes are undertaken; facilitates coordination between members of the RTT; assists in
    consolidating, managing, and organizing the supply of training across six subprograms;
    supports regional PSCAP procurement activities (see below); helps the RTT provide detail
    follow-up and quality assurance during implementation; implementation of communication
    and change management strategies; consolidates quarterly, semi-annual, and annual progress
    reports; and facilitates regional involvement in supervision and review missions.

   Procurement desks. Procurement desks, established within regional BCBs, are tasked with
    carrying out all relevant regional procurement activities for PSCAP. The desks are supported
                                               - 26 -


    by at least two local procurement specialists and work closely with the beneficiary
    institutions to vet and finalize TORs, undertake technical specification and evaluation,
    drafting and negotiation of contracts, and contract management. In addition, Desks are
    expected to commit to service standards to ensure the timeliness of procurement activities
    within respective regions.

Bureaus of Finance and Economic Development. In each region, the Bureau of Finance and
Economic Development (BOFED) is responsible for all relevant financial management activities
required under the Program including managing funds flows through Channel 1, ensuring
monthly consolidation of Statement of Expenses, ensuring the accuracy and timeliness of
financial reporting, and effecting payments on local and foreign contracts in line with the
recommendations of the regional PPD.

Other eligible institutions at regional and local levels including woredas and municipalities.
Several regional institutions are eligible to receive support—in-kind including through asset
transfer—under PSCAP and its six subprograms. These include sector bureaus (for example, for
health, education, and infrastructure) as well as authorities and agencies within the executive
branch; public sector training institutions such as Regional Management Institutes; the regional
and local judiciary or the courts; audit and oversight bodies; and woredas and municipalities.

Even though the actual transfer of PSCAP resources from regions to woredas and municipalities
is not currently envisaged at this stage, the bulk of PSCAP support is expected to be delivered in-
kind at the local level. In order to ensure a close match between regionally managed activities
and woreda and municipal level needs, the PSCAP planning process is expected to incorporate a
sample of woreda and municipal development plans. Woredas and municipalities are expected to
be informed about eligible expenditures under PSCAP so that capacity building activities (for
example, accounts and budget reform roll out or bulk and hands-on training) are appropriately
reflected in development plans. The introduction of PSCAP transfers from regions to woredas
and municipalities will be considered at a more advanced stage of program implementation.

4.4 Joint Government-Donor institutional review processes

A Joint Government-Donor PSCAP Working Group has been established to support information
sharing on capacity building, as well as joint preparation, appraisal, and supervision activities.
On the Government’s side, the MCB and MOFED are primarily involved in supporting this
harmonization agenda. From the donors’ side, members to date include AfDB, CIDA, DCI,
DfID, EC, Finland, France, Germany, IDA, Italy, Japan, KfW, Netherlands, SIDA, UNDP, and
USAID. The active involvement of these members in regular, institutionalized joint Government-
Donor review of implementation is critical to the success of a Sector-Wide Approach to PSCAP.

Specifically, formal quarterly review meetings of the Addis-based Joint Government-Donor
PSCAP Working Group are held to review implementation progress reports. In addition, a semi-
annual multi-donor supervision mission and an Annual Joint Government-Donor Review Mission
(ARM) are held prior to and/or during the mid-year reallocation and annual allocation exercises.
Both the supervision mission and ARM contribute to the ongoing due diligence requirements of
IDA and other donors; findings feed into the various allocative decisions undertaken by
Government, as well as the Annual Progress Report on the SDPRP. General Terms of Reference
for these arrangements are contained within the PSCAP Harmonization Agreement.
                                                                - 27 -




Figure 3. Institutional Framework for PSCAP—Planning, Appraisal, Approval, and Execution
                                              - 28 -




D. Project Rationale

1. Project alternatives considered and reasons for rejection

The Government, IDA, and other donor partners considered and rejected the following four
project alternatives in favor of a fifth alternative, described below.

Alternative 1: Other bilateral donors take the lead. The first alternative considered was to
encourage bilateral donors take the lead in financing the nation-wide, integrated program with
marginal involvement from IDA. The Government considered this unviable since no other
donors had the ability to help scale up PSCAP in terms of their ability to commit the required
financial resources or their ability to convene global knowledge resources across a variety of
reform areas (for example, civil service reform, urban management). The Government therefore
sought IDA’s lead role among PSCAP donors.

Alternative 2: Support provided through six separate, stove-piped IDA projects. A second
alternative was to support six separate operations for each subprogram. Neither the Government
nor the Bank considered this “stove-piped” approach robust in terms of exploiting the inter-
linkages and synergies across the subprograms, or ensuring a flexible, bottom-up approach to
planning and implementation. Furthermore, the administrative costs to the Bank of supporting
numerous different capacity building operations was deemed excessive. Finally, the likely
coordination problems for Government and donors that would result from a “stove-piped”
approach were precisely what the creation of the National Capacity Building Program was
designed to address. The scale and network economies that derive from integrating the six
subprograms under the umbrella of an omnibus national program were recognized early by the
Government, IDA, and other donor partners.

Alternative 3: Support leveraged purely through balance of payments support. A third
alternative considered by the Bank and donors such as DfID was to provide additional financial
assistance to the Government’s capacity building programs—financing primarily through
Government’s own treasury resources in FY2002 and FY2003 —through “direct budget support”
or DBS operations such as the Poverty Reduction Support Credits (PRSC). The weaknesses of
this alternative are three-fold. First, DBS commitments as a share of overall development
assistance in Ethiopia—while considerable—would not be sufficient to cover the financing gap
for the full range of SDPRP priorities such as food security, health, and education and capacity
building. Second, the lack of clarity on and institutionalization of key aspects of PSCAP design
such as rules of access, allocation, reallocation, and disbursement meant the DBS would
constitute undue fiduciary and operational risks. Finally, the advisory support and peer review
required for a variety of capacity building activities—for example, the design and implementation
of financial management or land management systems, necessitate intensive day-to-day
interaction and disbursement approvals at the level of specific plans rather than annual budgets.

Alternative 4: Replicate and enlarge the CBDSD design. Another alternative was to design a
larger version of the Capacity Building for Decentralized Service Delivery Project. This existing
operation inter alia seeks to provide support on a first-come, first-served basis—through a series
of demand-driven financing windows within the Urban Management Capacity Building
Subprogram—to beneficiaries that successfully apply for capacity building support from a menu
of eligible expenditures. It also provides a combination of flexible or demand-driven and
projectized support for the Civil Service Reform. While this approach to design sought to
                                                 - 29 -


provide greater flexibility, the early experience with CBDSD revealed three weaknesses that
contributed to less than satisfactory physical and financial performance. First, the project
originally intended to provide short-term, opportunistic financing for certain advanced capacity
building subprograms, and therefore was stove-piped with separate components for UMCBP and
CSRP. This type of design was neither intended to nor amenable to nation-wide scale up of the
other four subprograms (DLDP, JSRP, TSRP, and ICT) in a flexible manner. Second, the project
does not delegate financial and procurement responsibilities to regions, and only partially
delegates these responsibilities to the MFA. Third, the project provided financing through
Channel 2 (through sector ministries) rather than through Channel 1 (through the finance
ministries and bureaus), even though the latter is more amenable to larger scale implementation.
The Borrower therefore sought an alternative design, which was aligned to Ethiopia’s
intergovernmental system and amenable to a larger volume of disbursements to regions.

Alternative 5. IDA leveraging donor assistance for Sector-Wide Approach for PSCAP.
Having considered these alternative support modalities, the Bank has sought to support the
Government’s PSCAP with a five-year, US$100 million Support Project, using a Sector
Investment Loan or SIL. The Support Project aims to leverage considerable bilateral assistance,
which will be provided under a Sector-Wide Approach through (i) pooling of funds through
Channel 1, which is Government’s preferred modality for leveraging assistance under PSCAP,
and (ii) third party or Channel 3 arrangements. Transitional arrangements for donors with
existing projects are being identified to further encourage harmonization around the SWAP.

Options for using various IDA lending instruments were reviewed at length with the Borrower in
order to ensure that the Support Project could be effectively aligned in terms of design with the
Government’s program. The longer term time horizon of the APL with specific multi-year
performance targets were considered insufficiently flexible for the Government’s proposed
system of generating semiannual and annual output commitments from beneficiaries, and re-
allocating resources on a mid-year and annual basis. In addition, the transaction costs of
processing multiple phases of an APL would be ill-suited to the significant short-term financing
needs of PSCAP overall. The SECAL was deemed redundant to the ongoing serial balance of
payment support operations (or the Poverty Reduction Support Credits) and also inappropriate to
the requirements of implementation support.

2. Major related project financed by the Bank and/or other development agencies
                                                                         Latest Supervision
                                         Project                            (PSR) Ratings
      Sector Issue                                                  (Bank-financed projects only)
                                                                  Implementation     Development
                                     Bank-financed
                                                                   Progress (IP)   Objective (DO)
 Civil Service Reform
 and Urban Management CBDSD Project                                     U                  S
 Capacity Building
 Education               Education Sector Development Program            S                 S
 Food security           Food Security Program                           S                 S
 Health                  Health Sector Development Program               S                 S
 HIV/AIDS                Multi-Sectoral HIV/AIDS Project-ESMAP           S                 S
 Pastoral Development    Pastoral Community Development Project          S                 S
                                               - 30 -



      Sector Issue                                      Donor Involvement
                         Decentralization Support Activity for Expenditure Management and Control
                         (USAID, DCI); Internal and External Audit Subprogram (DCI); Auditor General
Civil Service Reform     Capacity Enhancement (CIDA); Expenditure Management, Support for Freedom
                         of Information Act, Top Management Capacity Building (DfID); Overall Support
                         (UNDP)
District-Level           District-Level Decentralization (DfID); Various “Area-based Programs” including
Decentralization         for regional administration (CIDA, DCI, Netherlands, SIDA)
                         Parliament Capacity Building (CIDA, DCI); Court Administration Reform
Justice Sector Reform
                         (CIDA); Justice Sector Reform Program (CIDA. SIDA, UNDP)
Tax System Reform        Tax System Reform Program (DfID, EC, IMF, Netherlands, SIDA, UNDP)
Urban Management and     Municipal Management and Development Program (GTZ); Municipal Leadership
Development              Program (EC)
Information and
Communication            Support for ICT development and School-Net (UNDP)
Technologies


3. Lessons learned and reflected in the project design

The design of the Government’s program, and therefore by the Bank’s Support Project, builds
directly on lessons learned from Ethiopia’s recent experience with public sector capacity building
as well as the international experience in discrete areas of public sector reform including civil
service and expenditure management reforms, decentralization, legal and judicial reform, tax
administration, and ICT. The design also seeks to build on examples of successful program
design in countries undergoing rapid institutional transformation.

3.1 Lessons learned from Ethiopia

Lesson 1. Projectized capacity building efforts supported by various donors in Ethiopia
over the 1990s tended to be fragmented and poorly coordinated. They lacked the flexibility
necessary to meet the fluid demands of institutional change. Multiple projects imposed
significant transaction costs on beneficiaries through distinct financial management and reporting
requirements. Scattered geographically based on the interests of various donors, these area-based
or projectized initiatives did not, in most cases, provide nation-wide coverage.

In deliberate attempt to break with the past, the Government has created a Ministry of Capacity
Building to coordinate a Sector-Wide Approach that pools donors resources around a single
design solution to PSCAP with common fiduciary requirements. The design allows the
Government to more thoroughly exploit economies of scope across capacity building programs
(for example, civil service reform and decentralization) by using the Government’s own planning
and budgeting system to encourage beneficiary institutions to prioritize across the full range of
eligible PSCAP expenditures on a yearly basis. It would also follow a system of performance-
based disbursement and reallocation to reward performers.

Lesson 2. Ethiopia’s tried and tested implementation strategy for managing rapid
institutional change relies on a combination of top-down prototyping, and to a lesser extent,
bottom-up implementation planning. This approach to rapid implementation was evident, for
example, during the creation of the federation, the woreda and municipal decentralization
process, and the re-launching of the CSRP. Increasingly, the Government has encouraged
                                                - 31 -


learning by doing initiatives at the regional and local levels; these initiatives help identify “good
practices” that are subsequently then scaled up (for example, municipal and urban land reforms).

The PSCAP planning and budgeting system enables regions and their local governments to
prioritize the roll out of prototypes and other prescribed activities within a resource envelope and
in line with their sub-national priorities. The traditional practice of federal authorities providing
informal guidance and direction, as well as the increasing tendency of regions to innovate
approaches to public sector management (for example, strategic planning) have been formalized
through the creation of a “matrix management” structure with subprogram directors providing
quality assurance or technical advice, and regions determining implementation priorities between
subprograms in any given year.

Lesson 3. The generally satisfactory record of other large scale operations such as the
Education Sector Development Program (ESDP) can be attributed to their alignment with
the intergovernmental fiscal system; delegation of financial management and
implementation responsibilities to regions; and a strong effort on donor coordination. Other
successful operations such as ESRDF benefited from a nation-wide network of implementation
hubs that support planning, project management, and supervision. By the same token, the
CBDSD project faced significant implementation delays in part because the project did not
sufficiently delegate financial and procurement management responsibility (for example, for
locally procured goods and services) to regions. Nor did it explicitly align planning and
prioritization of procurement activities with the Government’s planning and budget cycle.
Finally, the key executing agency was not sufficiently equipped to coordinate project activities.

Overall, PSCAP’s institutional architecture will follow and build on arrangements employed
under the SDPs and ESRDF. Specifically, the program will delegate financial and procurement
responsibilities to lead ministries at the federal level and lead bureaus at the regional level.
Planning of PSCAP activities will be undertaken in line with the established Government
procedures and in accordance with the financial calendar. The funds flow from federal to
regional levels will follow ‘Channel 1” (i.e., from MOFED through the BOFEDs). A network of
secretariats at the federal and regional levels will be used to ensure proper coordination of this
nation-wide effort.

Lesson 4. In Ethiopia’s resource-scarce public sector, behavioral change has resulted from
extrinsic and intrinsic incentive measures. Anecdotal evidence suggests that civil servants in
Ethiopia respond favorably to both formal extrinsic incentives such as increased pay and formal
performance targets, as well as intrinsic motivational measures such as participatory self-scrutiny,
positive reinforcement by the leadership, and sensitization campaigns. These efforts to strengthen
intrinsic motivational factors have resonated with actors within Ethiopia’s prevailing bureaucratic
and political culture. Such measures, employed in the Civil Service Reform Program, have
resulted in tangible improvements in service delivery performance including greater client
orientation on the part of public servants (for example, in the Ministry of Trade and Industry and
the Addis Ababa City Administration).

The reliance on intrinsic incentive mechanisms such as self-scrutiny has two implications for
PSCAP. First, in the short term, such measures in conjunction with significant capacity building
support are viewed as effective means of motivating performance and institutional change. In
subsequent phases of capacity building, the Government is intending to rely more heavily
extrinsic incentives. Second, intrinsic incentive measures including a nation-wide mobilization
and planning process, which relied heavily on peer review, have also been employed by the
                                               - 32 -


Government to communicate the objectives and expected outcomes of PSCAP, and elicit formal
commitments from regions and federal institutions to performance targets under the Program.

3.2 Lessons learned from international experience

Lesson 5. Sustaining rapid institutional change is often difficult, but feasible when political
and technocratic ownership are closely aligned. In a few African countries such Uganda and
South Africa where the learning by doing process has been (i) supported by high level political
commitment and clearly defined strategic framework, (ii) enriched through the involvement of
competent technocrats, and (ii) opened up to regular review by experts, stakeholders, and the
public at large. In such settings, the roles of the legislature, media, public at large in regularly
reviewing change processes have been institutionalized as well.

The program’s matrix management structure—built around subprograms and regions—as well as
regular joint reviews by donor teams is intended to provide timely technocratic support to the
ongoing process of change. At the same time, the participatory planning and review processes as
well as regular monitoring and evaluation including through client surveys are anticipated. In
addition, reviews of public sector reform processes such as the multi-donor financed Institutional
Governance Review, CFAA and CPAR updates, and ultimately, the Government’s Annual
Progress Reports on the SDPRP should provide the basis for more intensive scrutiny of
implementation progress.

Lesson 6. Based on its extensive experience across a wide range of institutional settings, the
Bank has identified several elements of good practice that should be incorporated in the
design of public sector reform programs. The Bank’s corporate strategy paper, "Reforming
Public Institutions and Strengthening Governance," identifies the following corporate priorities
which should inform the design of specific public sector reform operations—(i) a shift in focus
from the content of public policy to the way policy is made and implemented, (ii) support for a
broad range of mechanisms that promote public sector reform; (iii) emphasis on good fit over best
practice; (iv) enhanced support for institutional development through multi-sectoral
programmatic lending; and (v) a focus on organizing Bank teams to do better institutional work.

IDA support during PSCAP preparation and implementation reflects these broad corporate
priorities in the following ways. Program beneficiaries use the Government’s own planning,
budgeting, and execution processes as a way of prioritizing and sequencing their implementation
of capacity building activities across the six PSCAP subprograms, and ensuring “good fit” with
the specific institutional transformation needs of individual regions. The six subprograms of
PSCAP address a gamut of issues related to the fundamental reform of the state including the
creation of a local government sphere, establishment of formal checks and balances, and the
introduction of performance oriented public management systems. PSCAP also is inherently
multi-sectoral and seeks to avoid “stove-piping” through the involvement of sectoral institutions
at each level of the planning and implementation process. Finally, PSCAP is supervised with the
help of a sizeable Addis-based, multi-donor team, organized to leverage the core competencies of
different members of Ethiopia’s aid consortia in supporting institutional development.

4. Indications of borrower commitment and ownership

Since the mid-1990s, Ethiopia’s leadership has demonstrated a unique level of commitment to the
PSCAP agenda and its precursors. Described below are six indicators of borrower ownership of
the Program and its likely sustainability.
                                               - 33 -


Track-record of rapid institutional change. The Government’s track-record in supporting
rapid institutional change over the past decade is arguably one of the most compelling indicators
of its ownership of PSCAP and the state transformation agenda. Watershed moments in the
evolution of this agenda include the creation of the federal state system, the establishment of
regional subsidies and woreda block grants, and the re-launch of the CSRP.

Establishment of institutional framework. Following political reforms in 2001, the
Government established a “super-ministry” for capacity building to coordinate and monitor
institutional transformation processes. Capacity building focal points such as the CSRP liaison
offices have also been designated within each of the key economic management and sectoral
ministry. Capacity building bureaus were also established in the regions to ensure progress in
rolling out key NCBP activities to the sub-national level. Put simply, capacity building was
institutionalized as government-wide concern—a development that would profoundly affect
public spending in Ethiopia. Using its new institutional framework for capacity building
(including the numerous federal and regional officials newly redeployed to capacity building
offices across the country), the Government re-launched the nation-wide roll-out of established
subprograms such as Civil Service Reform, Tax Systems Reform, and to a lesser extent, Justice
Systems Reform, and launched for the first time several new subprograms such as District-Level
Decentralization, Urban Management Capacity Building, and ICT.

Allocation of Treasury resources. As a clear indication of high level political commitment to
public sector transformation, the federal government committed and efficiently disbursed
significant Treasury resources to PSCAP related subprograms over the FY2002-03 period (see
table 2). Senior officials at the regional and city levels followed suit by increasing expenditure
allocations to certain subprograms such as civil service reform and urban management, as well as
encouraging bottom-up innovations among public sector leaders (for example, the strategic
planning initiatives of the Tigray health bureau and the far-reaching restructuring the Addis
Ababa City Administration).

 Table 2. Expenditures of Treasury resources in PSCAP-related subprograms, FY2002-2003 (in
                                  millions of Ethiopian Birr)
                                                               Capital expenditures
                           Budget Items
                                                              Budgeted      Actuals
          1.   Program management                                2.0            1.0
          2.   Justice system reform program                    21.4           16.1
          3.   ICT                                              51.8           48.9
          4.   DLDP                                              6.7            5.2
          5.   CSRP                                              6.8            6.6
          6.   UMCBP                                             3.9            2.0
          7.   TSRP                                             30.4           28.6
                                   Total                       123.0          108.4

Development of Government plans and strategies. In early 1999, the Government took the
initiative to develop a National Capacity Building Strategy and Framework under the direct
supervision of the Prime Minister and other senior Ethiopian leaders. By mid-2001, it had
developed a National Capacity Building Program Document, a Capacity Building White Paper,
and several subprogram documents with detailed strategies and plans. The PSCAP planning
process itself has been unprecedented with the preparation of five-year medium term plans by all
eleven regions and federal subprograms.
                                                - 34 -


In March 2003, the MCB prepared an initial program document proposing the omnibus Public
Sector Capacity Building Program or PSCAP and a held a series of consultations within regional
and sectoral institutions starting in May 2003. These consultations revealed a broad and diverse
nation-wide constituency determined (i) to help develop the proposed omnibus program
comprising various reform initiatives; (ii) to play by explicit rules of the game for accessing
much-needed capacity building resources; and (iii) to utilize PSCAP to achieve broader goals
such as improved service delivery.

Participatory program identification at technical and political levels. Under the leadership of
the Ministry of Capacity Building, the Government initiated an unprecedented nation-wide
mobilization and strategic planning campaign around PSCAP and specifically, the notion of
“scaling up state transformation.” Teams from all the regions of Ethiopia participated in a
medium-term planning exercise that was carried out through a series of bi-weekly peer review
meetings over the June-September 2003 period. Regions set up steering committees to oversee
the preparation of consolidated regional PSCAP plans. Regional technical teams joined a federal
technical team to define the eligible expenditures for the program (based on the content of each
subprogram), prepared five-year plans that prioritized activities across subprograms, and
developed a narrative around the transformation process. Consolidated PSCAP plans for each
region were prepared and rigorously peer reviewed over this period of intensive preparation. A
federal plan was also prepared. IEC activities sought to raise awareness at the grassroots level of
the objectives of PSCAP through various media including television, radio, newsletters, and oral
or word of mouth traditions (for example, community-based Afari and Somali traditions). The
already impressive preparation process helped confirm the leadership role for MOFED in
ensuring transparent and fair resource allocation across regions and the lead role of other
technical ministries in ensuring quality in relevant reform areas (for example, MOR in tax reform
or MFA in urban management).

Over the 2003-2004 period, ownership of the objectives and priorities underlying PSCAP has
been confirmed on numerous occasions by senior members of Ethiopia’s leadership in the press,
public meetings, and through other media. By mid-September 2003, a wide range of political
leaders, bureaucrats, citizens, and training institutions at federal, regional, and local levels were
mobilized and organized around PSCAP as the Government’s primary instrument for state
transformation.

Engagement with international donor community. Notwithstanding its own contributions, the
Government acknowledged the considerable financial and technical assistance gap that remained
in rolling out its various reform programs. As the immediate-post war period came to a close, it
actively sought assistance and engagement from the international community. A high-level
seminar involving the Council of Ministers and members of the Bank’s team was a held in Sodere
in October 2001, followed by a range of CAS Workshops on capacity building, decentralized
service delivery, and private sector development in 2002. A Consultative Group meeting later
that year also provided an opportunity for Government to articulate the objectives and document
the progress made across its public sector reform subprograms. Donors in turn committed and
delivered short- to medium-term assistance to the Government. Notably, the Bank’s CBDSD
Project was approved and declared effective by early 2003. Short-term assistance from other
donors such as the EC, CIDA, DCI, DfID, GTZ, Italy, Netherlands, and SIDA was also
committed.
                                               - 35 -


5. Value added of Bank support in this project

The substantial and complex requirements of Ethiopia’s state transformation agenda necessitates
IDA’s intensive involvement for three reasons—(i) managing the demands of rapid nation-wide
scale up, (ii) leveraging the comparative advantage of IDA and other interested partners, and (iii)
mitigating risk factors associated with serial direct budget support.

Managing the demands of rapid, nation-wide scale up. The scale and scope of the
Government’s public sector capacity building program are unique in Africa (with the notable
exceptions of Uganda and South Africa), as is Ethiopia’s political commitment to overcoming the
fiscal and operational challenges to successfully implementing “state transformation.” Of the
various donor partners involved in capacity building, IDA is best positioned to help the
Government bring to scale this nation-wide, multi-sectoral program of institutional overhaul
within acceptable levels of risk. In addition, IDA financing in the context of Sector-Wide
Approach to public sector capacity building also enables the Government to “smooth” out
fluctuations in the provision of bilateral aid resources across regional states within the federal
system, across subprograms of PSCAP, and across time.

Leveraging the Bank’s comparative advantage and that of other partners around a “single
design solution” to PSCAP. IDA brings to bear considerable cross-country experience in
several of the reform areas under implementation as part of PSCAP including urban management,
district-level decentralization, civil service reform, and ICT. It is also leveraging its experience
as a lead or strategic partner in supporting large scale capacity building programs in the few
African countries that embarked on complex and rapid transformation strategies (for example,
IDA’s provided critical programmatic support to Uganda’s multi-pronged effort to deepen
democratic decentralization, civil service reform, expenditure management, and legal-judicial
reforms over the mid-late 1990s). Overall, in Ethiopia, the Bank is also playing a catalytic role in
encouraging donors—particularly those with intensive experience at the sub-national level and in
areas such as justice systems and tax reform—to pool their support and harmonize around the
Government’s “single design solution” for PSCAP.

Mitigating risk factors associated with serial direct budget support. A final set of rationale of
Bank involvement relates to mitigating the fiduciary and implementation risks associated with
IDA’s as well as bilateral direct budget support programs designed to help Government achieve
poverty reduction objectives in the SDPRP. Specifically, assistance to be provided under
PSCAP—for example, for the modernization of expenditure management systems, or
restructuring and skills development in woredas and municipalities—are expected to significantly
strengthen the confidence of Ethiopia’s aid consortia that budgetary resources are being
effectively utilized to deliver essential services with a decentralized framework.

E. Summary Program Analysis

1. Economic

For this “framework”-type project and the larger federal program that it seeks to support, the
Government will rely on its medium-planning and annual budgeting systems to generate federal
and regional applications with time-bound capacity building proposals. These applications and
proposals will be comprised of costed plans that are screened within indicative formula-driven
resource envelopes or drawing rights. Eligibility criteria will include inter alia the establishment
of agreed institutional arrangements (including regional planning and programming departments
                                                - 36 -


or equivalent, responsible for PSCAP); completion of relevant capacity assessments or inclusion
of assessments in first year plans; submission of medium-term action plans and annual
procurement plans using standard unit costs within established resource envelopes; and
submission of endorsed (either by regional cabinet or federal ministry head) participation and
performance agreements. Generic appraisal criteria include inter alia the relevance of planned
activities against assessed constraints; provision for completion of “the minimum mandatory”
capacity building (defined across subprograms); provision for program support (for example,
financial and procurement management and M&E); and evidence of participatory planning
including sample plans for local jurisdictions. Subprogram-specific appraisal criteria are also
envisaged and will include appropriateness of sequencing strategies recommended by federal
program director; sector-specific technical analysis; the previous year’s performance; and
submission of relevant TORs. Mid- and end-year reallocations of drawing rights are intended to
provide an incentive and in the process ensure the economic viability of project activities.

2. Financial

Three sets of financial issues are relevant to the Support Project. First, it is important to note that
fiscal additionality provided by PSCAP to regions will be explicitly reflected within the
Government’s Macroeconomic Fiscal Framework (MEFF), medium-term Public Investment
Program (PIP), and the annual vertical division of revenues. While the additionality will likely be
marginal to these macro-fiscal targets, the Program will be designed in a manner that continues to
secure the macroeconomic management fundamentals. Second, the ex ante civil works (facilities)
and ex post recurrent expenditure implications of capacity building activities are not included in
the list of eligible expenditures under PSCAP. In the case of regions, these costs will need to be
identified as well as their fiscal sources prior to drawing down on PSCAP resources. Third,
implementation of PSCAP activities are expected to result in improvements in expenditure and
revenue management, stronger cash or liquidity management, streamlined government operations,
and enhanced fiduciary accountability at all levels of government. While the direct financial
benefits of project activities may not be realized in the short term, increased receipts and better
value for money at all levels are expected over the medium-term.

3. Technical

Several aspects of the content of various reform subprograms under PSCAP will require ongoing
review and scrutiny. As a “framework”-type project, the nature and sequencing of this content
will need to be developed and managed flexibly through the annual planning and implementation
review processes within standards prescribed by subprogram directors. A central feature of the
PSCAP system is the “matrix management structure” in which Technical Teams comprised of
subprogram directors and supported by PPDs ensure the quality of regional plans, priorities, and
implementation processes.

4. Institutional

4.1 Executing agencies

At the federal level, responsibility for execution has been delegated across lead institutions that
house each of the six PSCAP subprograms or key elements of these subprograms. Specifically,
the executing agencies tasked with overseeing implementation of the federal PSCAP component
are: (i) MCB, which houses offices for the Civil Service Reform, District-Level Decentralization
and Justice Systems Reform Subprograms; (ii) MOFED, which is responsible for the overall
funds flow to federal and regional institutions, and also undertakes day-to-day management of
                                              - 37 -


CSRP activities related to expenditure management and control; (iii) MOR, responsible for the
Tax Systems Reform Subprogram; (iv) the ICTDA, which houses an implementation unit for
execution of the ICT Subprogram; (v) MFA, which houses an office for the Urban Management
Capacity Building Subprogram; and (vi) the Federal Supreme Court, which houses an office for
day-to-day management of JSRP activities related to the strengthening of the courts. This
approach to delegating management across lead ministries is appropriate to the Program’s multi-
sectoral focus. It will also encourage accountability for subprogram implementation in exchange
for greater autonomy for lead ministries to oversee and satisfactorily meet their day-to-day
implementation responsibilities. As noted earlier, the MCB’s Planning and Programming
Directorate (PPD) will serve as the body responsible for overall coordination across the various
executing agencies noted above.

Under the Program, the Bureaus of Finance and Economic Development as well as the Bureaus of
Capacity Building are also designated as executing agencies, responsible for the regional PSCAP
component, upon approval of signed participation and performance agreements. Specifically,
BCBs and their PPDs undertake day-to-day management (including planning and programming,
procurement, and M&E) and BOFEDs carry out all financial management activities on behalf of
lead regional institutions with technical mandates for each of the six PSCAP subprograms (for
example, BCB for Civil Service Reform) or the Bureau of Trade, Industry, and Urban
Development for Urban Management Capacity Building).

4.2 Program management

As reflected in its Program Implementation Plan (PIP), the Government has strengthened
program management framework for the federal level implementation of PSCAP. Specifically,
program management will be supported by (i) the Planning and Programming and the Budget and
Finance Directorates (PPD and BFD) of MCB, both of which will be appropriately strengthened
with international and local experts to carry out the full range of program management activities;
(ii) offices to support day-to-day management of each subprogram or, where designated, elements
of subprograms at the federal level; and (iii) a Federal Technical Team, comprising subprogram
directors, tasked with quality assurance during planning and implementation for the Program as a
whole. Similar arrangements in regions comprise (i) PPDs along with Procurement Desks,
housed in BCBs, responsible for program management of the regional component; (ii) inter-
bureau regional technical teams, who will fulfill the quality assurance function at the regional
level; and (iii) BOFEDs will be responsible for payment based on the approval of BCBs.

In addition to the generally robust framework for program management described above, the
Government is taking steps to rapidly embed necessary expertise in the PPD and BFD at the
federal level, PPDs at the regional level, and relevant staff in MOFED and BOFEDs prior to
effectiveness inter alia through the recruitment of experienced consultants with expertise in
financial management, procurement, and program management. Where necessary, resident
advisors are intended to support subprogram directors as members of the Federal Technical Team
(and their counterparts in regions).

4.3 Procurement

In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for
procurement management at the federal and regional level. Specifically, the BFD in the MCB
shall serve as the lead agency responsible for monitoring all procurement activities, and also
reviewing and consolidating procurement plans received from other executing agencies. In
                                               - 38 -


addition, the Ministry’s BFD is responsible for handling all ICB procurement of goods. National
procurement of goods and selection of consultants would be handled as follows:

   Procurement for the three subprograms under MCB (CSRP, JSRP, and DLDP) will be
    handled by MCB procurement unit from preparation of bidding documents and RFPs, until
    award of contract. The contracts for procurement of goods would be signed by MCB. The
    contracts for the selection of consultants may be signed by MCB or the respective program
    directors as required. The program offices would actively participate in the preparation of
    specifications and Terms of References and technical evaluation of bids and proposal.

   Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT,
    “expenditure management and control” activities under CSRP, and “strengthening of the
    judiciary” activities at federal level will be carried by the Ministry of Revenue, UDCBO
    within MFA, Information and Communication Technology Development Authority
    (ICTDA), and the EMCP Coordinating Office in MOFED and a designated office in the
    Federal Supreme Court respectively.

   BCBs are responsible for handling all procurement activities, except ICB procurement of
    goods, for the respective regions and city administrations (i.e., Addis Ababa and Dire Dawa).
    Relevant lead institutions in each region would participate in the preparation of procurement
    plans, specifications, terms of reference, technical evaluation of bids and proposals.

   MFA is tasked with providing additional support for emerging regions (Afar, Somalia,
    Benishangul-Gumuz and Gambella) in the management of procurement as required.

It is anticipated that procurement arrangements will evolve as capacity increases. Regional
proposals for building up their procurement capability and for changes in procurement
arrangements will be regularly reviewed and assessed by the BFD, and semi-annually by IDA and
donors. A more thorough analysis of procurement arrangements is provided in Annex 6.

4.4 Financial management (see Project Implementation Plan and Annex 6A)

PSCAP is legally constituted as a specific federal grant to be executed by multiple institutions at
the federal level, as well as regional BOFEDs and BCBs at the regional level. Four features of
PSCAP’s institutional framework have been identified as pertinent to the overall fiduciary risk of
the Government’s program: (i) alignment of PSCAP’s planning, budgeting, and execution
arrangements with the public finance system, (ii) provisions for embedding financial management
capacity across executing agencies, (iii) the utilization of the “Channel 1” modality for funds
flow, and (iv) the planned pooling of donor and Treasury funds. These are described in detail
below including the rationale and implications for managing financial management risks.

   As prescribed under a Sector-Wide Approach, the program (and therefore the Bank’s Support
    Project) will align resource allocation, planning, budgeting, and execution practices and
    procedures—where they are deemed to be robust—with those established under Ethiopia’s
    public financial management regulations. Specifically, federal and regional institutions
    participating in the Program shall use Government’s chart of accounts for financial reporting,
    comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term
    and annual plans in line with established procedures, disburse funds on a reimbursable basis
    against SOE submissions, and finally, submit financial and physical progress reports.
    Alignment with the Government’s financial system is designed to ensure that the planning
    and execution of capacity building activities is undertaken in a flexible manner in line with
                                                  - 39 -


     the changing demands on the ground. It is also intended to improve the accountability
     framework within which public sector capacity building activities at the federal, regional and
     local government levels are financed and implemented.

    The major financial management risks to PSCAP (and therefore the Bank’s Support Project)
     involve coordination and capacity constraints across numerous planning and programming
     departments (PPDs), BOFEDs, and federal subprogram offices involved in implementation.
     In order to mitigate these risks, all PPDs will recruit additional staff to strengthen their
     capacities and MOFED will provide regional staff with extensive training in the financial
     management requirements of the Program. In addition, the preparation and issuance of short
     and concise guidelines, as part of the PIP, on recording and reporting of the financial
     transactions of the Program is a crucial step in accelerating the implementation of the
     Program. The guidelines will be used by the staff of the executing agencies such as federal
     subprogram institutions and regional BOFEDs after MOFED conducts the necessary training.
     MCB will take the responsibility in the overall coordination of the Program’s
     implementation. After receiving the required financial reports from MOFED, MCB will
     prepare and submit regular financial monitoring reports to IDA.

    As described in the PIP, funds flow arrangements under PSCAP eventually involve the
     pooling of external resources (for example, from IDA and other bilateral donors) with
     Treasury resources. These pooled resources are then channeled from MOFED to designated
     federal and regional beneficiaries through “Channel 1” in line with assigned drawing rights
     and against monthly SOE-based disbursement procedures. Under the Channel 1 procedure,
     as practiced under the Education and Health Sector Development Programs, the specialized
     finance bodies at each administrative level control the release of funds and report upwards on
     their utilization. The same principles apply to both recurrent and capital budgets. Although
     MCB and Regional Bureaus of Capacity Building have a special role in approving and
     supervising the capital budget, the disbursement and accounting functions remain with

    Figure 5. Funds Flow and Reporting Arrangements under PSCAP

                         IDA Credit Account                   Government of Ethiopia
                           Washington, DC                         Contribution




                  IDA Special Account in USD
                      at NBE (MOFED)

                                                                         PSCAP
                                                                          PSCAP
                                                              Pooled Local Currency Account
                                                              Pooled Local Currency Account
                                                                   at NBE/CB (MOFED)
                                                                    at NBE/CB (MOFED)
                  One Special Account in USD
                  for each other pooling donor
                        at NBE (MOFED)




                                                 Local Currency Accounts
                                                 Local Currency Accounts            Local Current Accounts
                                                                                    Local Current Accounts
                Reporting on expenditures          (Regional BOFEDs)
                                                    (Regional BOFEDs)             (Lead federal institutions)
                                                                                   (Lead federal institutions)
                Flow of funds
                                              - 40 -


    MOFED and the Regional BOFEDs. At the federal level, designated lead institutions will
    serve as executing agencies that receive funds directly from MOFED to carry out capacity
    building activities. Other federal bodies such as sector institutions implementing the CSRP
    or other subprograms do not receive funds; rather lead institutions procure goods, training,
    and services on their behalf. At the regional level, BOFEDs will receive funds through
    Channel 1 based on approved annual plans in the same way as they currently receive
    Treasury resources.

   As noted above and depicted in Figure 5, PSCAP is intended to pool resources from domestic
    and external sources in the context of a SWAP. Accordingly, for each donor, including IDA,
    MOFED intends to open a Special Account (SA) in US Dollars at the National Bank of
    Ethiopia. In addition, MOFED will open one Birr account—the “pooled account”—for
    which money from the SAs and the government contribution will be deposited. The Birr
    account will serve as a consolidated fund for all donors and the government. MOFED will be
    responsible for the day-to-day management of the SAs and the pooled Birr account. Funds
    will be moved from the Foreign Exchange Special Accounts in the National Bank of Ethiopia
    to the Pooled PSCAP Account, and forwarded to the beneficiaries, based on the approved
    budget and agreed disbursement plan. Thus, released funds of one donor can be replenished
    from another donor on the basis of claims made. Although donor funds will be allowed to be
    kept in SAs in foreign currency, they will be transferred into Birr as soon as they are to be
    used and sent to the regions to cover anticipated expenditures. Part of the donor funds,
    however, will be kept in foreign exchange to be disbursed at the request of MCB and the
    regional capacity building bureaus through their regional finance bureaus. These funds will
    be drawn from the particular region’s allocation and be used to cover the costs of imported
    goods. The SAs established in the National Bank of Ethiopia by MOFED to receive donor
    contributions (including those from the Bank) are revolving funds. Once funds are transferred
    to the pooled account, or direct expenditures against approved contracts are undertaken for
    earmarked funds, replenishments can only be made when the necessary expenditure reports
    are received from the federal and regional beneficiaries (through their BOFEDs). It is
    absolutely crucial that these reports and other necessary documents are submitted monthly to
    the CAD. Otherwise, part of the program may be stalled due to lack of donor funds. A single
    financial reporting format is to be prepared by executing agencies, that is, federal lead
    institutions and regional BOFEDs. These forms will deal with both Government and donor
    funds used in the implementation of PSCAP. In addition donors such as IDA will need to
    receive at least monthly replenishment requests.

The overall conclusion from the financial management assessment is that the existing
Government system—where deemed sufficiently robust—can be used for the implementation of
PSCAP (and therefore the Bank’s Support Project), provided that additional staff are recruited at
all levels and the required trainings are provided by MOFED on recording and reporting of the
financial transactions. A more detailed analysis of financial management arrangements and
associated risks is provided Annex 5A.

5. Environmental

Not applicable.
                                               - 41 -


6. Social

As noted earlier, it is anticipated that PSCAP will affect a wide range of stakeholders with
myriad—at times competing—interests. Primary participants in public sector reform activities
that will be affected by PSCAP include federal, regional, and local level public servants (both
general administrators and frontline workers in sectors); officials and interest groups involved in
the management of control and sectoral agencies at the regional and local level; officials and staff
within supreme audit institutions; the judiciary and legislative oversight institutions such as the
public accounts committee; as well as the indigenous suppliers of training, equipment, and
knowledge services required for PSCAP including public and private training institutions, various
local firms, and NGOs or not for profit institutions. Indirect clients of public sector capacity
building include ordinary citizens in urban and rural areas, who could potentially take advantage
of the greater opportunities for democratic decision-making under woreda or municipal
decentralization. Citizens and local communities are also expected to benefit from service
delivery improvements resulting from various PSCAP subprograms. The private sector is also
poised to benefit from anticipated improvements in public sector governance (for example,
greater improvements in commercial justice or reduction in the processing time for business
licensing or customs clearance).

Overall, the social development impact of PSCAP will depend on the degree to which
institutional reform and capacity building efforts improve three critical aspects of state-society
relations—inclusion, accountability, and cohesion. These are discussed below along with the
prospects that specific subprograms in PSCAP would provide key “entry points” for deepening
social development impact.

   Inclusion. Under PSCAP subprograms, public officials are expected to undergo the attitudinal
    and behavioral changes necessary to foster the participation, free expression, and genuine
    inclusion of citizens, communities, and marginalized groups in public processes, such as
    planning and budgeting. Particularly worth of note are the CSRP, UMCP, and DLDP
    programs, which support the development of more predictable and participatory planning and
    prioritization processes. Efforts to foster grassroots participation both in woredas and
    municipalities are also envisaged. Risks that such consultation “prototypes” and capacity
    methodologies will be excessively top-down and formulaic should be noted and monitored in
    the future. Greater focus on improving and monitoring the quality—not simply the quantity—
    of local representation in public decision-making should be maintained.

   Accountability. The Program intends to support performance management and other related
    efforts to improve the accountability of public servants for efficient, effective, and client-
    oriented service delivery. In addition, capacity building activities are intended to result in
    unbiased and judicious exercise of regulatory authority (for example, in case of business
    licensing or customs clearance) in order to improve governance. Several subprograms
    including CSRP, JSRP, TSRP, and ICT (as well as those subprograms focusing on local
    government) serve as “entry points” through which service delivery operations, as well as
    citizen monitoring of frontline delivery performance can be strengthened. Key success
    factors are the Government’s continued commitment to involving citizens and the private
    sector in the monitoring of public sector performance (for example, through client score cards
    and surveys), and also its track-record in disseminating the findings of such efforts.

   Cohesion. The Program seeks to improve the capacity of public officials to carry out resource
    allocation, service delivery, regulatory, and related activities in a fair, transparent, and non-
    arbitrary manner—that is, increasingly in compliance with explicit and established rules of
                                               - 42 -


    game. Scope for speedy recourse and redress will also be critical for economic agents in
    commercial and other disputes. Such an approach to public management is critical to
    balancing the diverse interests of stakeholders and encouraging cohesion (or the accumulation
    of social capital) across diverse stakeholder groups such as regions, local communities, and
    other such groupings. The JSRP, CSRP, TSRP, and ICT all support strengthening of
    executive, judicial, and legislative oversight functions that delineate and enforce the legal and
    regulatory framework within which public officials and economic agents such as farmers as
    well as private sector firms function. The credible commitment of both state and non-state
    actors to new rules and regulations is an important indicator of success. To further encourage
    cohesion across a diverse stakeholder group under PSCAP, it will also be important to
    monitor the success of the federal government in encouraging emerging regions to join the
    mainstream of Ethiopian public administration practice, while meeting their specific cultural
    and institutional needs. Similarly, regions will need to rapidly build capacity in poorer and
    more remote woredas, and ensure appropriate targeting of capacity building efforts towards
    historically marginalized groups such as women.

    Finally, the performance-based features of the PSCAP system itself—that is, the proposed
    mid-year and annual reallocation of drawing rights based on performance—poses an
    important resource management challenge for the Government. If managed transparently and
    fairly, the system could help deepen the implementation of fiscal federalism including healthy
    competition for federal resources within and across regional states. However, arbitrariness in
    the application of PSCAP’s rules or poor dissemination of the rationale for (re)allocative
    decisions could undermine credibility of the system.

Overall, the Government is well-positioned to leverage the social development impact of the
Program provided that (i) increasingly bottom-up approaches to consultation and local level
capacity building are employed; (ii) citizens, firms, and public officials are involved in the
monitoring and publicly reviewing service delivery performance; and (iii) state institutions
(including those involved in allocating and managing PSCAP resources) operate in a fair and
transparent manner to balance the interests of diverse stakeholders, specifically the poor and
historically marginalized groups. These and related issues are further detailed in a social
appraisal report, archived in the project files. The report recommends that future review missions
focus on the above-mentioned social development and related risks over the course of
implementation. Suggestions on specific monitoring indicators are also included.

7. Safeguard Policies

                                Policy                                         Applicability
    Environmental Assessment (OP 4.01, BP 4.01, GP 4.01)                           No
    Natural Habitats (OP 4.04, BP 4.04, GP 4.04)                                   No
    Forestry (OP 4.36, GP 4.36)                                                    No
    Pest Management (OP 4.09)                                                      No
    Cultural Property (OPN 11.03)                                                  No
    Indigenous Peoples (OD 4.20)                                                   No
    Involuntary Resettlement (OP/BP 4.12)                                          No
    Safety of Dams (OP 4.37, BP 4.37)                                              No
    Projects in International Waters (OP 7.50, BP 7.50, GP 7.50)                   No
    Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)*                        No
                                               - 43 -


F. Sustainability and Risks

1. Sustainability

The sustainability of institutional reforms and capacity building activities under PSCAP depend
on the following six factors, which have been addressed in the context for program design.

   As a “framework” rather than “blueprint” –type operation, the Bank’s Support Project will
    depend on the Government’s system of program formulation and execution, and specifically,
    how effectively it articulates and enforces the rules of game governing access, allocation, and
    re-allocation. Of particular importance in institutionalizing PSCAP is the degree to which
    these rules are formally locked into the intergovernmental fiscal system (for example, through
    PSCAP’s designation as a specific purpose federal program additional to the regional
    subsidy, or the use of formula-based drawing rights and performance-based disbursements) as
    well as Government’s reliance on established planning and budget procedures to guide year-
    to-year prioritization processes. Alignment with the fiscal system is a key design principle
    underlying PSCAP; this bodes well for the program’s viability.

   The reform content of plans and the quality of implementation within this “framework”-type
    project will be a second factor affecting value for money and sustainability. Given the
    complexity of capacity building and institutional reform activities, the credibility of PSCAP
    as a whole will depend heavily on the review and quality assurance mechanisms the support
    planning, appraisal, and implementation at the federal and regional levels. Particularly
    noteworthy are the benefits that will likely derive from institutionalizing regular coordinated
    feedback from donor partners on the implementation of various subprogram activities within
    the overall federal and regional PSCAP components.

   Third, the program’s multi-sectoral scope places a premium on effective coordination within
    and across tiers of government. The Government’s network of capacity building offices and
    liaison units at the federal, regional, and local levels provides the basic institutional
    framework for this type of coordination. However, the efficacy of these arrangements will
    depend in large part on the clarity of roles and responsibilities between capacity building,
    finance, and sectoral offices at each tier of government. The role of institutions outside the
    executive including the legislatures and courts will also need to be appropriately defined.
    Recent efforts by the Government to clarify the roles and responsibilities as well as the
    accountability framework for the Program overall are highly encouraging. Specifically,
    delegation of program management responsibilities to federal subprogram offices and
    regions, as well as delineation of financial management and procurement arrangements across
    tiers of government bode well for coordination efforts during program implementation.

   Coordination among donors is a fourth factor necessary to ensure the continuity of
    Government’s institutional reform efforts. Organized in the form of a Sector-Wide
    Approach, the multi-donor support for PSCAP will reduce transaction costs and maximize
    consolidated external funding around a “single design solution.” The establishment of a Joint
    Government-Donor Working Group to support quarterly reviews, semi-annual supervision
    missions, and Joint Annual Review Missions will likely enhance transparency and credibility
    of Government efforts under PSCAP.

   Fifth, the credibility and viability of the PSCAP system will require that Government
    showcase tangible improvements in service delivery performance early on. Notable successes
                                              - 44 -


    such as dramatic reductions in processing time for business licensing, increased convenience
    and client orientation of one-stop shops in Addis Ababa, or rapid improvements in land
    management in cities such as Mekele and Bahir Dar are all indications that capacity building
    makes a difference for the “bottom-line” of ensuring value for the taxpayer’s money.

   A sixth and final concern is the need to ensure a regular participatory review (preferably
    involving Government, private sector, civil society, and external actors) of change processes
    to encourage learning-by-doing as well as effective demand for institutional change. The
    Government’s plans to use a variety of monitoring and feedback mechanisms such as
    surveys, client report cards, and workshops, as well as its commitment to require disclosure
    or public reporting of the findings of M&E activities under the program is highly
    encouraging. Equally important is the MCB’s commitment to regular disclosure of the
    findings of these various assessments as well as two-way IEC activities at the federal,
    regional, and local levels. Over time, it will be critical to foster a safe, yet accountable
    environment within which public servants and their clients can experiment with and develop
    more effective ways of undertaking planning, service delivery, as well as regulatory
    activities.

2. Critical Risks

Implementation of this ambitious and complex program poses an array of technical, managerial,
and coordination-related challenges for Ethiopia’s federal, regional, and local governments.
Three risks in particular (and associated risk mitigation measures) are worth highlighting.

   First and foremost, weak institutional capacity at all levels—and especially in emerging
    regions—poses significant financial, procurement, and program management risks to this
    ambitious project. Timely and accurate reporting on financial flows and physical
    implementation performance will be critical if the results-oriented reallocations envisaged
    under the Program is to function effectively. The major financial management risk for the
    Program is that MOFED may not receive timely reports to process replenishments of the
    special account and closing of the annual accounts of the Program due to limited institutional
    capacity across tiers of government, and specifically within BOFEDs and BCBs. Also,
    PSCAP will stretch the already weak capacity of federal and regional institutions to undertake
    procurement and contract management activities. In light of the implementation challenge
    that PSCAP poses, the Government’s plans to strengthen federal and regional PPDs, the
    BFD, and subprogram offices inter alia through the recruitment of skilled local and
    international consultants, intensive training in the operational guidelines, and early
    preparation and approval of Terms of Reference and procurement documents is encouraging.
    The role of MFA in providing technical support for plan preparation and implementation in
    emerging regions is also noteworthy. The adequacy of such efforts should be monitored,
    particularly in the first year of implementation, and remedial actions identified early.

   Second, while the PSCAP design places a premium on flexibility, the Government will likely
    face difficulties in adjusting the program semi-annually and annually, and reallocating
    drawing rights to meet changing circumstances and needs. At this stage, notwithstanding
    progress made on aligning PSCAP process with the new financial calendar and overall public
    finance system, the capacity currently available to make such rapid allocative adjustments,
    remains weak and probably inadequate. Strengthening of PPDs, as noted above, should help
    mitigate this risk, although major efforts to improve financial and physical reporting across
    tiers of government should continue in the run up to implementation. Also worthy of note is
    the Government’s commitment to quarterly, semi-annual, and annual reviews with all
                                              - 45 -


    stakeholders including donors is encouraging. These review processes should be timed
    closely with the annual budget cycle to ensure that adjustments and plans are made in time to
    be reflected in the annual budget (Annex 9).

   Third, in-service training on a massive scale is envisaged under PSCAP requires. The
    importance of moving beyond a purely public sector supply response to in-service training
    demand—given its limitations in terms of scale, cost, innovation, and efficiency—is widely
    acknowledged by Government and other key stakeholders. Recently, the Government has
    taken noteworthy steps towards clarifying a three-pronged approach for deepening the
    involvement of public, private sector, NGO, and university sectors in the delivery of training
    under PSCAP. First, the Government has confirmed the critical role of public sector
    suppliers such as the Civil Service College and Regional Management Institutes in the
    provision of “in-house” skills development (for example, related to implementation with
    Government procedures) as well as sensitization with Government policies. These types of
    activities are to be financed under the IDA program on a unit cost basis, i.e., covering the
    actual cost of the training sessions rather than the overhead or salaries of personnel in these
    public institutions. Second, the role of local and international private providers was
    acknowledged as key for highly specialized forms of training (for example, development of
    skills for the maintenance of IS/IT networks or best practice land management systems) and
    would be financed on the basis of competitive tendering under the IDA program. Third, for
    bulk “generic” training in areas such as general management, strategic management, finance,
    leadership development, public speaking, and computing, the Government intends to pre-
    qualify public autonomous, private, university, and non-profit suppliers to compete on a
    financial or cost basis for bulk training contracts bundled under the Program. As a basis for
    pre-qualifying suppliers, the Government intends to move forward with an assessment of the
    supply-side of the training sector.


          Figure 6. A three-pronged approach to deepening the indigenous supply response




The above-mentioned risk factors and others are described and rated in the table on the following
page. Despite several risk mitigation measures undertaken by the Government in the preparation
for program launch, the overall risk rating for the operation is considered high. Over the course
of implementation, further analysis and assessment will be required to assess the overall risk-
                                                      - 46 -


reward ratio (inclusive of fiduciary, institutional, and social development factors) by subprogram,
region, and the program as a whole.

                      Risk                             Risk              Risk Mitigation Measure
                                                      Rating
From Outputs to Objective
Insufficient expressed demand on the part of                   IEC campaigns prior to implementation will
citizens, civil society, and the private sector for            continue; systematic disclosure of findings of
improved public sector performance in terms             H      service delivery and related assessment; regular
of service delivery, empowerment, and good                     workshops with clients governed by institutional
governance                                                     charters across civil service institutions
Absence of or delay in woredas’ and                            Both budget and capital investment support will
municipalities’ access to fiscal support for                   provide fiscal additionality to capacitated local
                                                        N
investment and recurrent service delivery                      jurisdictions to meet recurrent and investment
needs, after receiving capacity building support               service delivery needs
Overemphasis on process rather than the                        PSCAP outcomes are defined in terms of service
bottom-line of service delivery and                            delivery impact rather than simply triggers; over
                                                         S
empowerment                                                    time, outcomes rather than outputs provide basis
                                                               for allocation and reallocation decisions
Lack of coordination between subprograms and                   The design empowers regions to prioritize
their outputs, or lack of consistency public                   between subprograms, exploiting synergies
sector reform programs across regions                          between them, and at the same time, leveraging
                                                         S
                                                               the expertise of federal subprogram directors to
                                                               ensure complies with national policy directors
                                                               and standards for content and implementation
Political commitment to institutional                          High level political involvement in consensus
transformation wavers, or Government is                        building around PSCAP across ministries, among
unable to sustain focus on PSCAP because its                   regional leaders; establishment of a nation-wide
                                                        M
ambitious development agenda (including food                   structure of capacity building bureaus and offices
security, human development, rural                             with budgetary responsibilities
development, and private sector development)
From Components to Outputs
Vested interests at regional and federal levels                At the regional level, allow for prioritization and
hamper various reforms including                               reallocation from subprograms that are stalled
                                                         S
restructuring, accountability, and systems                     towards those proceeding rapidly
modernization efforts
Lack of coordination among donors supporting                   Establishment of a Joint Government-Donor
the Sector Wide Approach                                       PSCAP Working Group to facilitate joint
                                                               quarterly review meetings, semi-annual
                                                               supervision, and annual review missions;
                                                        M
                                                               increased supervision intensity for Bank and
                                                               donor team including measures to better meet
                                                               due diligence requirements in regions, woredas,
                                                               and municipalities
Constraints on the cost, innovation, quality,                  Assessment of the supply-side of training and
timeliness, and efficiency of the supply                       capacity building across Ethiopia’s public,
response of purely public sector supply of                     private, and non-profit sectors; pre-qualification
training and capacity building in Ethiopia              H      of training suppliers for “generic training”
                                                               activities; and strengthening of public sector
                                                               training institutions to carry out “in house”
                                                               training activities
                                                   - 47 -


                      Risk                          Risk              Risk Mitigation Measure
                                                   Rating
 Severe constraints on absorptive capacity in               Strong program support prior to project
 emerging regions                                           effectiveness with the assistance of the Ministry
                                                            of Federal Affairs; offering premia on fees for
                                                      H     consulting assignments in remote regions;
                                                            establishment of “minimum mandatory” amount
                                                            of capacity building and a floor on reallocation
                                                            of drawing rights from any given region
 Weak institutional capacity at the regional and             Establishment of well-staffed Planning and
 federal levels to carry out core financial,                Programming Directorates (PPDs) and
 procurement, program management, and M&E                   subprogram offices or equivalents; contracting in
 activities, particularly in emerging regions               skills through of local consultants to support
                                                            various aspects of program management;
                                                      H     preparation of sample Terms of Reference and
                                                            procurement materials; intensive training of
                                                            Government officials; preparation of M&E
                                                            Action Plan as part of PIP/OM; incorporation of
                                                            semi-annual and annual output commitment into
                                                            participation and performance agreements
 Arbitrariness in resource allocation across                Formula-driven drawing rights with clear
 federal institutions and to regions, and weak              decision rules for performance-based
                                                   S
 capacity to effect mid-year and annual                     reallocation; strengthening of the network of
 reallocation of drawing rights against plans               PPDs to support planning and M&E
 Overall Risk Rating                               H
Risk Rating H (High Risk); S (Substantial Risk); M (Modest Risk); N(Negligible or Low Risk).


3. Possible Controversial Aspects

There are no controversial aspects of this project.


G. Main Credit Conditions

1. Effectiveness Conditions

a.       the Borrower has finalized and adopted the Program Implementation Plan, including a
         Procurement Plan, monitoring and evaluation action plan, financial reporting guidelines,
         and information, education and communication strategy, in form and substance
         satisfactory to the Association;

b.       the Borrower has recruited to: (i) the executing agencies: (A) at the federal level,
         Director, four team leaders and four team experts in the Planning and Programming
         Directorate, and (B) at the regional level, equivalent of the Director of Planning and
         Programming Directorate; and (ii) the MCB, two local procurement consultants, and an
         international procurement consultant, all in accordance with the provisions of Section II
         of Schedule 3 to the Development Credit Agreement;

c.       the Borrower has budgeted and approved implementation plans to be carried out by
         regional and federal institutions during the first year of PSCAP, and reflected the said
                                             - 48 -


       plans under the appropriate item in the federal budget, in form and substance acceptable
       to the Association;

d.     the Borrower has opened the Project Account and has deposited therein the initial deposit
       in an amount equivalent to Birr 9,000,000 to finance the counterpart contribution to the
       Project; and

e.     the Borrower has initiated pre-qualification of in-service training suppliers for “generic
       training” activities.

2. Financial and Other Covenants

a.     The Borrower (and specifically MOFED) shall submit the audited project accounts to
       IDA nine months after the end of each fiscal year. The audited financial statement will
       include all sources of pooled funds in the Program, including those from IDA, other
       pooling donors, and the Treasury.

b.     The Borrower (and specifically MCB) shall, after receiving compiled financial reports
       from MOFED, submit semi-annual consolidated Financial Management Reports (FMRs)
       to IDA forty-five days after the end of the FMR period.

c.     The Borrower and the pooling donors shall execute a Memorandum of Understanding as
       a condition for disbursement of funds from the pooled funds category.

d.     The Borrower shall comply with the following dated covenants, which serve as annual
       progress actions during implementation.

       1. No later than the end of the first program year, the Borrower shall (i) submit annual
          procurement plan, including sample development plans for up to 5% of the woredas
          and municipalities; (ii) launch the second woreda-municipal benchmarking survey;
          (iii) complete minimum mandatory requirements in at least four regions; and (iv)
          publish the PSCAP annual progress report, all in a form and substance satisfactory to
          the Association.

       2. No later than the end of the second program year, the Borrower shall (i) submit
          annual procurement plan, including sample development plans for up to 15% of
          woreda and municipalities; (ii) launch third woreda-municipal benchmarking survey;
          (iii) complete the prequalification of suppliers for generic training; (iv) review
          allocation and reallocation procedures and mechanisms, including reviewing
          alternatives for high performing executing agencies who have fully utilized their
          allocations; (v) complete minimum mandatory in seven regions; and (vi) publish
          Program annual progress report, all in a form and substance satisfactory to the
          Association.

       3. No later than the end of the third program year, the Borrower shall (i) submit annual
          procurement plan, including development plans for up to 25% of woredas and
          municipalities; (ii) launch the fourth woreda-municipal benchmarking survey; (iii)
          review feasibility of capacity building transfers to woredas and municipalities; (iv)
          completion of minimum mandatory in all regions; and (v) publish the Program
          annual progress report, all in a form and substance satisfactory to the Association.
                                             - 49 -


H. Readiness of Implementation

[ ] 1. a)   The engineering design documents for the first year’s activities are complete and
            ready for the start of project implementation.
[X] 1. b)    Not applicable.

[X] 2.      The procurement documents for the first year’s activities are complete and ready for
            the start of project implementation.

[X] 3.      The Project Implementation Plan has been appraised and found to be realistic and of
            satisfactory quality.

[ ] 4.      The following items are lacking and are discussed under loan conditions (Section G).

I. Compliance with Bank Policies

[X] 1.      The project complies with all applicable Bank procedures.

[ ] 2.      The following exceptions to Bank policies are recommended for approval. The
            project complies with all other applicable Bank policies.
                                                                                              - 50 -




                                                                  ANNEX 1: PROJECT DESIGN SUMMARY

                                         ETHIOPIA: Public Sector Capacity Building Program Support Project

Critical to the results framework for this programmatic capacity building operation is the importance of defining “outcomes” and “outputs”
sufficiently (i) to facilitate regular monitoring and supervision, and (ii) allow robust attribution of capacity building outputs to outcomes, and
eventually broader high level results. Under PSCAP, “outputs” are defined as the specific stroke of the pen actions, as well as other time bound,
verifiable change processes (such as systems development or restructuring) that seek to improve the institutional endowment of the state.
“Outcomes” are defined as the improvements in the quality of public institutions—that is, the enabling environment within which the
Government’s overall development objectives of improved service delivery, empowerment, and accountability can be achieved. By the end of its
implementation, PSCAP and its constituent subprograms will result in the following outcomes or improvements in institutional quality at the
federal, regional, and local levels.

 Hierarchy of Objectives                  Key Performance Indicators                                   Data Collection Strategy                    Critical Assumptions
 Sector-related CAS Goal:                 Sector Indicators:                                           Sector/ country reports:                    (from Goal to Bank Mission)
 1. Pro-poor growth through               1.1 Improved access, usage, and client satisfaction with     1.1 Country economic memorandum (CEM)       1. Government implements policy
 improved service delivery                supply of urban and rural land, delivery of agricultural     1.2 Poverty assessment                      reforms relevant to improving
                                          extension services, and infrastructure                       1.3 Public expenditure reviews (PERs)       productivity in the rural and urban sectors
                                          1.2 Reduced arbitrariness and transaction costs imposed                                                  including those related to land
                                                                                                       1.4 Client, household, firm level surveys
                                          by government                                                                                            management and utilities.
                                                                                                                                                   2. Government continues to increase the
 2. Improved human development            2.1 Improved access, usage, and client satisfaction with     2.1 Decentralized service delivery study    share of resources transfers to regions to
 outcomes through decentralized           delivery of health, education, and water services at all     2.2 PERs                                    finance essential services
 delivery of essential social services    levels                                                       2.3 Poverty assessment                      3. The public including firms,
                                                                                                                                                   communities, and other key stakeholders
 3. Good governance through               3.1 Increased transparency of actions by public officials    3.1 Institutional governance review (IGR)   actively participate in local decision-
 improved financial management            3.2 Enhanced grassroots participation and                    3.2 Annual Budget Reviews                   making to ensure a pro-poor orientation to
 performance, deepening democratic        empowerment in local decision-making                         3.3 IFA                                     public expenditures.
 decentralization, and legal and          3.3 Improved compliance with financial management            3.4 Legal and judicial assessment           4. Public servants respond with
 judicial reform                          reporting requirements, rules and regulations                3.5 Client, household, firm level surveys   behavioral changes consistent with
                                          3.3 Improved rule of law
                                                                                                                                                   transparency, responsiveness, and
                                                                                                                                                   accountability.
                                                                                    - 51 -



Project Development Objective:            Outcome / Impact Indicators:                       Project reports:                       (from Objective to Goal)
1. To improve the scale, efficiency, and 1. 1 Enhanced predictability of financial           1.1.1 Annual Budget Reviews            1. Government sustains focus and
responsiveness of public service          resource flows in-year and across years            1.1.2 Intergovernmental Fiduciary      continuity of state transformation agenda
delivery at the federal, regional, and     - Budget variance                                 Assessments (IFAs)                     despite much larger, ambitious SDPRP
local level; empower citizens to           - Federal-regional fiscal gap; regional-local     1.1.3 Annual review mission reports    agenda.
participate more effectively in shaping    fiscal gap                                                                               2. Federal and regional level governments
their own development; and promote                                                                                                  effectively use the PSCAP design to
good governance and accountability, by    1.2 Greater inclusiveness and transparency of      1.2.1 Annual Budget Reviews
                                         planning and prioritization processes                                                      coordinate efforts across subprograms and
scaling up ongoing institutional                                                             1.2.2 IFAs                             ensure consistency of public sector reform
transformation efforts under the           - Established practice of participatory           1.2.3 Annual review mission reports    programs across regions.
Government’s Public Sector Capacity        budgeting and public reporting on budgets         1.2.4 Annual Progress Report process   3. Federal and regional level leadership
Building Program, and specifically in      and performance at all levels
                                                                                                                                    maintain frontline service delivery focus
six priority areas: (i) Civil Service      - Regular involvement of civil society in                                                of PSCAP rather than overemphasizing
Reform; (ii) District-Level                planning, policymaking, budgeting, and                                                   process.
Decentralization; (iii) Urban              review processes
Management Capacity Building; (iv)                                                                                                  4. Sufficient demand-side pressures are
                                         1.3 Improved quality and efficiency of              1.3.1 Annual Budget Reviews            forthcoming on the part of citizens, civil
Tax Systems Reform; (v) Justice          government operations in priority sectors
Systems Reform; (vi) Information and                                                         1.3.2 IFAs                             society, and the private sector for improve
Communications Technology.                 - Improved service levels in terms of access,     1.3.3 Annual review mission reports    public sector performance.
                                           responsiveness, and cost efficiency                                                      5. Woredas and municipalities access
                                            - Reduced unit costs and processing time                                                fiscal support for their recurrent and
                                                                                                                                    investment needs in order to leverage
                                         1.4 Improved incentive environment for public       1.4.1 IFAs                             capacities towards specific service
                                         servants (gender disaggregated)                     1.4.2 Annual review mission reports    delivery goals.
                                           - Average civil service salary as percentage
                                           of living wage
                                           - Private-public wage ratios at each level
                                           - Wage decompression at each level
                                         1.5 Enhanced revenue performance and fiscal         1.5.1 Annual Budget Reviews
                                         autonomy                                            1.5.2 IFAs
                                           - Improved tax effort at all levels               1.5.3 Annual review mission reports
                                           - Increased own revenues and unconditional
                                           transfers as a share of total expenditures at
                                           sub-national levels
                                          1.6 Improved transparency and accountability       1.6.1 Public official and firm level
                                           - Reduced incidence of corruption and             surveys
                                           arbitrariness in rule enforcement (as judged by   1.6.2 IFAs
                                           economic agents)                                  1.6.3 Annual review mission reports
                                           - Increased access to justice, recourse and
                                           redress
                                           - Enhanced independence of the judiciary
                                           - Improved access to government information
                                                                                    - 52 -



Output from each Component:            Output Indicators:                                    Project reports:                         (from Outputs to Objective)
1. Legal and policy framework across   1.1 Law reform and revision undertaken and            1.1 Negarit Gazetta and other relevant
sectors strengthened                   adopted at federal level                              Government circulars and legislation
                                       1.2 No. of regions adopting enabling legislation      1.2 Financial Management Reports
                                       for local authorities                                 1.3 IFAs
                                       1.3 No. of regions adopting various tax               1.4 IGR
                                       proclamations (income, excise, TOT)                   1.5 Annual review mission reports
2. Restructuring and performance       2.1 Percentage of MABs (at federal and in each        2.1 Quarterly progress reports
improvement                            region) initiating restructuring and performance      2.2 Financial Management Reports (or
                                       improvement                                           FMRs)
                                       2.2 Percentage of woredas and municipalities          2.3 IFAs
                                       undergoing restructuring                              2.4 IGR
                                       2.3 Percentage of courts at each level initiating     2.5 Annual review mission reports
                                       performance improvement
                                       2.4 No. of regions adopting sector-specific
                                       automated IT solutions
3. Expenditure management systems      3.1 Percentage of budgetary institutions at each      3.1 Quarterly progress reports
reform                                 level implementing medium term and strategic          3.2 Financial Management Reports (or
                                       planning                                              FMRs)
                                       3.2 No. of regions adopting new budget                3.3 IFAs
                                       structure at all levels                               3.4 IGR
                                       3.3 No. of regions adopting of double entry,          3.5 Annual review mission reports
                                       modified cash systems at all levels
                                       3.4 Percentage of budgetary institutions each
                                       level adopting cash management directives
                                       3.5 Percentage of budgetary institutions at each
                                       level rolling out automated financial systems
                                       3.6 Procurement legislation adopted and
                                       directives issued
                                       3.7 Accounts and audits backlog reduced at
                                       federal, regional levels
                                       3.8 Percentage of budgetary institutions
                                       preparing standardized internal audit reports
                                                                                    - 53 -



Project Development Objective:            Outcome / Impact Indicators:                       Project reports:                    (from Objective to Goal)
4. Personnel management systems         4.1 Medium-term remuneration policy                  4.1 Quarterly progress reports
reform and roll-out                     developed, adopted at all levels                     4.2 Financial Management Reports
                                        4.2 Results-Oriented Performance Evaluation          4.3 IFAs
                                        rolled out at all levels                             4.4 IGR
                                        HR guidelines in woredas and municipalities          4.5 Annual review mission reports
                                        developed, adopted
                                        4.3 Percentage of budgetary institutions at each
                                        level implementing IT based HRM systems
5. Intergovernmental fiscal and revenue 5.1 No. of regions adopting fiscal                   2.1 Quarterly progress reports
mobilization mechanisms                 decentralization strategy including capital          2.2 Financial Management Reports
                                        funding mechanisms                                   2.3 IFAs
                                        5.2 No. of regions implementing TIN                  2.4 IGR
                                        5.3 Guidelines developed and implemented for         2.5 Annual review mission reports
                                        implementing withholding taxes, assessing
                                        presumptive tax bases
                                        5.4 Strengthening and performance
                                        improvement of FIRA and Customs
6. Vertical accountability mechanisms   6.1 Service standards for urban and other         2.1 Quarterly progress reports
established                             essential services developed and established at   2.2 Financial Management Reports
                                        all levels                                        2.3 IFAs
                                                                                          2.4 IGR
                                                                                          2.5 Annual review mission reports
7. Horizontal accountability mechanisms 7.1 No. of regions implementing guidelines for 2.1 Quarterly progress reports
or checks and balances established      citizen participation at the woreda and municipal 2.2 Financial Management Reports
                                        levels                                            2.3 IFAs
                                        7.2 Percentage of courts at each level            2.4 IGR
                                        undergoing performance improvement
                                                                                          2.5 Legal and judicial assessment
                                        7.3 Enhanced independence and efficiency of
                                        judiciary                                         2.6 Annual review mission reports
                                         7.4 Judges and lawyers trained
                                                                    - 54 -



Project Components:           Inputs: (budget for each component)            Project reports:                            (from Components to Outputs)
                                                                             1. Quarterly progress reports by            1. MCB and MOFED enforce rules
                                                                             federal, regional, and local officials as   governing formula-driven drawing rights
                                                                             well as subprogram directors                approach and performance-based
                                                                             2. Financial Management and Physical        reallocation fairly and transparently.
                                                                             Performance Reports (or FMRs)               2. Federal and regional institutions
1. Federal PSCAP Component                   $20 million
                                                                             3. Annual review mission reports            involved in program management are
                                                                             4. Evaluation reports                       well-versed and appropriately skilled in
                                                                                                                         IDA procurement and disbursement rules,
                                                                             5. Audits and evaluations                   as well as the operational guidelines.
                                                                                                                         3. Regions utilize the budget and planning
                                                                                                                         system to appropriately prioritize
                                                                                                                         subprogram activities for which there is
                                                                                                                         both a need as well as a strong
                                                                                                                         technocratic and political ownership.
                                                                                                                         4. Capacity is built to vigorously monitor
                                                                                                                         outputs at the regional and local levels.
                                                                                                                         5. MCB, MOFED, lead agencies as well as
                                                                                                                         their regional counterparts are
                                                                                                                         appropriately strengthened with skilled
                                                                                                                         staff to support the program coordination
2. Regional PSCAP Component                  $80 million                                                                 functions required for smooth
                                                                                                                         implementation.
                                                                                                                         6. Sufficient support is leveraged through
                                                                                                                         pooling mechanism from bilateral donors
                                                                                                                         7. Coordination among pooled and non-
                                                                                                                         pooled donors continues to progress
                                                                                                                         effectively through the PSCAP Working
                                                                                                                         Group and other mechanisms.
                                                                                                                         8. Sufficient numbers of training
                                                                                                                         institutions pre-qualify and compete for
                                                                                                                         generic training contracts under PSCAP.
                                               - 55 -


                       ANNEX 2: DETAILED PROJECT DESCRIPTION

       ETHIOPIA: Public Sector Capacity Building Program Support Project

1.1 How PSCAP’s two components work

The Bank’s Support Project is fully aligned with the basic design of the Government’s PSCAP.
As such, it supports the scale-up of ongoing institutional transformation and capacity building
activities through two components—one federal, and the other regional. Activities planned under
these two components will be drawn from a menu of eligible expenditures consisting of PSCAP’s
six subprograms and a mandatory program support activity. Drawing on this menu, each
component is (i) planned based on annualized five-year drawing rights; (ii) adjusted semi-
annually and annually; and (iii) reflected in participation and performance agreements with
commitments to deliver on specific capacity building outputs.

   Component 1—Federal PSCAP: This component supports federal level activities across
    each of the six subprograms including those capacity building activities for which there are
    scale and network economies including those activities that require national level
    prototyping. The component is required to include basic program support activities to ensure
    effective implementation.

   Component 2—Regional PSCAP: This component constitutes the bulk of the Program and
    is designed to empower regions to adapt and implement national reform and capacity building
    priorities envisaged under PSCAP’s six subprograms in a manner that is efficient,
    accountable, and sustainable. Synergies and trade-offs between key subprograms will be
    fully leveraged through this component. Regions will also shift resources year-to-year and
    in-year from poor performing to higher performing subprogram activities. This component is
    also required to include basic program support activities to ensure effective implementation.

1.2 Drawing down on activity menus within PSCAP Subprograms

The objectives and specific menu of activities that fall within each subprogram of PSCAP are
explained below. Selected and planned on a annual basis, these activities provide the building
blocks for the components described above.

Subprogram 1—Civil service reform. The overall objective of the Civil Service Reform
Subprogram is to promote the development of an efficient, effective, transparent, accountable,
ethical and performance-oriented civil service at the federal, regional, and local levels. Under
this subprogram, beneficiaries draw down on support across the following seven areas:

   Strengthening the capacity of Civil Service Reform (CSR) Coordinating structures is designed
    to enable CSR coordinating structures at federal, regional and local levels to more effectively
    support target institutions in implementing reforms and performing at levels that citizens
    require of them. Specifically, the following activities are envisaged: (1) review and redesign
    of the organizational structures as well as roles and responsibilities of CSR coordinating
    structures; (2) assessment and implementation of jobs and staffing requirements for change
    management and results-oriented performance; (3) assessment, management, and
    implementation of training requirements including preparation of materials, training of
    trainers, packaging of generic training activities, and coordination of external training or
    study tours; (4) design, development, and adoption of appropriate CSR change management
                                              - 56 -


    (including M&E) and coordination systems; and (5) strengthening of Information, Education,
    and Communication activities including the provision of equipment and technical know-how.

   Improving expenditure management and control activities seek to deepen implementation of
    the Country Financial Accountability Assessment Report and Country Procurement
    Assessment Report Action Plans, strengthen Ethiopia’s public sector fiduciary framework,
    and in the process, improve the efficiency and effectiveness of public expenditure
    management through the following capacity building activities: (1) development of a
    comprehensive legal framework for public sector financial administration; (2) nation-wide
    adoption of the new budget classification systems and related budget reforms; (3) roll-out of
    the double entry accounting system; (4) development of medium-term planning systems
    including the transition from the existing Public Investment Program into a Public
    Expenditure Program or PEP system and its integration with strategic planning and
    management initiatives; (5) implementation of procurement reforms; (6) strengthening of the
    internal audit function including the introduction of systems audits; (7) modernization of cash
    and asset management; and (8) roll-out of financial management information systems.

   Improving governance of human resources management and control aims to instill ethical,
    merit- and performance-based personnel management practices in the Ethiopian civil service
    through the following capacity building activities: (1) development and implementation of the
    prototype rules, regulations, and policies for human resource development, time management,
    promotion and transfer, as well as job grading and remuneration; (2) rollout of the results-
    oriented performance evaluation system and related incentive measures; (3) development and
    installation of payroll management as well as more comprehensive human resource
    management information systems; (4) strengthening of human resources through improved
    in-service training and sensitization of civil servants of key Government policies.

   Improving performance and public service delivery is a spearhead of the overall Civil Service
    Reform Program and aims to install a performance management system across ministries,
    agencies, and bureaus (MABs) in a phased manner. Specifically, the following activities are
    envisaged: (1) assessment of performance barriers through client surveys, business process
    and functional reviews, and training assessments; (2) preparation of targeted performance
    improvement plans and more comprehensive strategic plans; (3) retooling, training,
    implementation support, and related technical assistance for implementation of performance
    improvement initiatives.

   Improving accountability and transparency activities include: (1) strengthening of external
    audit and parliamentary oversight for economic governance; (2) technical assistance for
    promotion of performance monitoring techniques including expenditure or input tracking
    surveys, cost efficiency studies, and service delivery report cards; (3) development and
    implementation of ethics management and anti-corruption policies; and (4) continuing
    support for the development of accounting and auditing professions.

   Strengthening top management systems through: (1) the development of new and improved
    strategic planning and management systems, performance measurement techniques, and
    decision-making methods to aid civil service management; (2) training of top managers in
    strategic planning, performance measurement, top management decision-making, and value
    for money management; (3) development and implementation of top management
    development systems inter alia through leadership training and preparation of handbooks.
                                               - 57 -


   Building the policy and institutional capacities of emerging regions such as Afar, Somalia,
    Benishangul-Gumuz and Gambella, through: (1) assessment of existing civil service
    institutions including identification of capacity and infrastructure constraints as well as
    performance barriers; (2) development, on a learning by doing basis, of alternative techniques
    for implementing modern civil service management practices and reforms in emerging
    regions; (3) development and implementation of basic or “hybrid” legislation, structures, and
    systems to support basic governance improvements in emerging regions.

Subprogram 2—District-level decentralization. The District-Level Decentralization
Subprogram (DLDP) seeks to deepen the devolution of power to the lower tiers of regional
government, to institutionalize decision-making processes at the grassroots level with a view to
enhancing democratic participation, to promote good governance, and to improve decentralization
service delivery. Capacity building support under the subprogram covers the following seven
areas:

   Capacity building for manning and training activities support the following technical
    assistance activities: (1) preparation of human resource plans for woredas including aggregate
    projections of staffing requirements; (2) assessment of short-term training needs for woredas;
    (3) development of modules for short-term in-service training for electorates, administrators
    and civil servants in areas such as decentralization policy and strategy, local governance and
    capacity building, democratization, grassroots participation, general management, monitoring
    and evaluation, and local level planning; (4) development of systems for provision and
    evaluation of in-service training; and (5) training of trainers in facilitation techniques to
    support training of woreda level personnel.

   Grassroots participation support activities for woredas includes technical assistance and
    training activities for (1) further development of local grassroots participation framework
    manual and related monitoring and reporting mechanisms; (2) promotion of participatory
    techniques in woredas including the involvement of NGOs, civil society institutions, and
    other donor agencies in the development process at the local level; (3) measurement of the
    impact of participatory techniques and processes.

   Capacity building for woreda institutions and organizations involves: (1) technical assistance
    for gap analysis of functional assignments and remedial actions; (2) preparation of
    restructuring guidelines based on the legal framework of the regional governments and
    sample woredas; (3) implementation support for restructuring and performance improvement.

   Capacity Building for Program Development includes technical assistance for the following:
    (1) assessment and refinement of decentralization strategies and linkages among programs &
    sectors; (2) assessment of the impact of decentralization policy; (3) conduct of policy analysis
    on capacity building and decentralization; (4) development of benchmarks and monitoring
    and evaluation system for implementation of DLDP and strengthen the capacity of DLDP
    office; and (5) evaluation of PSCAP plans of woredas for nine regional governments and
    evaluation of the overall performance of woredas for nine regional governments.

   Capacity building for woreda fiscal transfer and own revenue enhancement comprise the
    following technical assistance activities: (1) studies, development, and adoption of model
    formula and budget allocation system for region-woreda block grant; (2) studies on options
    for capital investment and sector priority setting at woreda level; (3) identification of
                                               - 58 -


    institutional constraints on and remedial measures for own revenue collection, utilization, and
    revenue sharing at the woreda level.

   Capacity building for woreda planning and financial control aims to strengthen expenditure
    management and related fiduciary aspects of woreda decentralization through: (1) the
    development and implementation of a local (Woreda) multi-year planning system and fiscal
    framework; (2) training and technical assistance for improving reporting and supervision
    practices; and (3) the development and roll out of budget consultation systems to ensure
    participatory woreda planning and budgeting. It is important to note that capacity building
    activities related to financial management such as the roll-out of budgets and accounts
    reforms will be undertaken at the woreda level under the “governance of financial resource
    management” activities envisaged under the CSRP.

   Minimum service standards for woredas will help establish minimum basic service levels in
    priority sectors inter alia through: (1) technical assistance for refinement of minimum
    standard service indicators; (2) the development of general guidelines for rural woredas; and
    (3) assessment of the implementation of minimum service levels including through
    performance benchmarking at the woreda level.

Subprogram 3—Justice system reform. The Justice System Reform Subprogram aims to
promote the rule of law as well as the efficient and effective functions of the justice system as
part of Ethiopia’s democratization and private sector development processes. This subprogram,
currently a work-in-progress, will receive Bank assistance for the following activities:

   Strengthening of the Justice Systems Reform Office will involve (1) review of the
    organizational structures as well as roles and responsibilities of Justice System Reform Office
    structures; (2) assessment and implementation of jobs and staffing requirements for change
    management and results-oriented performance; (3) assessment, management, and
    implementation of training requirements including preparation of materials, training of
    trainers, packaging of generic training activities, and coordination of external training or
    study tours; (4) design, development, and adoption of appropriate change management
    (including M&E) and coordination systems; and (5) strengthening of Information, Education,
    and Communication activities including the provision of equipment and technical know-how.

   Strengthening the judiciary comprises the following capacity building activities: (1) training
    and professional development of judges and court clerks (with a special focus on the training
    of female judges); (2) establishment of training institutes for the judiciary; (3) court
    administration reform; (4) implementation of modern case load management systems within
    federal and regional courts; and (5) identification of measures to enhance access to justice.

   Law Revision and law reform initiatives include consultancy services for: (1) technical
    analyses and studies on the establishment of systems and procedures for declaring income
    and property; (2) reviews and analyses in new areas of law; (3) publication and distribution of
    legal research materials; (4) compilation, consolidation and distribution of legislation and
    regulations; (5) studies on procedural, commercial, and stock exchange draft laws.

   Strengthening legislative processes will be achieved through (1) training, technical advisory
    services, and acquisition of equipment for staff of federal and regional standing committees
    on legislative drafting and analysis of legislative process and management; and (2) training
    for members of standing committees on principles of federal grant and intergovernmental
                                               - 59 -


    fiscal framework, monitoring and impact assessment, HIV/AIDS and gender issues,
    accountability and participation.

Subprogram 4—Urban management capacity building. The objective of the Urban
Management Reform Subprogram is to enhance the capacity of municipalities in the delivery of
services and enable urban centers to play a more effective role in social and economic
development. Three sets of activities, financed under PSCAP, are envisaged.

   Federal and regional urban management policy involves technical assistance and support for
    (1) preparation of a National Urban Development Policy; (2) preparation of a National Urban
    Land and Housing Policy and Strategy; (3) preparation of a Model Municipality Act; (4)
    establishment of the Urban Development Fund (UDF); and (5) establishment of the National
    Association of Municipalities.

   Deepening the process of decentralization covers support for (1) preparation of model
    operating manuals and prototypes on financial management, procurement and contract
    administration, solid waste management system, operations and maintenance of infrastructure
    services, archive management, organizational structure and staffing plan, personnel policies
    and incentive mechanisms, land information systems, model municipality acts, model city
    court systems, municipality revenue and inter-governmental fiscal transfer systems (including
    service charges), and urban planning systems; (2) strengthening of relevant federal and
    regional institutions to provide technical support; (3) development of efficient revenue
    mobilization and fiscal transfer mechanisms including analyses of revenue potential of
    various urban centers; and (4) establishment of regional and town planning units.

   Local government restructuring and capacity building involves technical assistance and
    implementation support for the following municipal level activities: (1) the delivery of
    sanitation services; (2) the supply of serviced of urban land; (3) restructuring of the municipal
    financial system; (4) restructuring and preparation of staffing plans; (5) introduction of land
    information systems; (6) restructuring of services delivery systems in the areas of
    procurement and contract administration, operation and management of infrastructure
    services, overall municipality service delivery system, revenue mobilization and fiscal
    transfer; and (7) provision of "bulk" generic training to regional and municipality staff.

Subprogram 5—Tax systems reform. The Tax Systems Reform Subprogram aims to encourage
capital investment and development, increase tax revenues (through improved compliance and
efficiency of collection), and ensure equity and fairness in the tax system through a
comprehensive overall of the current legislation and tax administration system. These objectives
are to be achieved through the following subprogram activities:

   Tax policy and legislation activities include technical assistance for (1) the amendment of the
    current income tax legislation by reflecting the current tax business and investment
    environment; (2) strengthening of the enforcement powers of the tax collection institutions;
    (3) simplification of tax administration procedures and practices; (4) issuance and adoption of
    proclamations, regulations & operational directives; (5) development and implementation of
    regional revenue enhancement programs; (6) development of agricultural income tax and land
    use fee proclamations and directives; (7) research and review of various proclamations that
    need to be amended; and (8) analyses of revenue potential across regions.

   Taxpayer Identification Number (TIN) system rollout activities aim to information sharing
    between FIRA, ECuA, as well as regional and city administrations in order to control tax
                                              - 60 -


    evasion, create a dependable database on taxpayers, and forge efficient and effective tax
    collection through inter alia: (1) installation of equipment at operational TIN sites; (2)
    deployment of the TIN system at the national and regional levels; (3) training in the TIN
    system of relevant staff and other users; (4) enhancement of MIS capacity including
    procurement of hardware and software; (5) development, printing and publication of
    certificates, forms and manuals; (6) public awareness campaigns for tax payer registration;
    (7) monitoring and evaluation of the implementation activities; (8) establishment of links
    between TIN system of customs and financial institutions; and (9) TIN implementation for
    new tax payers.

   Presumptive taxation implementation aims broaden the tax base through sensitization of the
    hard-to-tax group, particularly the large informal sector and taxpayers who understate their
    income, through: (1) review of the profitability rate; (2) surveys of annual turnover of
    businesses; (3) IEC and other consultations with stakeholders prior to making amendments;
    (4) development and implementation of profitability rate directive(s); (6) development of
    relevant operating manuals and training for staff and taxpayers; (7) implementation of
    standard assessments based on review of the profitability rate; (8) development and
    implementation of accounting systems for revenue transfer payments refund; and (9) review
    and implementation of the revised standard assessment scheme.

   Value-Added Tax (VAT) implementation aims to ensure the appropriate balance between
    income taxes and commodity/consumption taxes, enhance the competitiveness of the
    Ethiopian business community internationally, and promote capital investment and
    development through technical assistance and capacity building for: (1) migration from VAT
    system to the main VAT system; (2) development and implementation of coherent
    operational programs and procedures; (3) development and implementation of comprehensive
    audit and enforcement programs; (4) organization of sustained staff training, taxpayers
    education campaigns, registration and revenue collection activities; and (5) regular
    monitoring and evaluation of the implementation progress.

   Strengthening of organizational structures, operational programs, systems and procedures is
    expected to foster voluntary compliance by taxpayers and ensure fairness and equity in tax
    administration through support for: (1) the development and implementation of
    comprehensive and accurate computerized accounting systems and operations; (2) training of
    federal, regional and city administration tax officers on the usage of manuals and adoption of
    various systems and procedures (3) review and evaluation of other relevant strategies,
    systems and procedures; (4) identification of training needs and organizing training and study
    tours; (5) customization & implementation of the integrated tax system; and (6) adoption of
    an effective organizational structure with competent and skilled staff.

   Reforming and modernizing customs aims to improve the efficiency, efficacy, and
    transparency of customs services through (1) supporting the migration to an enhanced IT
    system; (2) improving the management of the tariff classification through inter alia
    establishment of a customs laboratory; (3) establishing a customs training school to develop
    the knowledge and skills required by ECuA personnel to successfully implement new
    programs and procedures; (4) strengthening enforcement to combat contraband trade and
    international criminal activities; and (5) implementing all procedures consistent with sub-
    regional, regional, and international agreements.
                                                - 61 -


Subprogram 6—Information and communications technologies. The objective of the
Information & Communications Technologies (ICT) Subprogram is to harness ICTs for the
development of human resources, democratization, service delivery, and good governance.
Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector
Reform are seeking to use of ICTs in this manner. Successful implementation of ICT-based
solutions across government will require support for the procurement of hardware and software,
establishment of enabling legislation and regulations on the procurement and utilization of ICTs,
development of human resources, content, and applications relevant to service delivery; and
promotion of community-based information systems/services. The following areas will be
addressed under this subprogram:

   ICT human resource development for e-government initiative seeks to generate a critical mass
    of ICT literate worker in government through the following activities: (1) provision of ICT
    training for civil servants at all levels of profession; (2) establishment of ICT training centers,
    where relevant and affordable; (3) development of ICT training materials in working and
    local languages; and (4) provision of technical assistance to review human resource
    requirements of rolling out Government systems and applications.

   ICT for public service delivery and good governance through technical assistance and
    capacity building for: (1) development of information systems strategies, system design
    studies, and related analyses; (2) establishment of regional information centers, where
    feasible and affordable; (3) implementation of WAN, LAN and other information systems at
    the federal and regional levels; (4) procurement of appropriate hardware and software for
    public service delivery systems; and (5) IEC and other awareness building activities.

   ICT applications for sector development in health, education, agriculture, e-government, e-
    commerce, and other priority sectors through technical assistance, procurement of equipment,
    and training to support (1) customization of common administrative applications to regional
    context; (2) development and implementation of sectoral information systems at federal and
    regional levels; (3) coordination of different sector-specific information systems.

   Community-based information systems and services that allow access to government data and
    information and enable communities to become centers of indigenous knowledge and
    contents. The latter is an important dimension of ICTs for development and a strong effort
    must therefore be made to enable ICTs to operate at grass roots level and in all walks of life.
    The empowerment of communities with information is essential to its pursuit of specific
    developmental activities. These goals are expected to be achieved through: (1) development
    of local language content; (2) repackaging of globally available information to local
    community needs; (3) establishment of multi purpose community centers; (4) broadcasting of
    information through the local media; (5) procurement and distribution of appropriate
    technology for information sharing; and (6) training of communities in ICT use.

Mandatory activity—Program support. A mandatory activity, program support is designed to
ensure speedy implementation of the six subprograms under both the federal and regional
components. It finances incremental costs associated with operating requirements of Planning and
Programming Departments or equivalents in regions, the Budget and Finance Directorate in the
MCB, and related subprogram offices that serve members of the federal and regional Technical
Teams. Support activities also include the costs of program/project coordination and planning,
training management, IEC activities, monitoring and evaluation, training of staff in program
management, auditing, office supplies, equipment operation, transport, travel, and per diems.
                                                         - 62 -



                                   ANNEX 3: ESTIMATED PROJECT COSTS

          ETHIOPIA: Public Sector Capacity Building Program Support Project


                    Program Component                             Local    Foreign   Total

 1. Federal PSCAP                                                   59.6      16.4    76.0
 2. Regional PSCAP                                                 236.5      65.4   301.9
                                           Total Baseline Cost     296.1      81.8   377.9
                                                Contingencies       15.6       4.3    19.9
 Total Project Cost                                                311.7      86.1   397.8




                  Disbursement Categories                         Local    Foreign   Total

 Goods & Equipment                                                  41.3      30.7    72.0
 Consultant Services                                               116.7      29.1   145.8
 Training                                                          133.8      26.3   160.0
 Operating Costs                                                    20.0         -    20.0
                                                         Total     311.7      86.1   397.8
Note: Figures in total may not add up due to rounding.
                               - 63 -



           ANNEX 4: COST BENEFIT ANALYSIS SUMMARY
             (Cost-Effectiveness Analysis Summary)

ETHIOPIA: Public Sector Capacity Building Program Support Project




                          Not applicable.
                                                                   - 64 -



                                            ANNEX 5: FINANCIAL SUMMARY

              ETHIOPIA: Public Sector Capacity Building Program Support Project


                                     FY04               FY05                FY06    FY07    FY08    Total

Program Costs
 Investment Costs                      22.3                 80.5            113.3   109.2    52.4   377.8
 Recurrent Costs                        1.2                  4.3              6.0     5.8     2.8    20.0
        Total                          23.5                 84.8            119.3   114.9    55.2   397.8
Financing Sources
(% of Total)
 IDA                                  42%                26%                 25%     19%     30%     25%
 Government                           58%                36%                 35%     26%     41%     35%
 CIDA                                  0%                 9%                 10%     13%      7%     10%
 SIDA                                  0%                 2%                  2%      3%      2%      2%
 Other Donors                          0%                27%                 28%     39%     20%     28%
        Total                        100%               100%                100%    100%    100%    100%
    Note: Figures in total may not add up due to rounding
                                                  - 65 -



          ANNEX 5A: FINANCIAL MANAGEMENT ASSESSMENT TECHNICAL ANNEX1

         ETHIOPIA: Public Sector Capacity Building Program Support Project

Introduction

The financial management assessment was undertaken in line with the guidelines issued by the FM
Board on June 30, 2001 and revised on October 1, 2003. The assessment sought to determine whether
the Executing Agencies (EAs) identified under PSCAP have acceptable financial management
arrangements in order to ensure that (1) Support Project funds are used only for the intended
purposes in an efficient and economical way, (2) the preparation of accurate, reliable and timely
periodic financial reports and (3) safeguard the entities’ assets. The FM assessment of the Ministries
of Finance and Economic Development (MOFED), Capacity Building (MCB), Federal Affairs
(MFA), and Revenue (MOR), as well as sample of regional Bureaus of Finance and Economic
Development (BOFEDs) and Capacity Building (BCB) was undertaken in December 2003. The
Ethiopia Country Financial Accountability Assessment (CFAA) was carried out jointly by the
Government, Bank and donors, issued on June 17, 2003.

Country Issues

According to the 2003 CFAA, considerable progress has been made in the budgeting process, yet
several aspects of ongoing expenditure management reforms including medium-term planning,
budgeting, accounting, reporting, and auditing remain works-in-progress. A CFAA action plan
identified key commitments as well as sequenced capacity building activities necessary to adequately
address fiduciary risks within Ethiopia’s public finance system. Most of the activities in the action
plan will be covered under the existing public financial management reform agenda currently under
implementation with the assistance from donors.

The Bank is currently providing significant financial assistance to the Education and Health Sector
Development Programs (SDPs) through SWAP modalities (without pooling). PSCAP replicates
certain key design features of these SDPs including formula-based allocations, flow of funds through
the Channel 1 modality, and similar reporting arrangements between the federal and regional levels.
PSCAP also involves additional features such as delegation of financial management and
procurement responsibilities across several federal institutions as well as pooling for donor funds. A
noteworthy lesson from the SDP experience is the need for MOFED to address early on possible
delays in obtaining regular reports from the regions in order to ensure timely replenishment of the
SA. In addition, MOFED should anticipate potential delays in submission of audit reports as a result
of delay in financial reporting from the regions.

Risk Analysis

PSCAP will be implemented by several EAs with varying degree of implementation capacity. The
major financial management risk to the Program is the likelihood that MOFED would not receive
timely reports in order to process replenishments of the SA and close the annual accounts. In order to
address this risk, MOFED, MCB, the various federal EAs, as well as regional BOFEDs and BCBs
involved in execution of Program will recruit and appropriately assign additional civil service staff,
and where necessary consultants. In addition, MOFED will prepare short and concise guidelines on

1
  A detailed Financial Management Assessment Report that was prepared by financial management specialists
from the World Bank (February 4, 2004).
                                                          - 66 -


recording and reporting as part of the PIP, provide extensive training on the guidelines, and take the
necessary remedial actions to address potential reporting delays early in the implementation cycle.

SUMMARY RISK ASSESSMENT

Project: Public Sector Capacity Building Program Support Project            Date: February 4, 2004

                                                  Risk Assessment
                                                 H    S    M    N   Risk Mitigating Measures
Inherent Risk
Lack of trained manpower in the area of                             In the short-run, contract in skilled personnel in
accounting and auditing                                             these priority areas. In the long-run, the CSRP
                                                                   intends to develop incentive measures in line
                                                                    with the Results Oriented Performance
                                                                    Evaluation System.
Lack of clarity on professional standards for                       Strengthening of standards and the profession is
                                                             
accounting and auditing                                             one area of focus of CSRP.
The governance structure of the Program is                          The Government has designated MOFED with
not clearly defined, especially the                                 the financial management responsibilities for
relationship between MOFED and MCB                                  PSCAP and have established a “super ministry”
                                                                   coordination structure around MCB to ensure
                                                                    close coordination of other key cabinet
                                                                    ministries.
Program activities spread over all the regions                      The PPDs, BFD, and finance institutions such as
and federal line ministries                                        MOFED and BOFEDs at all levels will recruit
                                                                    adequate and trained staff
                      Overall Inherent Risk           
Control Risk
1. Executing Agencies                                               Government has designated the overall financial
PSCAP executing agencies are many and in                            management responsibility to MOFED and the
some cases the roles and responsibilities of                       overall coordination to PPDs in MCB and
each of them are not clear defined                                  BCBs. This is reflected in the PIP.
2. Funds Flow                                                       Regular field visits by MOFED, MCB and
Funds flow up to the regional levels                               World Bank mission.
3. Staffing                                                         Contract in local expertise as consultants at
Lack of trained manpower and low salary                            market rates.
scale
4. Accounting Policies and Procedures                               The guidelines to be designed will be concise
The financial management guidelines has not                        and clear to accommodate the needs of the
yet been finalized                                                  Program
5. Internal Audit                                                   The government should take initiatives to
There is a duplication of work between the                          consolidate the work of internal audit and
internal audit department of each executing                        inspection
agency and the inspection department of
MOFED and BOFEDs
6. External Audit                                                   Government has designated the overall financial
Low capacity in the auditing profession                             management responsibility to MOFED and the
                                                                   overall coordination to PPDs in MCB and
                                                                    BCBs. This is reflected in the PIP.
7. Reporting and Monitoring                                         Regular field visits by MOFED, MCB and
Non-regular reporting from lower levels,                           World Bank mission.
which are not complete and relevant
                     Overall Control Risk             
H = High, S = Substantial, M = Moderate, N = Negligible or Low
                                                     - 67 -


Strengths and Weaknesses

The country’s discipline in executing budget and compliance with the existing government
regulations is the major strength in executing this Program. MOFED and BOFEDs have good internal
control system, including regular post audit by the inspection departments at both MOFED and
BOFEDs. All the executing agencies at the federal level and five larger regions are using the new
chart of accounts based on modified cash basis of accounting. All the executing agencies involved in
processing most of the Program’s financial transactions are strictly following-up the budgetary
discipline and regular government reporting mechanism. Despite all the strengths, there are some
weaknesses in implementing the Program. These are as follows:

Significant Weaknesses                                Resolutions
Lack of trained manpower in the area of financial     Address incentive framework and career paths for
management and high turnover of staff                 financial management personnel in the civil service, and
                                                      strengthen the accounting and auditing professions, both
                                                      of which are supported under the CSRP
The Program is implemented by various agencies        Strengthen the monitoring capacity at the federal and
                                                      regional level and regular supervision by the Bank
Auditing the Program financial statements may take    Agree with the selected auditors on the timetable to
time to complete as the executing agencies are        complete the audit well in advance and the MOFED
various and dispersed all over the country            should close the accounts immediately after the end of
                                                      the fiscal year.
Regular financial reports may not be received on      Design a system of monitoring to ensure that transfer of
time from regions                                     funds is based on the receipt of regular financial reports

Executing Agencies

PSCAP will follow a Sector-Wide Approach and will be implemented by various sector ministries
and regional bureaus. The sector ministries include MOFED, MCB, MFA, Ministry of Revenue,
ICTAD, Federal Supreme Court and all the eleven regional BOFEDs and Bureaus of Capacity
Building. MOFED will be responsible for the transfer of money and compiling all the financial
reports, including annual financial statements and the external audit requirements. MCB, through its
Planning and Programming Department, is responsible for overall co-ordination, monitoring all the
activities of the Program and report compilations. The Ministry’s BFD will be responsible for the
overall procurement monitoring as well as procurement of ICB.

At MOFED, the Counterpart Funds Unit (CFU) will be responsible for the management of the SAs in
US Dollars and the pooled Birr account. Based on the approved work plan, CFU will transfer money
to BOFEDs and line ministries. The CFU will collect all the statements of expenditures from all
regional BOFEDs and line ministries and submit requests for each donor for the replenishment of the
SAs. The Central Accounts Department (CAD) at MOFED will be responsible for regular financial
reports and the annual audit of the Program accounts. Each BOFED will establish one Birr account
for the implementation of PSCAP activities under the “Regional Program” and make payments as per
the instruction of BCBs. BOFEDs will be responsible for the recording and reporting of the financial
transactions of the Program to MOFED monthly.

Funds flow

For each donor, including IDA, MOFED will open one special account in US Dollars at the National
Bank of Ethiopia. In addition, MOFED will open one Birr account for which money from the SAs
                                                  - 68 -


and the government contribution will be deposited. The Birr account will serve as a consolidated fund
for all donors and the government. MOFED will be responsible for the day-to-day management of the
SAs and the pooled Birr account.

The first installment from IDA will be deposited in the Special US Dollar Account opened at NBE.
MOFED manages the flow of funds between the SA in US Dollars and the pooled Birr account,
based on projections for payments of goods and services expected to be procured locally or
internationally. MOFED can draw from the US Dollar SA to the pooled Birr account as required.

Federal EAs and regions, through the BOFEDs, are required to formally submit requests for budget
transfers, financial reports, and Statements of Expenditures (SOEs) justifying the use of funds
previously received from MOFED. Budget transfers requests and SOEs are sent to the CFU and
financial reports to CAD in MOFED. SOEs record amounts and purposes of expenditures incurred
from the advanced funds. On receipt of the SOEs from EAs, CFU sends an application for withdrawal
to IDA and other donors for the replenishment of the SA. The SA is replenished by an amount
equivalent to the total of SOE.

Staffing

The staffing level at each of the executing agencies varies in number and quality. For example, the
CAD has 29 staff, out of which 7 are degree holders and the others have diploma from various
colleges. The CFU at MOFED has 2 staff, of which 1 is a degree holder. The Addis Ababa BOFED
has 17 staff, out of which 5 are degree holders and the others are diploma holders from various
colleges. The SNNPR BCB has 10 staff (3 degree holder and 7 diploma holders) serving in a pool.
The pool serves the BCB and regional health bureau.

BCBs receive accounting services from an administrative pool, which supports more than two
institutions. Some of the BCB is intending to recruit contractual staff to look after the accounting task
of the Program. MOFED and BOFEDs also need additional staff to discharge their responsibilities
properly. In general, MOFED, BOFEDs and BCBs do not have sufficient staff in place to handle
both the government and donor financial transactions. As agreed during appraisal and subsequent
negotiations of the Program, required recruitment of key staff has been initiated and will be
incorporated into the first year procurement plans.

Budgeting and planning

According to the Government of Ethiopia’s Chart of Accounts, PSCAP will be proclaimed annually
as a Program under the MCB, which is designated as a public body. Allocations to federal executing
agencies (for example, Urban Management Capacity Building Program, or ICT) and regions (for
example, Tigray National Regional State or Oromiya National Regional State) will be classified and
proclaimed as “subprograms” under PSCAP in the federal budget in order to allow for mid-year and
annual reallocations. As such, resources leveraged by regions from PSCAP will be fully additional to
their subsidy and therefore, not offset in general purpose transfers. Each federal and regional EA will
prepare a consolidated PSCAP annual plan for each budget year and following various technical
reviews (discussed in annex 9), MCB shall propose the approved elements of the plan as part of the
annual budget proposal. Following Cabinet approval and the subsequent appropriations process,
MOFED will transfer the resources to the federal EAs (designated above) and BOFEDs.
                                                 - 69 -


Accounting policies and procedures

Starting from July 2002, the Government has introduced a double entry modified cash basis of
accounting. The new accounting reform has been introduced at the federal level and to five regions,
namely, Amhara, Oromiya, Addis Ababa, Tigray and SNNPR. These regions and federal line
ministries are using a computerized Budget Disbursement and Accounting System (BDA) to some
extent. The other regions are using a manual system of accounting based on single entry.

The main elements of the accounting reform are the adoption of (i) a revised and comprehensive chart
of accounts consistent with the reformed budget classification, (ii) a system of ledgers
accommodating all types of accounts (including transfers, current assets and liabilities, and fund
balance in addition to revenues and expenditures), (iii) double entry book-keeping (thus, self-
balancing set of accounts), (iv) a system of control of budgetary commitments (recording
commitments as well as actual payments), (v) modified cash basis transaction accounting and (vi)
revised monthly report formats to accommodate double-entry book-keeping and commitment control
and permit better cash control.

The computerized BDA system enables public bodies to produce financial reports much more easily.
In the meantime, accounting and financial reporting are performed manually in most jurisdictions.
Massive capacity building would be required in order to accelerate the rollout of the BDA system.
This would need to include support to clearing accounts backlog, equipment and customization of
software, training of staff, etc.

The new chart of accounts is capable of recording the financial transactions and producing the
required regular reports for PSCAP. However, MOFED needs to prepare concise guidelines on how
to record transactions and report the results because (1) all regions are currently not using the same
chart of accounts and accounting system, (2) the chart of accounts do not include account nos. for
PSCAP activities, and (3) the specific reporting formats for the program (therefore, the Bank’s
Support Project) need to be clearly mentioned.

All the source documents will be kept at the regional BCBs/BOFEDs and federal EAs where the
transactions took place. BCBs/BOFEDs and all federal EAs will report to MOFED on regular basis.
MOFED will develop the reporting formats before effectiveness of the Program.

Internal audit

MOFED and BOFEDs have an inspection department performing post audit activities on assessing
whether the budget utilization is in line with the intended purposes. The staff of the inspection
department varies from region to region. Each of the EAs has an internal audit department, which
performs post audit activities on all the financial transactions of the entity. The recent CFAA report
for the Ethiopia recommended that the government should consolidate the organizational structure,
redefine the role and responsibilities of the internal audit function to better address the need of the
government. The Expenditure Management and Control activities (EMCP) under the Civil Service
Reform Program is currently working in improving the internal audit function. It is envisaged that
the Inspection Departments at MOFED and BOFEDs and the Internal Audit Section of each EA will
perform post-audit activities on the financial transactions of PSCAP.

External audit

According to the Ethiopian Constitution, the Office of Federal Auditor General (OFAG) is
responsible to carry out the audit of all the financial transactions of the federal government and
                                                        - 70 -


subsidies to the regions. Each of the regions has regional Auditor General responsible for auditing
financial transactions in the region. The OFAG usually delegates its responsibility mostly to the
Audit Services Corporations, the government owned audit firm, and in some cases to private audit
firms to carry out the audit of donor-financed projects. For the Bank’s PSCAP Support Project,
OFAG will assign an external auditor acceptable to IDA.

MOFED is currently the main body responsible for closing the accounts and getting the audit reports
for two sector programs, ESDP and HSDP. MOFED’s experience-to-date with these programs
suggests that periodic delays in the submission of audit reports were caused primarily by accounts
backlogs within regions. In order to improve the reporting system for PSCAP, the capacity at all
levels should be strengthened by adding additional staff and providing regular training by MOFED on
recording and reporting.

According to the new audit policy of IDA, MOFED will prepare a consolidated Program accounts,
which include all the sources from pooled donors and the government and related Program
expenditure and the auditors will express a single opinion on the consolidate Program accounts.
Considering the nature of the Program, the audit reports should be submitted to IDA nine months
after the end of each fiscal year, which ends on July 7 of each year.

Reporting and monitoring

Federal and regional EAs are responsible for reporting the uses of funds transferred from MOFED.
MOFED requires monthly reports from all EAs participating in the implementation of the Program,
but from the practical point of view quarterly reports are highly recommended. MOFED will develop
short guidelines on reporting.

The Bank requires quarterly Financial Monitoring Reports (FMRs) to be submitted 45 days after the
end of each quarter. The FMRs includes financial, procurement and physical reports. Considering the
nature of the Program, IDA agreed to receive FMRs on a semi-annual basis, to be received 45 days
after the end of each six months. MOFED will be responsible for the financial sections and MCB for
the other two sections of the FMR. MCB after receiving the financial reports from MOFED will
submit the whole FMR to IDA. A format for the FMR was agreed during the negotiation.

Action plan

      Action to be taken                                 Expected completion date   Responsible body
1     Preparation of a short guideline on recording
      and reporting of financial transactions as part    Before effectiveness       Borrower
      of the PIP.
2     Organize workshop(s) for finance staff at all
      levels to familiarize them with the flow of
                                                         Before effectiveness       Borrower
      funds, recording and reporting requirements
      of PSCAP
3     Incorporation of initiatives to strengthen the
      financial management capabilities of EAs           Before effectiveness       Borrower
      into the final procurement plan
4     Opening of bank accounts at the national and
                                                         Before effectiveness       Borrower
      regional levels
                                               - 71 -


Supervision plan

Implementation of PSCAP is highly decentralized, involving all the regions and five federal
ministries/authority, and envisages the utilization of IDA support equivalent of US$100 million over
a five-year period. The supervision requirements of the Support Project will be intensive and should
include at least two supervision missions per year, along with the agreed quarterly meetings of the
Donor PSCAP Working Group with the Government on progress. Each supervision mission should
include visits to the regions to verify that funds are being used for their intended purposes.
                                                 - 72 -



                ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS

             ETHIOPIA: Public Sector Capacity Building Program Support Project

General

Procurement at the federal level is regulated by (a) the Financial Proclamation No. 57/1996 which
constitutes the Procurement Law, (b) the Financial Regulations No. 17/1997 issued by the Council of
Ministers, and (c) the Ministry of Finance Directives – procurement and contracts, issued in 1997 and
revised in 1999. Two Country Procurement Assessment Reviews (CPARs) were carried out in 1998
and 2002. The reviews include detailed diagnosis of the current procurement system, its strengths,
weaknesses and an action plan to address the weaknesses. The main weakness identified were (i) lack
of an oversight body for policy and monitoring, (ii) weak procurement procedures, (iii) lack of a legal
and regulatory framework, and (iv) lack of adequate procurement capacity.

The main recommendations and action plan of the CPAR include (i) enactment of a procurement law,
(ii) establishment of a regulatory body, (iii) development of procurement directives, (iv) preparation
of standard bidding documents, manuals and guidelines, and (v) implementation of a comprehensive
capacity building (including training) strategy. The Government has accepted the recommendations
of the CPAR and has established a taskforce to lead the procurement reform process. As part of the
procurement reform program the Government has drafted a new procurement code that is expected to
be enacted by July 2004. The code provides for the establishment of an independent regulatory body
and the Government plans to fully decentralize procurement functions to civil service institutions at
the federal level staring from the middle of 2004.

The directives issued by the MOFED have been adopted by regions without major changes and are
applicable for procurements done at the regional level. The directives provide waivers for
procurement financed by donors or lending institution, and the procurement follows the guidelines
and procedures of the donor or lending institution, if indicated in the financing agreement and the
financier wants to exercise its right.

Use of Bank Guidelines and Standard Bidding Documents

All goods financed under the Support Project would be procured in accordance with the Guidelines:
Procurement under IBRD Loans and IDA Credits of January 1995, lastly revised in January 1999.
Bank Standard Bidding Documents for Goods, the Standard Pre-Qualification Document (if
applicable) and the Standard Evaluation Forms shall be used.

Consultants will be selected in accordance with the Guidelines: Selection and Employment of
Consultants by World Bank Borrower of January 1997 lastly revised in May 2002. IDA’s Standard
Request for Proposals (SRFP), the Forms of Contracts as needed (lump sum, time based, and/or
simplified contracts for short-term assignments and individual consultants) as well as the Sample
Form of Evaluation Report for Selection of Consultants shall be used for all consulting assignments.

The Government is planning to develop new standard bidding documents for the procurement of
goods, works and services. The National Bidding documents, when developed, can be used for
national competitive bidding after verification by the Bank that the countries laws and procedures are
acceptable. In order to be acceptable the national procedures should ensure that (i) bids will be
advertised in national newspaper(s) with wide circulation; (ii) the bid documents clearly explains the
bid evaluation and award criteria; (iii) bidders are given adequate response time (minimum four
                                                 - 73 -


weeks) to prepare and submit bids; (iv) bids are awarded to the lowest evaluated bidder; (v) foreign
bidders are not to be precluded from participation in NCB; and (vi) no domestic preference margins
are applicable to domestic manufacturers and suppliers.

Advertising. The GPN was issued on March 6, 2004 in the United Nations Development Business
(UNDB) and Development Gateway, listing the Program Components and goods, training, and
consulting services for which specific contracts will be advertised. The Borrower will keep a roster of
the responses received from potential bidders interested in participating in bidding for contracts.

It is not anticipated that there would be any contract with estimated value exceeding US$10 million.
Specific Procurement Notices (SPN) will be published in at least one national newspaper of wide
circulation for contracts to be procured under ICB and NCB procedures and for consultant contracts
with an estimated cost of US$100,000 or more to obtain expressions of interest (EOI) prior to the
preparation of the shortlist. The Borrower is encouraged, in addition to national advertising, to
advertise also in UNDB and DG-Market, in order to get the broadest interest possible from potential
bidders. The Borrower may, advertise on the online version of the UNDB and the Development
Gateway to save time. The date of advertisement of a specific contract should coincide with the date
that the bidding documents are available for purchase by interested bidders. Sufficient time would be
allowed (not less than 30 days) for NCB and not less than 45 days for ICB contracts.

Consultant contracts estimated to cost US$200,000 or more would be advertised on the online version
of Development Business or DG-Market and in an International or Technical Newspaper, in order to
seek “Expressions of Interest”. The Borrower will send a copy of this advertisement to those firms
that have responded to the expressions of interest for consulting contracts listed in the GPN. The
Borrower will wait at least two weeks after the advertisement has appeared requesting expressions of
interest, before preparing the short list.

Procurement capacity

The Country Procurement Assessment Report (CPAR) done in 1998 and updated in 2002 has
identified procurement capacity as one of the major weaknesses in public sector procurement. The
procurement capacity assessments undertaken for the Program also confirm these findings. The
assessments also concluded that the procurement risk was high at the regional and federal levels.

The Ministry of Capacity Building (MCB) has a procurement unit under the BFD that was
established recently during the implementation of the CBDSD Project. This unit would play a major
role of coordinating procurement activities of the Program. However, the unit’s performance has not
been very satisfactory. The regional BCBs generally use a pool service for conducting procurement
that is comprised of members from different bureaus. The procurement handled by the regional
procurement pool services is mostly limited to small value procurement for internal use of the offices
and no international procurement has so far been done by the regions. Some regions have however
members from the regional health and education bureaus that have some experience in international
and World Bank procurement procedures.

The following six constraints were identified during the capacity assessment done of the EAs. First,
the number of procurement staff in each EA is not adequate and a majority of the staff have not
participated in procurement training programs. Second, there is lack or very limited experience at
regional level especially in selection of consultants and international procurement. Third, the
procurement unit at MCB and the pool system organizational setup of the regional Procurement Units
is not adequate for handling the large volume of procurement anticipated under the PSCAP. Fourth,
                                                   - 74 -


the procurement records management systems are not adequately organized. Fifth, there is no
national and standard documents available for procurement of goods, and consulting services.
Finally, some national procedures, especially on the procurement of works are not acceptable.

In order to build capacity, one international consultant and two additional national procurement
specialists with adequate qualification and experience would be recruited to the BFD to assist in the
management of the procurement functions and building procurement capacity. The advertisements for
these consulting posts were issued prior to negotiation. The international consultant and two local
procurement consultants shall be employed prior to effectiveness. The former shall be responsible
for providing technical assistance and training in the management of procurement activities at federal
level and regional bureaus, and for mentoring national procurement staff.

A comprehensive and intensive procurement training program would be conducted for procurement
staff in each of the EAs for all staff that have not already participated in such type of training. At least
two staff from each EA that is involved in the preparation of bidding documents, and evaluation of
bids would participate in the training program. The training should cover all aspects of procurement
and focus on the identified weak areas such as: procurement planning and monitoring, selection of
consultants, preparation of tender documents, and evaluation of bids. The training program could
include specialized training for selected staff at management training institutes in Africa such as
ESAMI, GIMPA etc. The first round of training would be conducted prior to effectiveness. An
orientation workshops would be conducted to staff in the EAs that are involved in the procurement
decision-making process including tender committee members, department heads, bureau heads with
the assistance of the international consultant during Program launch.

The number and qualification of the procurement staff in each EA shall be reviewed and additional
staff shall be employed or assigned where shortages are identified. Each EA shall have a separate
desk for procurement with at least two qualified staff with adequate training in procurement. Prior to
the commencement of any procurement function, relevant EAs including the BFD in MCB should
submit participation agreements that confirm satisfactory compliance with eligibility criteria
including establishment of prescribed institutional arrangements; delineation of service standards for
procurement and financial management; confirmation that staff involved in procurement have
received necessary training, and national and international consultants involved in procurement are
both qualified and appropriately tasked to carry out PSCAP related activities.

Procurement planning

Five-year drawing rights have been assigned to each EA and annualized in order to establish the first
year’s budget envelope. Five-year PSCAP Action Plans prepared by federal EAs and regions are
being revised within the medium-term resource envelopes. Furthermore, a draft consolidated
procurement plan including all budgeted items for twelve months has been prepared prior to
negotiations. The draft is being further revised to reflect the period for the implementation of the full
procurement cycle for all the items including those that may last eighteen months or more, and will
be further refined and finalized well in advance of effectiveness. It is noted that this rolling
procurement plan and the five-year Action Plan are to be regularly revised in line with the in-year and
annual reallocation arrangements envisaged under this performance-oriented program. A draft
Program Implementation Plan (PIP) incorporating operational guidelines has been prepared, and will
be finalized as a condition for effectiveness.
                                                - 75 -


Procurement implementation arrangements

In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for
procurement management at the federal and regional level. Specifically, the BFD at MCB shall be
responsible for monitoring all procurement activities, and also reviewing and consolidating
procurement plans received from other executing agencies. In addition, the BFD is responsible for
handling all ICB procurement of goods under the Program. National procurement of goods and
selection of consultants would be handled as follows:

   Procurement for the three programs under MCB (CSRP except expenditure management and
    control activities, JSRP except strengthening of the judiciary, and DLDP) will be handled by
    MCB procurement unit from preparation of bidding documents and RFPs, until award of
    contract. The contracts for procurement of goods would be signed by MCB. The contracts for the
    selection of consultants may be signed by MCB or the respective program directors as required.
    The program offices would actively participate in the preparation of specifications and terms of
    references and technical evaluation of bids and proposal.

   Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT,
    expenditure management and control activities under the CSRP, and strengthening of the
    judiciary activities under the JSRP activities at federal level will be carried by the Ministry of
    Revenues, UDCBO within MFA, Information and Communication Technology Development
    Authority (ICTDA), a designated office in MOFED, and the Federal Supreme Court respectively.

   BCBs are responsible for handling all procurement activities, except ICB procurement of goods,
    within the respective regions and city administrations (i.e., Addis Ababa and Dire Dawa).
    Relevant lead institutions in each region would participate in the preparation of procurement
    plans, specifications, Terms of Reference, and technical evaluations of bids and proposals.

   MFA is tasked with providing additional support for emerging regions (Afar, Somalia,
    Benishangul-Gumuz and Gambella) in the management of procurement as required.

It is anticipated that procurement arrangements will evolve as capacity increases. Regional proposals
for building up their procurement capability and for changes in procurement arrangements will be
regularly reviewed semi-annually by IDA and donors.

Procurement methods (Table A)

Goods

The program will finance office and field equipment, and supplies. To the extent possible and
practicable, goods and equipment to be purchased under the program would be combined into
packages worth at least US$150,000. Packages estimated to cost the equivalent of US$150,000 or
more would be procured under ICB procedures using Bank’s Standard Bidding Documents. Goods
that can not be packaged and procured efficiently using ICB procedures will as much as possible be
packaged in sizable contracts to be awarded on the bases of NCB procedures. Contracts estimated to
cost less than US$150,000 equivalent would be procured using NCB. Procurement for readily
available off-the-shelf goods that cannot be grouped together estimated to cost less than US$50,000
equivalent would be procured on the basis of Shopping Procedures. Solicitations for National and
International Shopping will (a) be issued in writing to at least three reputable suppliers (it may be
better to approach five or six suppliers because not all three suppliers may respond, so that at least
three competitive quotations are received.), (b) include specifications, and if goods are not
                                                 - 76 -


immediately available, the delivery time, (c) give the estimated cost, including cost of inland
transportation and insurance, (d) be opened at the same time for evaluation (to avoid abuse), and (e)
in the case of International Shopping quotations, be solicited from at least three suppliers from two
different countries. Alternatively such goods may also be procured from UN Agencies (Inter-Agency
Procurement Services Office or IAPSO) provided each individual contract does not exceed
US$100,000.

Services

Consulting services shall include development of legal frameworks and policies; training needs
assessments for strengthening human resource and financial management skills; studies in
organizational structures and functional assignments in rural districts and municipalities;
development of guidelines and manuals for new systems for improved service delivery, law reform;
development of WAN/LAN and other management information systems.

As a general rule, consultant services will be selected through the Quality and Cost Based Selection
(QCBS) method. For contracts estimated to cost less than the equivalent of US$200,000 per contract,
the shortlist may be made up entirely of national consultants in accordance with section 2.7 of the
guidelines, provided that foreign consultants who wish to participate are not excluded from
consideration. Indefinite Delivery Contract (IDC) procured by using QCBS method may be used for
large contracts involving technical assistance taking into consideration the capacity limitation of
regional offices. Consultant for complex and highly specialized assignments with high downstream
impact and assignments that can be carried out in substantially different ways may be procured under
contracts awarded using Quality Based Selection in accordance with the provisions of clause 3.2 of
the Consultant Guidelines. Services for audit and other similar services estimated to cost less than US
100,000 equivalent per contract may be procured under contracts awarded using least-cost selection
method in accordance with the provisions of clauses 3.1 and 3.6 of the Consultant Guidelines.
Consulting assignments costing less than US$100,000 may be procured by using Selection Based on
Consultants Qualifications (SBCQ) by comparing the qualification of consultants who have
expressed an interest in the job or who have been identified. Individual consultants will be selected in
accordance with Section V of the Guidelines. Services for tasks that meet the requirements of
paragraphs 3.8 to 3:11 of the consultant’ Guidelines may be awarded using the Single Source
Selection method. Services for which a team of Consultants are not required and meet all the
requirements set forth in paragraph 5.01 of the Consultant Guidelines shall be procured under
contracts awarded to individual consultant in accordance with the provisions of paragraphs 5.1
through 5.3 of the Consultants Guidelines.

Training shall include human resource development in the areas of financial and human resources
management; justice system, tax system; information and communication technology; and urban
management. Selection of training institutes for workshops/training for which the quality of training
is of critical importance and the training can be carried out in substantially different ways, the
selection may be based on a competitive process using Quality Based Selection (QBS) method. For
standard programs for which detailed course contents can be adequately defined in advance Quality
and Cost Based Selection (QCBS) may be used.

Prior review thresholds (Table B)

All goods contracts estimated to cost US$150,000 or more and the first contract under NCB will be
subject to IDA review of bidding documents prior to inviting for bids and bid evaluation reports prior
to contract award.
                                                           - 77 -


Single source selection irrespective of value will be subject to IDA prior review. Consultancy
contracts with firms with estimated value of US$100,000 or more, and consultancy contracts with
individuals estimated to cost US$50,000 or more and the first contract will be subject to prior review
by the Bank in accordance with the procedures in Appendix I of the Consultants Guidelines.

Contracts not subject to prior review will be selectively reviewed by the Bank during program
implementation and will be governed by the procedures set forth in paragraph 4 of Appendix I to the
relevant Guidelines.



                                     Procurement Methods (Table A)
                          Table A: Program Costs by Procurement Arrangement
                                        (US$ million equivalent)2

                                                                  Procurement Method
       Expenditure Category                                                                                        Total
                                                     ICB           NCB        NS/IS               Others3

                                                       30.7            28.0           13.3                0          72.0
       Goods & Equipment                             (11.7)           (3.6)           (2.7)               0        (18.0)
                                                          0               0               0         145.8          145.8
       Consultant Services
                                                          0               0               0         (37.0)        (37.0)
                                                          0               0               0         160.0          160.0
       Training
                                                          0               0               0         (40.0)        (40.0)
                                                          0               0               0           20.0           20.0
       Operating Costs
                                                          0               0               0          (5.0)          (5.0)
                   Total Program Cost                  30.7            28.0           13.3          325.8          397.8
       Funded by IDA’s Support Project               (11.7)           (3.6)           (2.7)         (82.0)       (100.0)




2
 Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies
3
 Includes goods to be procured through national shopping, consulting services, services of contracted staff of the project
management office, training, technical assistance services, and incremental operating costs related to managing the project.
                                                        - 78 -


                        Annex 6, Table A2: Consultants Selection Arrangements
                                       (US$ million equivalent)
                                                                                                     Grand
                             CQ               QCBS                QBS                IC
                                                                                                     Total

   A. Firms                  20.0               88.8                10.4              -               119.2
                            (5.6)             (22.2)              (2.6)               -               (30.3)


   B. Individuals             -                  -                   -              26.6              26.6
                              -                  -                   -              (6.7)             (6.7)


   Total                     20.0               88.8                10.4            26.6              145.8
                            (5.6)            (22.2)             (2.6)              (6.7)             (37.0)
  Note: QCBS = Quality- and Cost-Based Selection; CQ = Selection based on Consultant’s Qualifications;
  FB = Fixed Budget Selection; SS = Single Source Selection; QBS = Quality Based Selection.
  Figures in parentheses are the amounts to be financed by the Bank Credit
  1/
     Including contingencies
  2/
     Since the Program envisaged in-year and annual reallocations of resources across EAs, figures in the table
  represent an estimate of methods to be utilized for procurement during the Program period, based on a review
  of federal and regional rolling five-year Action Plans as well as activities planned for the first year.



                  Table B: Thresholds for Procurement Methods and Prior Review (US$)

                                 Contract Value             Procurement            Contracts subject to Prior
Expenditure Category
                                    Threshold                 Method                          Review
Goods                        Greater than 150,000         ICB                     All
                             Less than 150,000            NCB                     First contract for each
                                                                                  Executing agency
                             Less than 50,000             NS / IS                 None
                             Less than 100,000            IAPSO                   None
Consultants                                                                       First contract for each
                                                                                  Executing Agency
           Firm              Greater than 100,000         QCBS, QBS, LCS          All
                             Less than 100,000            QBS, CQ, LCS            Post Review
                                                          SSS                     All contract
           Individual        Greater than 50,000          IC                      All contracts
                             Less than 50,000             IC                      Post review
Note: ICB – International Competitive bidding; NCB – National Competitive bidding; NS/IS – National Shopping /
International Shopping; QBS – Quality Based Selection; LCS – Least Cost Selection



      Overall Procurement Risk Assessment:                 High
      Frequency of procurement supervision                 Once every six months
                        missions proposed:                 (includes special procurement supervision for
                                                           post-review/audits)
                                                          - 79 -


                              Table C: Allocation of Credit Proceeds
                 Expenditure Category Amount in US$ million Financing Percentage

                                                     Amount
           Expenditure Category                                                  Financing Percentage
                                                   (US$ million)

1. Pooled Funds

  Expenditure financed under Subprogram
  activities, including goods, consultant                              Such percentage of Pooled Fund
  services, training and operating costs, for:                         expenditures as the Association may
                                                                       determine for each Fiscal Year
    (a) Federal Program                                 13.22
    (b) Regional Program                                54.91

2. Non-Pooled Funds


  Expenditure financed under Subprogram
  activities, including goods, consultant
  services, training and operating costs, for:                         100% of foreign expenditures and
                                                                       85% of local expenditures
    (a) Federal Program                                   6.48
    (b) Regional Program                                25.09

                                                                       Amounts due pursuant to Section 2.02
3. Refunding of the PPF                                   0.30
                                                                       (c) of the DCA
                     Total                              100.0
(1) Goods - the amounts shown here include all ICB procurement across PSCAP (Federal & Regional);
(2) Consultants - the amount shown includes the estimated cost of procurement of international consultants (Federal
& Regional Programs)
(3) Training - the amount represents federal training activities.
(4) Programs - the amount represents estimated costs of goods & consultants to be procured locally and all training
activities at the regional level.
(5) Operating Cost - the amount represents the recurrent cost estimate.
(6) Unallocated - the amount represents the 12% contingency across all categories to meet any unforeseen price and
physical variations & exchange rate fluctuations during the implementation of the program.




DISBURSEMENT ARRANGEMENTS

The closing date of the proposed Credit will be July 7, 2009 The proposed IDA credit would be
disbursed against the categories shown in Table C in Annex 6. Disbursements will be made in
accordance with procedures and policies outlined in the Bank's Disbursement Handbook.

The Support Project will utilize the traditional disbursement method for disbursing IDA funds from
the Non-Pooled Funds category, that is, based on SA, SOE procedures and direct payment procedures
(see Uses of Statement of Expenditures below). As a basis for disbursing IDA funds from the Pooled
Funds category, the Borrower, the Bank, and relevant pooled donors (or cooperating partners) will
                                                  - 80 -


need to (i) execute an MOU as well as annual Side Agreements governing the proportion of
expenditures to be replenished by respective cooperating partners, and (ii) agree on a satisfactory
SOE format—with sufficient detail—for pooled fund expenditures to be replenished from the SA. To
ensure that parallel and differing SOE and disbursement procedures are not introduced under the
Program, the Borrower and the Bank will ensure that disbursement from the Non-Pooled Funds
category will cease, and remaining funds reallocated to the Pooled Funds category once utilization of
the pooling arrangements is initiated.

At this stage, the capacities at all levels seem very low in terms of producing the regular financial and
other reports required to sustain report-based disbursements by project launch. The Government and
the Bank have therefore agreed that disbursement from IDA will follow a traditional disbursement
method at the outset. Over time, it is anticipated that the Government would transition first, to the
more detailed SOE format describe above, and eventually, to a report-based method—comprising
regular Financial Monitoring Reports (FMRs) plus additional statements—to facilitate disbursement
from the Pooled Funds category.

Uses of Statement of Expenditures (SOEs)

Disbursements made on the basis of SOEs, as described above, will be as follows: (a) for goods and
grants on all contracts less than US$150,000; (b) for individual consultants on all contracts less than
US$50,000; (c) for consulting firms on all contracts less than US$100,000 and (d) for training and
workshops, and operating costs on all contracts regardless of the amount. The Borrower will retain all
the supporting documentation for SOEs, including completion reports and certificates, at the point of
transaction. The supporting documents will be made available to IDA during Program supervision
and will be audited annually by independent auditors acceptable to the Association. Disbursements
for expenditures above these thresholds will be made against presentation of full documentation
relating to those expenditures. During the launch workshop, a session on preparation of withdrawal
applications, including the preparation and submission of required supporting documents is required.

Special Account

To facilitate disbursements against eligible expenditures under the Credit, the Treasury Department
of MOFED will establish an SA in the National Bank of Ethiopia. The authorized allocation for the
Special Account will be US$15,000,000. Upon effectiveness, IDA shall make an initial deposit up to
US$8,000,000 into the Special Account. Once the total disbursements from the Credit account,
including commitments, have reached an aggregate amount of SDR 15,000,000, the initial allocation
may be increased up to the authorized allocation. The CFU will submit replenishment applications at
least once a month.

Counterpart funds

The Government shall open a local currency account at the NBE and shall deposit Birr
9,000,000 for the first program year and subsequent deposits by February 15 and July 15 of
each fiscal year.
                                                  - 81 -



                             ANNEX 7: PROJECT PROCESSING SCHEDULE

          ETHIOPIA: Public Sector Capacity Building Program Support Project

Project Schedule                                            Planned                           Actual
Time taken to prepare the project (months)              11 months                          21 months
First Bank mission (identification)                      July 2002                          July 2002
Appraisal mission departure                            March 2003                       January 2004
Negotiations                                            April 2003                       March 2004
Planned Date of Effectiveness                            July 2004                                  -
Prepared by: Federal Programming and Planning Department, MCB; Federal Government Technical Team
from Ministries of Capacity Building , Federal Affairs, Finance and Economic Development, and Revenue; and
Regional Technical Teams.
Preparation Assistance: CBDSD Project $150,000; PPF US$348,000.

Bank staff who worked on the project included:
Team Member from Bank                                      Role/Responsibility/Specialization
Overall coordination
Navin Girishankar, Sr. Public Sector Spec., AFTPR          Task Team Leader, overall design
Elsa Araya, Operations Analyst, AFTPR                      Review of overall design, operational support
Shenaz Ahmed, Program Assistant, AFCO6                     Program and organizational support
Local government sub-team
David DeGroot, Sr. Local Government Spec., AFTU1           Review of decentralization, overall design issues
David Savage, Sr. Municipal Dev’t Spec., EWDSA             Intergovernmental fiscal issues
Vivek Srivastava, Sr. Public Sector Spec., AFTPR           Decentralized personnel management, costing
Civil service reform sub-team
Navin Girishankar, Sr. Public Sector Spec., AFTPR          Review of overall design and support for CSRP
Justice sector sub-team
Elizabeth Adu, Chief Counsel, LEGAF                        Overall review of Justice Sector Program
Michele Gutman, Consultant, LEGRA                          Legal and judicial assessment
ICT sub-team
Deepak Bhatia, Manager, Information Advisory Group         Overall review of ICT activities
Sectoral sub-team
Gary Theisen, Sr. Education Spec., SASHD                   Education sector
Anwar Bach-Baouab, Lead Operations Officer, AFTH3          Health sector
John Riverson, Sr. Highway Engineer, AFTTR                 Roads sector
Ian Campbell Davies, Consultant, IEF                       Environment
Christine Cornelius, Lead Operations Officer, AFTR1        Rural development
Operational support sub-team
Reynaldo Castro, Consultant, AFTPR                         Review of program design, operational support
Prasad C. Mohan, Sr. Communications Spec., AFTQK           Information, education, and communication
Eshetu Yimer, Sr. Financial Mgt. Spec., AFTQK              Financial management assessment and related issues
Brighton Musungwa, Sr. Financial Mgt. Spec., AFTQK         Financial management assessment and related issues
Samuel Haileselassie, Sr. Procurement Spec., AFTQK         Procurement capacity assessment and related issues
Sarah Vaughn, Consultant, AFTPR                            Social appraisal

Bank funds expended to date on project preparation:
1. Bank resources: $158,684.38 in FY2003; $169,459.13 in FY2004
2. Trust funds: Not Applicable
3. Total: US$328,143.51
                                                   - 82 -


Estimated Approval and Supervision costs:
1. Remaining costs to approval: US$10,000
2. Estimated annual supervision cost: US$170,000

Donor members of PSCAP Working Group who worked on the project included:
Multi-donor team members
DfID
S. Lister, Consultant, Expenditure Management
K. Brown, Consultant, Civil Service Reform
R. Mellors, Consultant, Decentralization
M. Frazer, Consultant, Expenditure Management
K. Gebreselassie, Expenditure Management
C. Fumo, Social Development
R. Blandon, Tax Systems Reform
CIDA
C. Piggott
J. Rivard
S. Racine, Justice Systems Reform
DCI/Ireland
S. Assefa
GTZ/Germany
H. Matthaeus, GTZ, Urban Management
IMF
A. Kyei, IMF, Tax Systems Reform
M. Netsere, IMF, Tax Systems Reform
Italian Cooperation/Italy
A. Cecci, Urban Management
Netherlands
A. De Boer
P. De Keizer
M. Vogels
SIDA
E. Korsgren
P. Sevastik, Consultant, Justice Systems
                                          - 83 -



                     ANNEX 8: DOCUMENTS IN THE PROJECT FILE

        ETHIOPIA: Public Sector Capacity Building Program Support Project

A. Correspondences During Preparation
 Letters to Ministry of Capacity (MCB) BuildingCB regarding PSCAP (don’t’ we want to      Formatted: Bullets and Numbering
    mention which Minister?)
       o World Bank, Comment on PSCAP Action Plan Guidelines to Director of MCB External
            Relations and Resource Mobilization, June 6, 2003 (dates)
       o World Bank, Feedback on PSCAP Action Plan Preparation Process to the Minister of
            Capacity Building, August 6, 2003
       o PSACAP Donor Group, Donor Follow up on Pre-appraisal to the State Minister of
            Capacity Building, November 24, 2003
       o World Bank, Management Visit to Minister of Capacity Building, November 17, 2003
 Letter to MOFED
       o World Bank, Follow Up on World Bank Management Visit, November 24, 2003            Formatted: Bullets and Numbering
 Letters from Government
       o MOFED letter on specific purpose grant
       o MCB letter on institutional arrangements

B. World Bank and Joint Mission Aide-Memoires During Preparation
 Capacity Building Mission, July 2001
 PSCAP Identification Mission, Aide Memoire, July 8 –August 29, 2002
 PSCAP Preparation Mission, Aide Memoire, February 12-28, 2003
 PSCAP Pre-Appraisal Mission, Aide Memoire, September 15-26, 2003
 PSCAP Appraisal Mission, Aide Memoire, January 26-February 10, 2004

C. Government Documents, Action Plans, and Related Materials
 National Program Document Vol I and II, 2003/04 – 2007/08
 PSCAP Concept Document, May 2002
 Federal PSCAP Plans
          o Expenditure Management and Control Program – Strategic Plan                     Formatted: Bullets and Numbering
          o Federal PSCAP Plan – Civil Service Reform Program (CSRP)
          o Federal PSCAP Plan – District Level Decentralization Program (DLDP)
          o Federal PSCAP Plan – ICT
          o Federal PSCAP Plan – Justice Sector Reform Program (JSRP)
          o Federal PSCAP Plan – Tax System Reform Program (TSRP)
          o Federal PSCAP Plan – Urban Management Capacity Building Program (UMCBP)
 Regional PSCAP Plans
          o Addis Ababa City Government PSCAP Action Plan
          o Afar National Regional State Government PSCAP Action Plan
          o Amhara National Regional State Government PSCAP Action Plan
          o Benishangul-Gumuz National Regional State Government PSCAP Action Plan
          o Dire Dawa City Government PSCAP Action Plan
          o Gambella National Regional State Government PSCAP Action Plan
          o Harari Peoples National Regional State Government PSCAP Action Plan
          o Oromiya National Regional State Government PSCAP Action Plan
          o SNNPR Government PSCAP Action Plan
          o Somali National Regional State Government PSCAP Action Plan
          o Tigray National Regional State Government PSCAP Action Plan
                                           - 84 -


  First PSCAP Design Workshop, May 9-10, 2003
           o Joint Government - IDA Communiqué, May 9-10, 2003
           o Welcoming Note – World Bank, May 9-10, 2003
           o Group Questions for Breakout Session, May 9-10, 2003
           o Summary of Breakout Session
           o Civil Service Reform Program - Presentation, May 9-10, 2003
           o Information, Communication and Technology - Presentation, May 9-10, 2003
           o Urban Management Capacity Building Program – Presentation, May 9-10, 2003
           o Tax System Reform Program, May 9-10, 2003
           o Justice System Reform Program, , May 9-10, 2003
           o Regional Perspective: Amhara, , May 9-10, 2003
           o Regional Perspective: Benishangul-Gumuz, May 9-10, 2003
           o Regional Perspective: Oromiya, , May 9-10, 2003
           o Regional Perspective: World Bank, , May 9-10, 2003
           o Sectoral Perspective: Health, Tigray, , May 9-10, 2003
           o Sectoral Perspective: Primary Education, Amhara, , May 9-10, 2003
           o Sectoral Perspective: Performance Management, DfID, May 9-10, 2003
           o Sectoral Perspective: Urban Services, Addis Ababa, May 9-10, 2003
 Agenda, Thematic Notes and Minutes of the PSCAP Action Plan Preparation Workshops
           o Addis Ababa with Emerging Regions, June 18-19, 2003
           o Awassa, June 21-22, 2003
           o Bahir Dar, July 5-6, 2003
           o Adama, July 19-20, 2003
           o Makale, August 1-3, 2003
 Ethiopia: Progress in Implementation of Tax Reform, November 18-22, 2003
 Implementing Capacity Building Strategy and Program, Unofficial Translation, February 2002
 Oromiya Bureau of Finance & Economic Development, Decentralization Process in Oromiya,
   October 2002
 Oromiya Bureau of Finance & Economic Development, Learning Decentralization by Doing-
   Financial Decentralization in Oromiya, October 2002
 Tigray Bureau of Finance & Economic Development, Highlight on the Framework of the
   Financial Management, October 2002
 Tigray Bureau of Finance & Economic Development, Summary Notes on the Exercised
Endeavors to Strengthen Decentralization, October, 2002

D. Communiqués, Press Releases, and Newsletters
 World Bank, Oromiya Regional State Joint Communiqué, IDA Visit, November 4, 7, 2002          Formatted: Bullets and Numbering
 World Bank, Amhara Regional State Joint Communiqué, IDA Visit, February 24-26, 2003
 World Bank, Tigray Regional State Joint Communiqué, IDA Visit, October 28-November 1,
    2002
 World Bank, Communiqué-CAS- Decentralization
 World Bank, Information Note-CAS-Capacity Building
 Frontline http://www.worldbank.org/afr/et/pscap.htm                                          Formatted: Bullets and Numbering
 PSCAP Website: http://www.worldbank.org/afr/et/pscap.htm

Background Notes, Papers, and Assessments By World Bank, and Multi-Donor Teams
 AFRITAC, Report on Cash Management
World Bank, Amhara Regional State Joint Communiqué
World Bank, Brainstorming minutes on decentralized fiscal support for infrastructure
 World Bank, Concept Note on Federal Legislative Framework for Urban Land Management in       Formatted: Bullets and Numbering
   Ethiopia, March 2, 2003
                                            - 85 -


World Bank, Communiqué-CAS- Decentralization
World Bank, Concept Note on Federal Legislative Framework for Urban Land Management in
  Ethiopia, March 2, 2003
 World Bank, Committing to & Monitoring Capacity Building Outputs through PSCAP Action
  Planning, July 19, 2003
World Bank, Minutes of Community Empowerment
 World Bank, Output Oriented Action Pplans for PSCAP, Presentation, July 19, 2003.
 World Bank, Political and Administrative Accountability Review, Background Note to IGR
 World Bank, Design Options – PSCAP Grant and Drawing Rights Approach, Background Note
World Bank, Programmatic Design of Community Empowerment
 World Bank, PSCAP -– Informatics, Presentation
 World Bank, Platform for State Transformation, Presentation
 World Bank, PSCAP Regional Technical Notes on Decentralization, Municipal Development and
  Civil Service Reform
          o Tigray, October 28-November 1, 2002
          o Oromiya, November 4-7, 2002
          o Amhara, February 26-28, 2003                                                      Formatted: Bullets and Numbering
World Bank, Design Options – PSCAP Grant and Drawing Rights Approach
 World Bank, Cost of Decentralization, Background Note, April 2003
 World Bank, Financial Management Assessment Report, February 2004
 World Bank, Procurement Assessment Report, February 2004
 World Bank, Social Appraisal Report, April 2004
 DfID, Review of Capacity Building Approaches for Local Government, July 2003

Inputs from World Bank Sector Teams
 World Bank, Minutes of Community Empowerment                                                Formatted: Bullets and Numbering
 World Bank, Brainstorming Minutes on Decentralized Fiscal Support for Infrastructure
 World Bank, Programmatic Design of Community Empowerment, Background Note
 World Bank, Education Team Note on PSCAP
 World Bank, Education Team Note on PSCAP – Prototype Capacity Development Matrix
 World Bank, Environment Team Note on PSCAP
 World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia
 World Bank, Environment Team Note on PSCAP and Environment Management in Ethiopia-2
 World Bank, Note from Infrastructure Team
 World Bank, Infrastructure Note on PSCAP – Responsibility Matrix – Road
 World Bank, Infrastructure Note on PSCAP – Responsibility Matrix – Energy
 World Bank, Infrastructure Note on PSCAP – Responsibility Matrix – Water
 World Bank, Infrastructure Note on PSCAP – Responsibility Matrix – Urban Development

Economic and Sector Works
 Multi-Donor/GOE, Country Financial Accountability Assessment, March 31, 2003
 World Bank/GOE, Country Procurement Assessment Report, March 2003
 World Bank, Woreda Studies – Volume I, January 2002
 World Bank, Woreda Studies – Volume II, January 2002
 World Bank, Municipal Decentralization in Ethiopia, July 2001
 World Bank: Issues in State Transformation: Decentralization, Delivery and Democracy – An
   Institutional Ggovernance Review Concept Note

Donor Coordination and Harmonization
 PSCAP Donor Working Group Members
                                          - 86 -


   Minutes of PSCAP Donor Working Group Meetings –March 14 and 19, 2003
   Minutes of PSCAP Donor Working Group Meetings –July 16, 2003
   Minutes of PSCAP Donor Working Group Meetings –August 13, 2003
   Minutes of PSCAP Donor Working Group Meetings – August 27, 2003
   Minutes of PSCAP Donor Working Group Meetings – November 11-18, 2003
   Bilateral Donors, Harmonization Issues Note, February 10, 2004
                                                 - 87 -



    ANNEX 9: KEY FEATURES OF RESOURCE ALLOCATION AND MANAGEMENT—EXCERPT
                    FROM THE PROGRAM IMPLEMENTATION PLAN

          ETHIOPIA: Public Sector Capacity Building Program Support Project

This chapter describes resource allocation and resource management arrangements under PSCAP.
This includes an explanation of the Program’s rules of access and allocation for drawing rights; its
appraisal criteria for plans from federal and regional institutions; its planning, budget, and execution
system with the Government’s public financial management (including the chart of accounts and
financial calendar); and finally, PSCAP’s performance-oriented execution and reallocation features.

Specific-purpose federal program

As a specific-purpose federal program, PSCAP serves as a pillar of Ethiopia’s evolving
intergovernmental fiscal system. The Program allocates five-year drawing rights to additional federal
resources across federal and regional beneficiary institutions. Failure to utilize these time-bound
rights results in their reallocation from poor performers to high performers within a given fiscal year
and across fiscal years. These performance oriented features of PSCAP represent an important
innovation in terms of the design of fiscal transfers within the Ethiopian public finance system.

At the same time, the basic planning, budgeting, and execution system of Program is fully with the
requirements of the Government’s public financial management as well as its SDPRP monitoring
systems. Federal and regional institutions participating in PSCAP use the Government’s chart of
accounts for financial reporting, comply the financial calendar for issuance of resource ceilings,
prepare rolling medium-term and annual plans in line with established procedures, disburse funds on
a reimbursable basis against SOE submissions, and finally, submit financial and physical progress
reports. Alignment with the Government’s system is designed to ensure that the planning and
execution of capacity building activities is undertaken in a flexible manner in line with the changing
demands on the ground. It is also intended to improve the accountability framework within which
public sector capacity building activities at the federal, regional and local government levels are
financed and implemented in GOE’s state transformation process (Table 3).

Budget classification of PSCAP expenditures

The Government of Ethiopia’s Chart of Accounts will be utilized to plan, budget, and report on
PSCAP expenditures. Specifically, PSCAP will be proclaimed annually by Cabinet in the GOE
budget as a program under the MCB, which is designated as a public body. Allocations to the 6
eligible federal institutions and the 11 regions will be proclaimed under PSCAP subject to mid-year
reallocations based on performance.

    Coding and Classification of the Federal Component. PSCAP budget coding and classification
     for the federal level allocation will be structured as follows: (a) Public Body codes will be
     designated as “Ministry of Capacity Building”; (b) Program code will be designated as “Public
     Sector Capacity Building”; (c) Sub-Agency codes will only be designated for the CSRP, DLDP
     and JSRP as “Planning and Programming Department; (d) Subprogram codes will be designated
     as Ministry of Revenue; Ministry of Federal Affairs; Ministry of Finance and Economic
     Development; Information, and communication Technology Development Authority; and (e)
     Project code will be designated for each subprogram (i.e. Urban Management and Reform
     Project, Tax Systems Reform Project, Information & Communications Technology Reform
                                                 - 88 -


    Project, Civil Service Reform Project, District Level Decentralization Reform Project, Justice
    Systems Reform Project, and Program Support Project).

   Coding and Classification of the Regional Component. PSCAP budget coding and classification
    for the regional level allocation will be structured as follows: (a) Public Body code will be
    designated as “Ministry of Capacity Building”; (b) Program code will be designated as “Public
    Sector Capacity Building”; (c) Sub-Agency code will be designated; (d) Subprogram code will
    designated for each region (i.e. Tigray Public Sector Capacity Building, Afar Public Sector
    Capacity Building, Amhara Public Sector Capacity Building, etc.); and (e) Project Code will be
    designated for each regional subprogram (i.e. Civil Service Reform Project, Justice System
    Reform Project, Tax Systems Reform Project, Urban Management Reform Project, Information
    & Communications Technology Reform Project, District Level Decentralization Reform Project,
    and Program Support Project).

Rules of access or eligibility criteria

PSCAP is envisaged as a nation-wide program, designed to help remedy the severe public sector
capacity constraints at the federal, regional, and local levels. To ensure the consistency of PSCAP
activities undertaken by a wide array of beneficiaries with national policies and priorities, the
Government has established clear rules of access. These access rules or eligibility criteria are
detailed below and should be met by federal lead institutions as well as regions before their annual
implementation plans can be considered for financing under the Program:

    1. Signed “Participation and Performance Agreement” by the relevant minister responsible for
       federal subprogram or relevant cabinet member in the case of regions (sample participation
       and performance agreements are included in Section 4 of this PIP).

    2. Establishment of appropriate governance and implementation arrangements;

    3. Completion of relevant capacity assessments across all participating sectors and levels of
       participating institutions, especially in the case of woreda and municipal strengthening;

    4. Timely submission of endorsed costed medium-term rolling plans, as well as technically
       sound, feasible annual implementation/procurement plans in line with financial calendar;

    5. Explicit provision for evaluation of annual performance including dissemination to the public
       of such evaluations, satisfaction score cards, etc, as part of the consultative planning process.

Inputs from various nation-wide reviews

As key inputs to the PSCAP planning, budgeting, and execution process, several review processes
should be underway at the close of any given fiscal year. Specifically, the Government is responsible
for consolidation of PSCAP outturn data (based on Statements of Expenditures) for the previous year
by subprogram and region. These data are compiled in the form of a consolidate physical and
financial report by the Planning and Programming Department and submitted as an input to the Joint
Annual Performance Review Mission (ARM) no later than September 30. The ARM for PSCAP is
held not later than October 1 each year and its findings—widely distributed—should serve as inputs
to the SDPRP Annual Progress Report (to be issued in late October each year) as well as the annual
multi-year planning exercise for PSCAP (see below).
                                                - 89 -


Fiscal framework—medium-term projection and division of PSCAP resources

Each year, during the Government’s multi-year planning exercise, the Ministry of Finance and
Economic Development (MOFED)—in close consultation with the Ministry of Capacity Building
(MCB)—will ensure the medium-term projections of available PSCAP resources from external and
Government resources—estimated in Year 0, February 2004, to be approximately Birr 3.3 billion
over the 5 year planning period—are appropriately reflected in the Macro-Economic and Fiscal
Framework (MEFF), which is prepared no later than October 26.

Once the overall available pool of resources available over the medium-term has been established,
both Ministries will initiate a formal dialogue with relevant PSCAP stakeholders such as lead
institutions and regional governments on the vertical and horizontal division of resources and issue
revised medium-term indicative planning figures for federal subprogram and regions no later than
November 10. Guidelines for the vertical and horizontal split are described below and should
provide the basis for joint Government-donor review:

   Vertical Division of PSCAP Resources in the First Year and Subsequent Years. During program
    preparation, an original 80-20 percent vertical division of PSCAP resources (drawn from
    domestic and donor sources) over five years was effected between regional and federal levels of
    government respectively. Each year, the actual allocations for federal and regional components
    of PSCAP should be revised on changes in resource projections. Changes in the proportions
    between federal and regional allocations (i.e., the 80-20 split) should be undertaken in a
    transparent manner, in dialogue with federal and regional authorities, no more frequently than
    once a year, and on the basis of clear criteria such as the previous year’s performance as well as
    existing multi-year commitments at the federal and regional levels.

   Horizontal Split of the Regional PSCAP Component in the First Year and Subsequent Years.
    Once the vertical split has been reviewed each year, a horizontal split of the regional component
    is undertaken on the basis of the established formula for the federal-regional subsidy as well as
    re-pooled drawing rights which high performers could draw down. The formula consists of three
    factors—the region’s population, its level of development gap, and its previous years’ own
    revenue performance—weighted at 65%, 25%, and 10% respectively. During program
    preparation, the above-mentioned formula was applied and five-year drawing rights were
    assigned to each region.

    Each year, up to 50% of the five-year drawing rights of individual regions will be subject annual
    reallocation from poor performers to high performers. Reallocation recommendations by the
    PSCAP Federal Technical Team will comply with the following rules and be clearly
    communicated to all regions and federal institutions:

    1. A cut-off point of fund utilization (as evidenced by SOE replenishment requests) and
       activity-based performance, 75% in both cases, will be established. Regions performing
       above this cut-off point are not subject to reallocation.

    2. A minimum entitlement equivalent to 25% of the approved annual plan in any given year will
       be established for all regions to ensure that under-performers continue to have incentives and
       resources to establish a the minimum statutory level of capacity.

    3. At end-year, poor performers or those with 25% or less of fund utilization and activity-based
       performance will have 50% of their remaining five-year drawing rights re-pooled and
       reallocated to high performers purely on the basis of performance ranking.
                                                 - 90 -


    4. All such reallocations will be reflected in readjustments to their overall five-year envelopes.

    In future years, the formula as well as rules for annual reallocation will be reviewed and revised
    as necessary and any changes or modifications, will be made on the basis of extensive
    consultations, and widely publicized to all regions and related beneficiaries.

Planning—aligning with Public Investment Program (PIP) preparation

As one of the Federal Government’s major capital spending initiatives, PSCAP is reflected within the
Government’s Public Investment Program. PSCAP planning is therefore integrated and aligned with
the PIP preparation timetable, as laid out in the financial calendar.

Accordingly, following the issuance of revised indicative medium-term planning figures, federal lead
institutions and regions (under the guidance of their Regional Technical Teams) undertake and
submit to the PSCAP Federal PPD their revised and appropriately costed rolling five-year PSCAP
Action Plans no later than December 25. As noted in the eligibility criteria, the revisions of these
plans should be undertaken in a participatory manner involving consultations with various regional
and local stakeholders. Revisions of the PSCAP Action Plans should reflect the public sector
capacity building priorities identified in woreda and municipal development plans.

The Federal Technical Team (FTT), MCB, and MOFED review and finalize revised medium-term
consolidated PSCAP Action Plans (by federal and regional components) no later than February 8.
As part of this exercise, on the recommendation of the FTT, both ministries finalize the Annual Fiscal
Plan for PSCAP part of the Government’s overall fiscal plan) no later than January 24.

Budgeting—Preparation, Appraisal Adoption, Execution, and Re-allocation

Based on the Annual Fiscal Plan (i.e., the annualized drawing rights), federal lead institutions prepare
their PSCAP budgets along with annual procurement plans no later than March 1. These are
submitted to the FTT via the Planning and Program Directorate (PPD) for appraisal and review.
Similarly, regions submit their annual budgets and procurement plans to the Federal PPD no later
than February 22 so that their Regional Technical Teams can pre-appraise, review, endorse, and
submit their plans to the FTT no later than March 1. Regional Technical Teams, under the guidance
of respective BCBs, are expected to have prepared their matching budgets for PSCAP activities (for
example, for civil works and ongoing recurrent or O&M) at the same time.

The FTT then reviews and appraises annual implementation and procurement plans under the federal
and regional components against the following appraisal criteria established within and across
subprograms:

    1. The relevance of planned activities given existing assessments is established, as well as
       provisions for additional assessment where required are included;

    2. Prioritization of the “minimum mandatory” capacity building—especially with regard to
       financial management, procurement, and related program support activities—is established as
       a necessary precursor to any more advanced activities;

    3. Demonstration that civil works required to house any goods (e.g. especially ICT) are in place,
       and that budgetary provisions have been made for additional upfront civil works and ongoing
       recurrent as well as operations and maintenance requirements of goods procurement;
                                                 - 91 -


    4. Evidence that annual plans are based on consultation with key stakeholders including local
       governments, regional bureaus, communities, and other stake holders, and that this
       consultative planning process becomes increasingly “bottom up” in each successive year as
       evidenced by steadily increasing numbers of woreda and municipal action plans, formal
       public consultations, participation of reference and focus groups in the planning process;

    5. Sector-specific criteria such as sequencing, the previous year’s performance, and the
       submission of relevant TORs.

    6. Explicit focus on issues related to gender and HIV/AIDS mitigation.

It is anticipated that the FTT will need to provide comments and suggest revisions in federal and
regional plans as a basis for finalizing annual implementation and procurement plans. Once revised,
the plans should be submitted to IDA for no objection no later than March 15. The FTT finalizes
these plans for the federal and regional components no later than March 22 and submit them for
cabinet approval.

PSCAP’s annual plan for the Year Y+1 will be submitted along wit the overall budget to the Council
of Ministers no later than May 22. Matching requirements in regional budgets (for civil works and
recurrent costs) will be submitted to regional cabinets at the same time. The Cabinets should
recommend the federal and regional budgets inclusive of PSCAP budgets no later than June 2.
Approval and adoption by federal and regional legislatures will be undertaken roughly between June
8 and July 2, in anticipation of the coming fiscal year.

Execution and Mid-year Reallocation

Once proclaimed and allocated, execution of PSCAP budgets begin at the start of the fiscal years on
July 8. Following an initial release to cover implementation financing requirements for up to the first
quarter, funds are released to federal lead institutions and regions for monthly reimbursement against
consolidated SOEs.

Mid-year Reallocation Rules. PSCAP also envisages mid-year reallocation of annualized drawing
rights, i.e., a re-appropriation between regions within a federal budget line. Key performance criteria
used as a basis for these in-year adjustments are SOE submissions and activity-based progress
reports. Accordingly, federal lead institutions and regions submit their consolidated reports on year-
to-date SOE submissions and activity-based performance, as well as projected budget utilization
through the end of year Y to the Federal Technical Team (FTT) no later than January 22.

The FTT will recommend in-year reallocations across regions on the basis of the following rules
(similar to those applicable for annual reallocation), which are to be clearly reiterated to all regions
and federal institutions at the start of each year:

    1. A cut-off point of fund utilization and activity-based performance, 75% of projected cash
       flows in both cases, will be established. Regions performing above this cut-off point are not
       subject to reallocation;

    2. A minimum entitlement equivalent to 25% of the approved annual plan in any given year will
       be established for all regions to ensure that under-performers continue to have incentives and
       resources to establish a the minimum statutory level of capacity;
                                                - 92 -


    3. At mid-year, poor performers or those with 25% or less of fund utilization and activity-based
       performance will have 50% of their remaining annual drawing rights re-pooled and
       reallocated to high performers;

    4. In-year reallocations will be reflected in readjustments to the annual and five-year envelopes;

    5. Access rules for high performers seeking to draw down on re-pooled drawing rights are the
       submission of revised plans (with revised projections for utilization through end-year),
       compliance with financial and physical reporting requirements, and satisfactory achievement
       of the in-year cut-off point.

The FTT will hold discussions with regions on its review and recommendations for in-year
reallocation between regions within annualized budgets no later than February 8. Following these
discussions, the reallocation proposal will be submitted for no objection by IDA on February 15, and
then MCB and MOFED issue in-year reallocations between regions and federal institutions no later
than February 22.

The Role of the Supplemental Budget. In the case in-year reallocations prove insufficient for high
performers, MCB may seek to draw down on future years’ annualized drawing rights or allocations.
In such cases, high performers should demonstrate nearly full (over 85%) utilization of annual
drawing rights and realistic projections for utilization that exceed available resources from in-year
reallocation. Once reviewed by the Federal Technical Team, the proposed use of future annualized
drawing rights (financed in part of fully through IDA support) through the Government’s
supplemental budget mechanism should be submitted to IDA for no objection. Following IDA’s no
objection and finalization by the MCB, allocations within the supplemental budget for high
performers will be finalized and communicated the EAs in questions as well as all other stakeholders
involved in PSCAP.
                                                                             - 93 -


Table 3. PSCAP’s Alignment with the Financial Calendar—the Planning, Budgeting, and Execution Cycle
                                                                                                                                               IDA and Multi-Donor
         Dates                     Cycle/Stage                                        Government Actions
                                                                                                                                                     Actions
I. PLANNING
                                                         1. Consolidation of PSCAP outturn data by subprogram and region for Year Y-1
                               Consolidation of budget   2. Preparation of consolidated report on physical and financial performance as
     July 8- Sept 30                                     input to Joint Annual Performance Review Mission no later than 30 Sept
                                   and outturns

                                Joint Annual Review      Findings submitted for multi-year planning and SDPRP Annual Progress Report          1. Participate in ARM for
         Oct 1                         Mission           no later than 1Nov                                                                   PSCAP
                               SDPRP Annual Progress     1. APR published and widely distributed including inputs from Annual
         Oct 30                                          Performance Review Mission on PSCAP
                                     Report
                                                         1. Joint Annual Performance Review Mission findings and data collection on
                                                         PSCAP indicators no later than Sept 30                                               1. Review and verify
                                                                                                                                              methodology for vertical and
                                Multi-year planning      2. Preparation and approval of MEFF inclusive of available PSCAP resources for       horizontal split
     July 8- Nov 10             including findings of    Y+1, Y+2, Y+3, etc. no later than 26 Oct
                                annual performance       3. Regional and Federal dialogue on vertical and horizontal division of PSCAP
                                 reviews for PSCAP       resources including Federal Technical Team’s recommendation on reallocation of
                                                         five-year drawing rights, and issuance of revised medium-term indicative
                                                         planning figures for federal subprograms and regions no later that Nov 10
                                                         1. Federal lead institutions and regions undertake and submit revisions of rolling   1. Review of annual fiscal plan
                                                         five-year plans within revised medium-term envelopes no later than Dec 25            for PSCAP with other Direct
                                  Public Investment      2. Federal Technical Teams, MCB, and MOFED review and finalize revised               Budget Support Donors
     Nov 11 – Feb 8             Program preparation,     medium-term plans no later than Feb 8
                                 inclusive of PSCAP
                                                         3. Annual Fiscal Plan for PSCAP (as part of overall fiscal plan) finalized by
                                                         MOFED and MCB no later than Jan 24
II. BUDGETING
                                                                                                                                                                                Comment [RvN1]: I suggest to leave this out.
       A. Budget Preparation                                                                                                                                                    Make it a combined budget/planning cycle.
                                                         1. Federal lead institutions submit their PSCAP budgets including preparation of     1. Review and no objection by
                                                         first year procurement plan within annualized drawing rights no later than Mar 1     IDA on annual procurement
                               Submission of PSCAP       2. Regional Technical Teams review, finalize, and endorse annual budget              plan(s)
     Feb 8- Mar 22
                               annual budget requests    submissions to Federal Technical Team no later than Mar 1
                                                         3. Federal Technical Team reviews, finalizes, and recommends overall annual
                                                         budget for PSCAP no later than Mar 22
                                                                         - 94 -


                                                                                                                                         IDA and Multi-Donor
    Dates                      Cycle/Stage                                        Government Actions
                                                                                                                                               Actions
                             Preparation of           1. Overall budget recommendation to Council of Ministers inclusive of PSCAP is
                          Recommended Federal         made at the federal level
Mar 23-May 22
                          Budget and Matching         2. Matching requirements in regional budgets (i.e., for civil works and ongoing
                            Regional Budgets          recurrent expenditure implications of PSCAP) recommended to cabinets
                                                      1. Council of Ministers reviews recommended budget inclusive of PSCAP and
May 23 – Jun 2                                        approves no later than Jun 2
                         Budget Recommendation
                                                      2. Regional cabinets review and recommend matching budget requirements for
                                                      PSCAP and approves no later than Jun 2

  B. Legislative Adoption and Appropriations
                                                      1. Approval by Federal and Regional legislatures of recommended budget
 Jun 8 – Jul 2                                        inclusive of PSCAP


  C. Budget Implementation and Mid-year Reallocation of PSCAP funds
Jul 8 – Jul 14                                     1. Notification of proclaimed federal and regional budgets
Jul 8 – Aug 15                                        1. Allocation of proclaimed federal and regional budgets
 Jul 8 – Jul 6                                        1. Execution of proclaimed budget
                                                      1. Federal lead institutions and Regional Technical Teams submit consolidated     1. Review and no objection by
                                                      report on in-year SOE and activity-based performance and projected utilization    IDA of in-year reallocation
                                                      through end of year Y to Federal Technical Team no later than Jan 15              proposals
                                                      2. Federal Technical Team dialogues with regions on its review and
                                                      recommendations for in-year reallocation between regions within annualized
Jan 8 – Feb 8              Mid-year reallocation      budgets for year Y no later than Feb 8
                            process for PSCAP
                                                      3. MCB and MOFED finalize and issue in-year reallocation between regions and
                                                      federal lead institutions no later than Feb 22
                                                      4. Proposals for use of supplemental budget by high performers should be
                                                      submitted to IDA for no objection, and finalized by MCB in line with relevant
                                                      financial management regulations
                                                       - 95 -


    ANNEX 10: HARMONIZATION ISSUES FOR BILATERAL DONORS—PREPARED BY BILATERAL
          MEMBERS OF PSCAP JOINT GOVERNMENT-DONORS WORKING GROUP4

            ETHIOPIA: Public Sector Capacity Building Program Support Project


Introduction

This note is intended to encourage strong bilateral support for the PSCAP and to clarify joint thought amongst all
donors about how and under what conditions, commitments should be made to PSCAP, and the implications arising
therefrom. Donors acknowledge that an enormous amount of effort has gone into planning and developing the
Programme so far, mainly by the GoE and the World Bank. It must also be acknowledged that the GoE is already
implementing some of the PSCAP programmes with its own resources. Bilateral donors are much encouraged by:

   Government’s expressed determination and commitment to address the capacity building needs of the
    country;
   Government’s desire to establish a comprehensive, holistic and integrated approach to capacity
    building under one umbrella programme;
   High level of ownership of PSCAP plans by the regional governments of the country;
   The overall intergovernmental design and drawing rights approach; and
   The general content of the subprogrammes of PSCAP.

There are, however, some design and programming issues which need to be considered for PSCAP
implementation, over which the donors (and IDA) have serious and valid concerns: inter alia the quality
of the various plans, the approach in some components, gender and HIV/AIDS analysis and
mainstreaming, the sustainability of the heavy ICT investment, monitoring and evaluation arrangements
and the planning and resource allocation timetable. However, it is felt that further efforts at this time to
resolve all of these issues are more likely to hinder the process of project formulation and approval.
Rather, the emphasis should now be on how to best optimise bilateral and IDA contributions and facilitate
a learning process in the programme as it proceeds. It is considered likely that much of the programme
will get off to a slow start given the lack of capacity for procurement and the giant step that still has to be
made in most of the programmes from the present plans to actually doing something. It is also likely that
the enormous challenges the programme is posing in terms of content, approach and implementation
management will necessitate continued revision of plans, especially over the first 2 or 3 years. As already
indicated at the Pre-Appraisal stage, the Programme should therefore be seen very much as a learning by
doing process.

Three critical issues stand out which require resolution before implementation. These are:
 If and how the bilateral donors should engage;
 Confirmation of the Approach to Capacity Building; and
 Harmonisation procedures

Bilateral donor engagement

The GoE objective is to design and implement a single, multi-donor solution to the public sector capacity
building challenge, and their desire is for all bilaterals to join with IDA to support this programme. To



4
 Specific donor agencies represented in the drafting of the note during the appraisal of the program included DfID,
CIDA, DCI, GTZ, Netherlands, and SIDA.
                                                    - 96 -


become committed, bilateral donors intending to participate should endorse the overall programme design
and implementation arrangements. There are 3 basic options open to them:

   Stay on the outside if they have strong reservations or incompatible agreements with their current
    programmes, leaving PSCAP largely to the Bank and the GoE.
   Make minor contributions on the margins.
   Get fully involved as either a pooling or non-pooling donor, and seek to influence the course of the
    Programme from the inside.

It can be clearly argued that Ethiopia deserves a chance to implement PSCAP even if their plans could be
further improved. Options 1 and 2 leave one on the outside of one of the ‘biggest development efforts
town’ and could be interpreted as a reluctance to respond to GoE plans and priorities. Also, the
opportunity costs of trying to undertake and negotiate parallel programmes to PSCAP would likely be
higher given that the space will be restricted. There are strong arguments, if one is to be involved at all, to
fully embrace PSCAP and seek to join a learning process through option 3.

Confirmation of the approach to capacity building

There are a variety of approaches evident in the PIP covering the range from demand to supply driven,
but in some of the subprogrammes there is an inappropriate emphasis on deficit analysis followed by
‘prototype design’, top down delivery and bulk training. PSCAP will, however, inevitably become a
learning process, with some aspects succeeding and others requiring modification as implementation
proceeds. Since PSCAP is intended to be transformational, it must give strong emphasis to planning and
implementation approaches which are highly participative and which promote ownership of development
plans and capacity building by citizens and officials at all levels. As both bilateral donors and IDA can
bring considerable lessons learned from their current programming, there should be a strong commitment
by all donors to incorporating those lessons learned from their current programming into the PSCAP
process. MCB has demonstrated considerable openness to the views of various stakeholders regarding
design, but it would be desirable for it to confirm its position regarding their capacity building approach.

Similarly, the monitoring and evaluation system should be a driver of a participative learning process
rather than a formalised recording system for central government and donor consumption. The GOE has
shown a commitment in the PIP to biannual (and quarterly) review mechanisms, therefore, it behoves all
donors to be fully engaged in the review process.

The implications of a more demand driven learning approach are significant in terms of the nature and
scale of the review process. This should not be a ‘business as usual’ presentation of routine data. Rather,
it requires a more collaborative and elaborate mechanism for review of experiences, analysis of problems
and development of new solutions through an action-reflection process. Woreda, Regional and Federal
level review meetings thus become fundamental learning fora. There is an obvious need to develop a
clear TOR for a joint Government/Donor Review process. This platform will enable problems to be
jointly owned and resolved by both the actors themselves and the donors. Now is an appropriate time,
particularly for the Bilateral donors, to make firm commitments of time and the sharing of resources
necessary to participate fully in ALL Regional and Federal Reviews, if donors are to have any hope of
being adequately informed on the issues from all 6 subprogrammes in all 11 administrative regions. It is
obvious a careful sharing of resources and responsibilities will be required to ensure effective
coordination across all subprogrammes at both the federal and regional levels.
                                                   - 97 -


Donor harmonisation

It is important for non-IDA donors, who now wish to become fully involved and strengthen this learning
process, to iron out and harmonise their respective positions. It is also no longer acceptable to simply
leave the key donor role to the World Bank, as has happened during the preparation phase. The GOE and
World Bank have taken steps to encourage full bilateral participation through a number of harmonization
approaches in Ethiopia, such as the PRSC, SDPRP and PSCAP. All participating donors should therefore
take up responsibilities for supervision and involve themselves fully, if they want their perspectives to be
taken into account. It is also important that GoE and all donors maintain dialogue on harmonisation
throughout implementation. Harmonisation should promote policy dialogue aligned to the SDPRP cycle,
taking into account the concerns of pooled and non-pooled partners to PSCAP. The following issues
represent the consensus views of bilateral donors in terms of harmonisation:

   Pooling offers the most straightforward and coherent arrangement and simplifies the implementation
    management for what is a wide-ranging and complex programme. It should be encouraged.
    Budgetary off-set and the full additionality of PSCAP resources are compelling reasons to support
    PSCAP through the pooling arrangement. For various reasons, however, some donors may be unable
    to join this arrangement, although they wish to be fully involved in PSCAP and to integrate their
    activities as closely as possible. This should also be accommodated.

   On-going bilateral programmes: Several bilateral donors are presently engaged in on-going
    programmes which closely relate to the scope of PSCAP. Wherever possible, donors and the GoE
    agencies which they are supporting should endeavour to harmonise the planning and implementation
    arrangements for their programmes with those being established for PSCAP.

   Donor Harmonisation/Participation Agreement: The MOU will be the legal binding document for all
    donors involved in the pooling arrangements for PSCAP. It is important however, that non-pooling
    donors also be encouraged to sign on to an overall participation agreement that confirms their
    commitment to a code of practise covering mechanisms for non-pooled contributions, co-ordination
    and participation in joint review procedures etc. Such a Harmonisation/Participation Agreement will
    take into account the OECD-DAC principles on harmonisation, as well as local requirements for
    PSCAP.

   Procurement: Procurement arrangements should ideally be designed to strengthen the GoE system.
    At the same time, donors are concerned about capacity constraints that may slow the momentum of
    PSCAP. Donors emphasize the need and support GOE efforts to establish strong capacity for
    procurement planning and management within the framework of IDA procurement methods for
    pooled funds. Lessons from a variety of donor experiences (CBDSD, ESDRF, ERA) and the CPAR
    recommendations should be integrated into PSCAP procurement. Donors agree to work as a team to
    appraise GOE procurement TORs to ensure quality control in a timely manner. They will also take
    active interest in the annual GOE procurement plans to stimulate dialogue on capacity development
    methodologies. Options allowing responsive bilateral procurement of technical assistance via Channel
    3 should be maintained. Donors also endorse efforts to ensure a diverse source of supply from the
    public, private and NGO sectors for PSCAP training and other requirements.

   Fiduciary requirements: Bilateral donors should also work closely with the World Bank and MCB to
    plan and harmonize fiduciary and other assessments, in order to maximize harmonization of
    individual donor planning, approval and review processes.
                                                  - 98 -


Additional Issues

   Loans versus grants: PSCAP is a human resource and public service development project which,
    because of its size and enormous complexity will inevitably become a learning by doing programme.
    The likelihood of the Programme generating significant financial returns in the short or medium term
    is low. The risk analysis in the PAD also shows almost all output risks to be high, substantial or
    moderate. It would therefore be appropriate to maximise the use of grant funds and for the Bank to
    maximise use of its own grant facilities in the IDA contribution. Creative bilateral financing of
    PSCAP, such as the interest buy-down option, urging of bilateral Executive Director’s at the Board to
    consider increasing Ethiopia’s grant facility from IDA, and the sympathetic review of Ethiopia’s
    HIPC completion point and urgent need for topping up, should be encouraged.

   Gender and HIV/AIDS: Donors are concerned that these important issues should receive more focus
    through PSCAP especially in the programme objectives, activities and indicators.

   Monitoring and evaluation: Whilst the reasons for the delay in formulating a comprehensive M&E
    strategy are understood, donors are concerned that this dimension of the programme is not fully
    available to be appraised during the present mission. An effective monitoring and evaluation system
    will be an essential tool in PSCAP to ensure learning at all levels and to keep abreast of the numerous
    sub programmes and activities. Serious attention should be given to revisiting sub programme log
    frames and to developing clear linkages with the overall PSCAP log frame.

   Due diligence and learning-by-doing at the sub-national level: The need for all donors to be able to
    participate fully in a learning programme and conduct satisfactory due diligence requires a
    commitment from donors to engage fully at the regional and woreda levels. Therefore, the World
    Bank and bilateral donors will engage with MCB and MOFED to harmonize donor and GOE input
    into joint review processes, through both formal M&E mechanisms, such as the Annual Review
    Mission (ARM), and informal M&E mechanisms, that can facilitate the review processes, provide
    additional donor input to the periodic reviews, and facilitate inter-regional learning. Modalities for
    strengthening this commitment will be discussed between donors, MCB and MOFED in the run up to
    implementation and reflected in the Harmonization Agreement. This is not a parallel monitoring
    system or mechanism for TA, but will complement and strengthen existing joint Monitoring and
    Evaluation arrangements, as has been established in the SDPs. It does, however, imply that bilateral
    donors will increase their presence and gain more knowledge and insight into PSCAP implementation
    in the regions.
                                                                  - 99 -


                                             ANNEX 11: STATEMENT OF LOANS AND CREDITS

                      ETHIOPIA: Public Sector Capacity Building Program Support Project

                                                                                                                     Difference expected
                                                               Original Amount in US$ Millions                            and actual
                                                                                                                       disbursementsa


Project ID   FY     Purpose                                     IBRD         IDA         GEF     Cancel.   Undisb.     Orig     Frm Rev'd

P049395      2003   ETHIOPIA -ENERGY ACCESS                      0.00       132.70       0.00     0.00     147.29     29.08        0.00

P050938      2003   Capacity Building for Dec.Serv.Del.          0.00        26.20       0.00     0.00      27.90     11.55        0.00

P044613      2003   ET Road Sector Development Program II        0.00        0.00        0.00     0.00     134.39      2.00        0.00

P075915      2003   ET Pastoral Community Development            0.00        0.00        0.00     0.00      29.57      -0.34       0.00

P081773      2003   EMERGENCY DROUGHT RECOVERY PROJECT           0.00        0.00        0.00     0.00      16.23     -12.18       0.00

P050383      2002   Ethiopia:FOOD SECURITY PROJECT               0.00        85.00       0.00     0.00      97.85      -3.05       0.00

P057770      2002   ET CULTURAL HERITAGE                         0.00        5.00        0.00     0.00      5.22       1.06        0.00

P069886      2001   Multisectoral HIV/AIDS                       0.00        59.70       0.00     0.00      35.32     35.65        0.00

P073196      2001   ET:Demobilization and Reintegration Proj     0.00       170.60       0.00     0.00      36.02     29.29        0.00

P052315      2001   ET:CONSERVATION OF MEDICINAL PLANTS          0.00        2.60        0.00     0.00      2.03       -0.88       0.00

P067084      2001   EMERGENCY RECOVERY AND REHAB. PROJECT        0.00       230.00       0.00     0.00     107.79     86.31        0.00

P050342      2001   Women Dev. Initiatives                       0.00        5.00        0.00     0.00      4.17       1.82        0.80

P035147      2001   ET CONSERV.& SUSTAIN. USE MEDIC. PLAN        0.00        0.00        1.80     0.02      1.88       1.03        0.00

P069083      2001   AFTKL: ET GLOBAL DISTANCE LEARNING           0.00        4.90        0.00     0.00      5.25       4.74        0.00

P000756      1999   Health Sector Dev.                           0.00       100.00       0.00     0.00      31.05     28.13        0.00

P000736      1998   ET ENERGY II                                 0.00       200.00       0.00     0.00      36.49     39.30        0.00

P000733      1998   ET: AG. RESEARCH & TRAINING                  0.00        60.00       0.00     0.00      21.42     17.86        0.00

P000755      1998   ETHIOPIA ROAD SEC. DEV. PROG.                0.00       309.20       0.00     0.00      87.35     88.18       67.54

P000732      1998   Educ. Sect. Dev.                             0.00       100.00       0.00     0.00      11.52     12.39        0.00

P000771      1996   Social Rehab. (ESRDF I)                      0.00       120.00       0.00     11.48     33.11     24.85       21.56

                    Total:                                       0.00       1610.90      1.80     11.50    871.85     396.82      89.90
                                                 - 100 -


                                              ETHIOPIA
                                       STATEMENT OF IFC's
                                      Held and Disbursed Portfolio
                                             30 June, 2003
                                            In Millions US Dollars


                                              Committed                              Disbursed
                                                IFC                                     IFC
FY Approval   Company               Loan    Equity      Quasi      Partic   Loan    Equity       Quasi   Partic

               Total Portfolio:      0.00     0.00          0.00     0.00   0.00      0.00        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 12: COUNTRY AT A GLANCE

ETHIOPIA: Public Sector Capacity Building Program Support Project
- 102 -
                              - 103 -


             ANNEX 13: LETTER OF SECTORAL POLICY

ETHIOPIA: Public Sector Capacity Building Program Support Project
- 104 -
- 105 -
- 106 -
       - 107 -


MAP: IBRD NO. 31158

				
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