Mozambique - Municipal Development Project

Document of The World Bank Report No: 2243 3-MOZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR26.7 MILLION (US$33.6 MILLION EQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR A MUNICIPAL DEVELOPMENT PROJECT June 21, 2001 Water and Urban 1 Africa Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective 6/20/2001) Currency Unit = Metical 1 MZM = US$0.000048 US$1 = MZM 21000 FISCAL YEAR Government & Public Enterprises -- January 1 to December 31 ABBREVIATIONS AND ACRONYMS DNAL National Directorate of Local Administration GCM Municipal Capacity Building Office GOM Govemment of Mozambique IDA Intemational Development Association IMAP Intermediate Institute of Public Administration MAE Ministry of State Administration MDP Municipal Development Project MGF Municipal Grants Fund MPF Ministry of Planning and Finance PCU Project Coordination Unit PIM Project Implementation Manual PROL Local Government Reform and Engineering Project PRU Urban Rehabilitation Project SIFAP Training System for Public Administration Vice President: Callisto E. Madavo Country Manager/Director: Darius Mans Sector Manager/Director: Jeffrey S. Racki Task Team Leader/Task Manager: Alan Carroll  MOZAMBIQUE MUNICIPAL DEVELOPMENT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 7 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population 10 4. Institutional and implementation arrangements 10 D. Project Rationale 1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and other development agencies 13 3. Lessons learned and reflected in the project design 15 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 18 E. Summary Project Analysis I. Economic 18 2. Financial 19 3. Technical 20 4. Institutional 21 5. Environmental 23 6. Social 24 7. Safeguard Policies 25 F. Sustainability and Risks 1. Sustainability 26 2. Critical risks 27  3. Possible controversial aspects 30 G. Main Loan Conditions 1. Effectiveness Condition 30 2. Other 31 H. Readiness for Implementation 31 1. Compliance with Bank Policies 31 Annexes Annex 1: Project Design Summary 32 Annex 2: Detailed Project Description 40 Annex 3: Estimated Project Costs 67 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 68 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 76 Annex 6: Procurement and Disbursement Arrangements 82 Annex 7: Project Processing Schedule 93 Annex 8: Documents in the Project File 94 Annex 9: Statement of Loans and Credits 96 Annex 10: Country at a Glance 98 Annex 11: Terms of Reference for Project Coordination Unit 100 Annex 12: Environmental Guidelines for MGF Investments 115 Annex 13: Project Operations - Organizational Chart 125 MAP(S) MOZ3 1398  MOZAMBIQUE MUNICIPAL DEVELOPMENT PROJECT Project Appraisal Document Africa Regional Office AFTUI Date: June 21, 2001 Team Leader: Alan G. Carroll Country Manager/Director: Darius Mans Sector Manager/Director: Jeffrey S. Racki Project ID: P001806 Sector(s): BD - Decentralization, UM - Urban Management Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: N Program Financing Data [ ] Loan [X] Credit [ Grant [ Guarantee [ Other: For LoanslCredits/Others: Amount (US$m): 33.6 | Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5% Service charge: 0.75% Financing Plan (US$m): Source Local Foreign Total BORROWER 1.44 1.84 3.28 IDA 11.55 22.05 33.60 NORDIC DEVELOPMENT FUND 3.15 2.03 5.18 Total: 16.14 25.92 42.06 Borrower: GOVT OF MOZAMBIQUE Responsible agency: MINISTRY OF STATE ADMINISTRATION (MAE) Municipalities of participating cities Contact Person: Mr. Jose Guambe, Director of Municipal Development, Ministry of State Administration Tel: 258-1-307888 Fax: 258-1-428565 Email: prolmae@zebra.uem.mz Estimated disbursements ( Bank FYIUS$m): FY 2002 2003 2004 2005 2006 Annual 3.59 8.82 9.59 10.83 9.23]_ Cumulative 3.59 12.41 22.00 32.83 42.06 Project implementation period: 2002 through 2006 Expected effectiveness date: 09/01/2001 Expected closing date: 02/28/2006 OC-S PAOFoI- e ad  A. Project Development Objective 1. Project development objective: (see Annex 1) 1. The primary development objective of the proposed project is long-term, beyond the four-year life span of the project itself. It is to strengthen the capacity of municipal governments in the areas of management, finance, and the provision of infrastructure and services. This would encompass eventual improvements in the fiscal transfer system, improvements in municipal revenue mobilization and financial management, establishment of true municipal control over staffing and capacity-building, and the development of effective mechanisms for municipal provision of infrastructure and services, including the use of various forms of private sector participation. 2. The project's specific objectives are: (a) to assist the Government of Mozambique (GOM) in operationalizing the legal, institutional, and fiscal framework for municipal governance; (b) to create an institutional framework for training of elected and appointed municipal officials and municipal employees and begin the training of officials and staff of all the municipalities in basic administrative and technical subjects; (c) to pilot test a Municipal Grants (MG) mechanism to finance investments by the municipalities, with a view to laying a foundation for a mechanism which would eventually become a part of the intergovernmental fiscal system; and (d) to implement, through the MG, capital investments which would have tangible economic and social benefits while also providing an opportunity for the municipalities to improve their technical and financial capacities. 2. Key performance indicators: (see Annex 1) Legal and Institutional Reform Comonent: 1. Legal instruments elaborated and submitted for approval by the appropriate higher authorities concerning (i) recruitment, management and mobility of municipal staff; (ii) municipal budgets, financial management, accounting, and auditing; (iii) municipal revenue collection; (iv) the transfer of responsibilities and resources (e.g. for primary education and primary health) to the municipalities; and (vi) private municipal service providers and municipal public enterprises. 2. Studies undertaken and manuals prepared and disseminated for (i) recruitment, selection and employment of municipal staff (prepared in coordination with the Ministry of Planning and Finance); (ii) improving municipal financial management and revenue systems; (iii) preparation, supervision, and execution of municipal development plans and municipal annual action plans; and (iv) community participation in municipal decision-making. 3. Long-term program of municipal development elaborated in collaboration with governmental, municipal, civil society, and donor stakeholders. Capacity-Building Component: I. GCM established in IMAP and plans in place for continued existence of GCM at project close. 2. Strategy for training for municipalities developed and under implementation with linkages to the Government's public sector reform program and SIFAP. 3. Target numbers of municipal elected and appointed officials and municipal staff trained (see detailed project description for exact targets). Municipal Grants: -2 -  1. Municipalities implement yearly investment activities (works, goods, consultancies) according to the guidelines of the MG, procuring civil works contractors (firms), suppliers for the purchase of equipment, and consultants for technical assistance. 2. MG mechanism is closely monitored quarterly and evaluated annually. The MG is modified in a timely way to take account of ongoing lessons of experience. 3. By the end of the project, a refined MG is available for replication and eventual "mainstreaming" within the Government's institutional and fiscal framework. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: IDA/R2000-76 (IFC/R2000-80) Date of latest CAS discussion: 06/01/2000 The proposed project would support the primary CAS objective of poverty reduction through sustainable economic growth. The project is central to one of the CAS's three strategic priorities, namely improving governance and empowerment, a major element of which is support for the government's decentralization program. By developing further critical elements of the legal and policy framework and strengthening the capacities of the new autonomous municipal governments, and by enabling municipalities to start improving the quality and coverage of municipal infrastructure and services, the project would both advance the process of decentralization in the existing municipalities and lay the foundation for the extension of the program to other municipalities. The project also would form part of the Bank's continued support to improving human capabilities by (i) upgrading environmental infrastructure in the five cities, thereby alleviating ill health and low productivity, especially the urban poor and (ii) helping to create the conditions for the next stages of decentralization, in which the delivery of social services would be improved through deconcentrated and devolved mechanisms. The project would contribute to increasing economic opportunities through private sector-led growth by improving basic infrastructure in five of Mozambique's largest cities. 2. Main sector issues and Government strategy: The prolonged civil war in Mozambique (1975-92) had a severe impact on its urban centers. Large numbers of rural people fled to urban areas, tripling the urban population between 1980 and 1995. The urban population of Mozambique now represents about 38% of the national total (1998) and is still growing rapidly, at nearly 6% per year, compared with a total national population growth rate of around 2.4% per year (figures from the World Development Indicators 2000). The huge influx of mostly poor migrants into cities and towns overwhelmed infrastructure systems originally designed for much smaller numbers. With severely deteriorated infrastructure and services, cities are not capable of adequately supporting the economic productivity of fims and households. Living conditions in cities are deficient for most residents. Slums and squatter settlements are a very visible part of the urban landscape. The urban poor -- 62% of urban dwellers according to the most recent 1996-97 poverty study -- suffer disproportionately from bad environmental sanitation, resulting in ill health and stunted economic opportunities. Urban service deficiencies include deteriorated roads, inadequate supplies of potable water, and poor drainage and domestic sanitation resulting in widespread water-borne diseases (infant mortality was 135 per thousand in 1997 compared with 69 for low-income countries world-wide, with a major share due to diarrhea and other sanitation-related diseases). In 1993, only 23% of households in Maputo had a sewerage connection; the vast majority of urban residents still rely on pit latrines or have no sanitation facilities. Haphazard dumping and low collection levels of solid waste (only 37% in Maputo in 1993, which probably has gone down since then due to rapid growth of the city) contribute to these problems. In - 3 -  addition, a severe problem of deforestation and loss of mangroves near coastal areas results from the dependence of most of the urban population on fuel wood and charcoal for energy. Since 1987, the Government has been engaged in a program of economic rehabilitation, shifting from a command economy to one based on market forces. A policy of gradually decentralizing authority to local governments is a key feature of this program. In early 1997 the National Assembly approved a package of several laws governing municipal elections, the creation of municipal councils and assemblies, and municipal finances. Among the main components were constitutional amendments to permit the creation of local governments (Lei 9/96, November 22, 1996); the Law of Municipalities (Lei 2/97, February 18, 1997); and the Law of Municipal Finances (Lei 11/97, May 31, 1997). These constituted a comprehensive national legal framework giving municipalities extensive administrative and financial autonomy. Municipal elections were held on June 30, 1998 in 33 urban centers: 10 regional capitals (Cidades Capitais), 13 cities (Cidades), and 10 towns (Vilas). In August 1998 the newly elected municipal Presidents (mayors) were sworn in. Support for the preparation of the legislative package on municipalities was a major accomplishment of the Bank-financed Local Government Reform and Engineering Project (PROL). As the Government's Letter of Sector Policy indicates, the next few years will be a learning and testing period for the new municipalities and the central govermnent. Based on these lessons, the Government plans to go forward with further decentralization. Achieving the full degree of municipal autonomy envisaged in the laws will be a long-term task, however. Entrenched habits of centralization and authoritarianism will take time to break down, and the essential building blocks of successful government -- appropriate staff, adequate financial resources, and an appropriate regulatory framework -- will requires years of work and experience to establish and fine tune. Moreover, the perfonnance of the municipalities in the near future may be affected by the fact that the main opposition party boycotted the 1998 municipal elections, and the voter turnout was extremely low (around 15% of the eligible population). Municipal governments have consistently lacked investrnent funds, and they are barely beginning to develop systematic approaches for the provision of urban infrastructure and services. There is a huge backlog of dilapidated roads, drains, and sewer systems which have not been maintained. Recurrent services such as solid waste collection have low coverage and fluctuate with the availability of municipal or donor funding. Organizational structures for infrastructure and service provision are archaic, often relying on "force account" cadres of municipal laborers. Little use is made of private sector contracting. User fees for sewerage, sanitation, and solid waste disposal are minimal or non-existent. Municipal sanitation departnents don't keep fees collected for services; these go back to the general municipal treasury. Municipal governments' revenues are extremely low, averaging US$6.71 per capita across the five main cities in 2000. Less than half are own source or locally collected revenues (US$2.71 per capita in 2000 for the five cities), and these are largely a fees and licenses, with market fees being the most important. The majority of municipal revenues are fiscal transfers from the central government. At the same time, recurrent expenditures are increasing and now represent 70 percent of total expenditures on average. Of these, over 40 percent are consumed by personnel costs. In consequence, maintenance of municipal assets is extremely low in proportion to total expenditures, and, unless the trend is changed, municipalities will be able to afford little of the needed new investment and improvement in municipal services. To deliver the improvements promised by municipalization, municipal revenues will have to increase significantly. Financial projections undertaken as part of the preparation of the project show that under a realistic scenario of pro-active measures to increase revenues and control expenditures, the five main cities would be able to afford steadily growing investment programs and still provide for adequate operation and maintenance. This scenario presumes a modest success in increasing revenue generation (including fees to - 4 -  cover costs of services), new tax revenues that exceed the cost of collection, actively controlled recurrent expenditures, and an increase in fiscal transfers. Importantly, a number of new local taxes are provided for in the recent Law of Municipal Finances, potentially representing very productive sources of municipal revenues. In December 2000 the Council of Ministers approved the Municipal Tax Code (Decree No. 52/2000) setting out the regulations for municipalities to collect the head tax (Imposto Pessoal Autirquico ), the property tax (Imposto Predial Autdrquico), the economic activity tax (Imposto por Actividade Economica), the commerce and industry tax (Imposto Autarquico de Comercio e Induistria), and the Income Tax - Section B (Imposto Sobre o Rendimento de Trabalho - SecJcao B). The new municipalities are empowered to provide a full range of municipal infrastructure and services. Basic urban services (such as garbage collection and drainage) have always been handled by the local city and town administrations. However, the transfer of competencies for activities beyond these basic services (such as pre-school and primary education and primary health posts), along with commensurate resources, will be a long and difficult process. It will depend, to a large extent, on improving the capacity within the municipalities to fulfill existing responsibilities. MAE, with help from the PROL Project, drafted a decree regarding the transfer of competencies which is being considered by the Council of Ministers. The transfer mechanism envisaged in this proposed legislation is intended to be a contract between the central government and the municipalities spelling out the assignment of central government staff to the municipality, the transfer of fiscal resources, and the allocation of physical assets for each type of service. Finally, the new municipalities require policy reforms and assistance to improve their human resource capabilities. Except to a limited degree in Maputo, municipalities have no senior level engineers, planners, or financial specialists, and one is lucky to find middle-level technical personnel in the larger urban centers. The new municipal Presidents and Assembly members will require considerable orientation and training. Even in the private sector, there is a severe shortage of trained and experienced Mozambican engineers, planners, and financial specialists. It is especially difficult to recruit technically qualified people for long-term assignments away from Maputo. 3. Sector issues to be addressed by the project and strategic choices: Long Tem The project would constitute the first stage of an expected long-term (10-15 year) program of support for municipal government strengthening. This program, which would be multi-institutional and open to support from any donor agencies, would be one of the outputs of the project. The long-term program would cover, among other things: a. The eventual harmonization of the MG within the government's intergovernmental fiscal system and its extension to all municipalities. b. The eventual improvement of the municipal fiscal transfer system to make it more predictable and transparent. c. Continuation of reforms to give municipalities control over staffing and skills, through appropriate policies and regulations from the center. d. Development of an increasingly demand-driven municipal capacity building system through development of a training "network". -5 -  e. Greater empowerment of municipalities in revenue mobilization through assistance with tax cadastres and related technical methods. f. Testing and extension of new mechanisms for better municipal infrastructure and service provision including autonomous public services and various forms of contracts with the private sector. g. Operationalization of mechanisms to allow municipalities to exercise their responsibilities in the roads and water sectors, in both capital investment and maintenance. h. Management of urban land in a more efficient way. Short Term Under the Proiect The project would address a selected number of key priorities which are critical to continuing and improving the process of making municipalities functional: a. Completing major pieces of the legal and policy framework, particularly in the areas of municipal finance and personnel management, that are needed for the effective operationalization of municipal governments' autonomy and the improvement in urban infrastructure and services. b. Laying a foundation of basic knowledge and skills among middle and senior level municipal staff and elected and appointed municipal officials through pre- and in-service training programs; as well as establishing an institutional and material capacity, in a semi-autonomous institution (IMAP) to carry on with training over the long terrn. c. Establishing an initial set of mechanisms for municipalities to plan, manage, and maintain public investments in infrastructure and services. d. Through the proposed Municipal Grants, initiating a system for financing capital investments by municipalities to provide the opportunity to 'learn by doing' and to build legitimacy and support for the municipalization process. e. Developing new administrative models for municipal financial and fiscal management and service provision. f. Providing guidance, in the form of studies, technical assistance, manuals, and the like, for better human resource management by municipalities. g. Providing guidance and incentives for gradually improving operation and maintenance, as well as cost recovery, of basic urban services by municipalities. Taking into consideration institutional capacity constraints at the central and municipal levels and the need to keep the project from becoming overly complex, a deliberate decision was made to exclude from the project a number of important subjects. Some of these are the domain of other sectoral agencies and could be taken up through separate projects and/or donors. Among the excluded subjects are urban land planning and mapping; land management and land use control; land and housing cadastres; housing policy and housing finance; urban environmental management; urban transport and major roads; and other large-scale urban infrastructure. -6 -  C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The Municipal Development Project would have four components: (1) Legal and Institutional Reform, (2) Municipal Capacity Building, (3) Municipal Grants, and (4) Project Management and Technical Assistance. The first and second components would cover all 33 municipalities. The Municipal Grants would be a pilot program in five municipalities: Maputo, Beira, Nampula, Quelimane, and Pemba. See Section D.3 for the rationale. Detailed descriptions of each component appear in Annex 2 of this PAD. The Lezal and Institutional Reform component would provide technical assistance to the Ministry of State Administration for the drafting of legal instruments (regulations, decrees, etc.) and the preparation of studies, manuals, guidelines, and other materials needed to establish the legal and policy framework -- the "enabling environment" -- for municipal development and management. The Municipal Caoacity Building component would provide in-service training to elected and appointed municipal officials, municipal staff, and members of other organizations which support the municipalities. It would also develop materials for pre-service training and provide technical assistance to develop and improve systems and processes. A significant part of the training program would be contracted out to private and non-governmental entities. This component would develop a strategy that encompasses training in the municipal government system and public administration in general, as well as basic technical skills needed by the municipal authorities, such as municipal finance and delivery of infrastructure and services. The Capacity Building component would be institutionalized in the Intermediate Institute for Public Administration (IMAP). This component would be funded by the Nordic Development Fund (NDF) as parallel financing of the project. The Municipal Grants (MG) would provide municipalities with financial resources to implement high-priority civil works, equipment, and consultant services. The MG is based on the idea that if municipalities are to be responsible for the operation and maintenance of infrastructure and services, they should be responsible for their implementation, in the interest of building local-level capacity and promoting the sustainability of the investments. The Municipal Grants would be designed on a modest scale, as a pilot program for "learning by doing". It has been agreed that, during the initial four-year phase of this project, the MG would be initiated with five municipalities (Maputo, Beira, Nampula, Quelimane, and Pemba). The objectives of the MG are (a) to provide resources to municipalities for small and medium sized infrastructure, equipment, and consultant services; (b) to enable the municipal governments to develop capacity to plan, implement, and manage basic investments and to integrate the associated expenditures (municipal contributions to the investment costs; operation and maintenance costs) and revenues into their budgets; and (c) to test and refine the MG, identifying problems, trying different solutions, and, to the extent possible, laying a foundation for a sustainable, expandable municipal grants mechanism. It is important to note that the US$ 22.75 m. cost of the Municipal Grants component represents an estimate of the maximum amount that could probably be drawn down by the five municipalities under optimal conditions and with the best performance by municipalities and contractors. The actual amount that would be disbursed under this component would depend on many factors (see Risks under Section F.2 of this PAD) and may be significantly less than the maximum estimate. -7 -  The Project Management and Technical Assistance component would include a Project Coordination Unit (PCU) to be located within MAE and accountable to the Director of DNDA (see section C.4 below on institutional and implementation arrangements). The PCU would be headed by a Project Director and staffed by five other professionals, all long-term international or national consultants. This component would also include the provision of technical assistance to the five municipalities participating in the MG through a consulting firm. It would offer support to the municipalities on demand in the areas of municipal engineering, procurement, contract management, works supervision, and financial management. hidliftiv Baof%o _ _ _ _ _ _____________ ( 9;0\0 0,;;00 lt0;t iit02Sr; -7; WtI$ Total (U ) n:ig tota (I) Legal and Institutional Reform BD 3.37 8.0 3.37 10.0 (2) Municipal Capacity Building UM 4.77 11.3 0.00 0.0 (3) Municipal Grants llY 22.75 54.1 19.86 59.1 (4) Project Management and Technical 6.97 16.6 6.90 20.5 Assistance to Municipalities Contingencies (Physical and Price) 3.35 8.0 2.62 7.8 PPF 0.85 2.0 0.85 2.5 Total Project Costs 42.06 100.0 33.60 100.0 Front-end fee 0.00 0.0 0.00 0.0 Total Financing Required 42.06 100.0 33.60 100.0 Mozambique Municipal Development Project The Govemment IDA NDF Municipalities Total Components by Financiers Amount % Amount % Amount % Amount % Amount % (US$ Millions) 1. Legal and Institutional Reform 0.00 0.0% 3.37 100.0% 0.00 0.0% 0.00 0.0% 3.37 8.0% 2. Municipal Capacity Building 0.00 0.0% 0.00 0.0% 4.77 100.0% 0.00 0.0% 4.77 11.3% 3. Municipal Grants 0.62 2.7% 19.86 87.3% 0.0% 2.28 10.0% 22.75 54.1% 4. Project Management and TA 0.07 1.0% 6.90 99.0% 0.00 0.0% 0.00 0.0% 6.97 16.6% Total Base Cost 0.69 30.13 4.77 2.28 37.86 PPF 0.85 0.85 Contingencies 0.04 2.62 0.41 0.28 3.35 8.0% Total Disbursement 0.73 1.7% 33.60 79.9% 5.17 12.3% 2.55 6.1% 42.06 100 - 8 -  2. Key policy and institutional reforms supported by the project: Decentralization. Decentralization is one of the key pillars of the GOM's long-term program of public sector reform. Decentralization is both a means to make the provision of infrastructure and services more efficient and an essential part of a more accountable and inclusive governance system. One component -- well advanced -- is the devolution of authority, responsibility, and resources to 33 municipal governments ("autarquias municipais"). The proposed project represents the centerpiece of support for the implementation of this major element. Another component -- in its infancy -- is the deconcentration of decision-making to provincial and district levels of public administration through multi-sectoral, "horizontal" systems of planning, financing, and management. This initiative is being spearheaded by the Ministry of Planning and Finance (MPF), with support from the Ministry of State Adrninistration (MAE) and the UNDP, under the Decentralized Planning and Financing Program (Programa de Planificag5o e Financiamento Descentralizado). Legal and policy framework. The Legal and Institutional Reform component aims to help the Government to produce a package of legal instruments (regulations, decrees, etc.), guidelines, and manuals which would constitute an "enabling framework" for municipalities to effectively exercise their functions. The component would address, among other things: (i) the correction of gaps, conflicts, or other limitation in the Pacote Autarquico, the complex of 1997 laws creating the autonomous municipal govemments; (ii) the need for new legal instruments conceming recruitment, management and mobility of municipal staff, (iii) the need for legal instruments concerning municipal budgets, rules for municipal financial management, accounting, auditing, revenue collection, and expenditure management; and (iv) the need for regulations on the transfer of responsibilities and resources (e.g. for primary education and primary health) to the municipalities, private municipal service providers, and semi-autonomous municipal public enterprises; . Capacity building. Addressing institutional capacity constraints is a major focus for Government policy. The proposed project would help to complete the legal and institutional framework at the central level to support decentralized municipal governance and build institutional capacity in the municipalities for providing urban services and infrastructure. The project explicitly seeks to build upon existing institutions where possible. Thus, the Capacity Building (training) component would be based within the Intermediate Institute for Public Administration, the Government's designated institution for training of the public sector, and would be coordinated with the SIFAP. The Capacity Building program would provide training to municipal staff and elected and appointed officials, and will be linked to reform of the civil service salary and employrnent laws. It therefore would support the Government's long-term civil service reforn program, the focus of which is to improve the qualifications and skills of its public officials and increase the degree to which the public administration is service-oriented and responsive to its constituents' needs. Finally, the municipalities participating in the Municipal Grants would gain capacity, as implementing agencies, in planning, financing, managing, and maintaining capital investments. Staged approach to reform. GOM has adopted a "gradualist" approach to decentralization, in view of the country's enormous capacity constraints, and in the belief that so fundamental a reform will require time and flexibility to adjust programs to developments as they occur. The proposed project supports this approach. Within the project itself, the issues to be addressed are explicitly limited. However, one of the activities and outputs of the project would be the participatory development of a broader, long-term (10-15 years) program for municipal development. This program framework-consisting of policy reforms, capacity-building measures at the central and municipal levels, and complementary investments-would be agreed upon by the relevant Mozambican institutions and by interested external assistance agencies. It would form the basis for future support in the urban development field. -9-  The project also incorporates a new, incentives-based approach to financial assistance through the Municipal Grants, to achieve institutional development in Mozambique. Municipalities would be required to contribute an annual average of 10% in counterpart funds from their own budgets toward all activities funded by the MG. This would promote ownership and sustainability. Municipalities would also be required to demonstrate satisfactory performance in using the previous year's grant allocation in order to qualify for a subsequent allocation. If a municipality fails to meet the qualification criteria within six months of the start of the new 12-month grant cycle, it would be disqualified, and a new municipality would be invited to participate. A municipality's overall financial performance over the previous two years would, moreover, determine the extent to which the subsequent year's grant increases or decreases. This would be determined by a formula measuring the ratio of the percentage change in operating revenues to the percentage change in recurrent expenditures over a two year period. The higher the ratio, the greater the municipality's capacity to mobilize capital investment resources to leverage grant funds. This approach aims to stimulate better performance and increased self-reliance among the beneficiary institutions. However, it also implies a higher risk of slow or non-performance than traditional projects, particularly during the early stages of the project (see Section F2, Critical Risks). MG risks. monitorina. and restructuring: It is important to note that the MG component is a pilot scheme with high risks. Its design is based on detailed consultations with central government and municipal stakeholders during more than 18 months of project preparation. Nevertheless, the MG is a relatively complex mechanism whose actual performance remains to be tested. Its functioning and results would be monitored carefully through quarterly reports and evaluated annually at the project review. If the MG is found to have serious problems. it would be restructured as needed based on the lessons leamed. 3. Benefits and target population: The main benefits of the project would be: (a) an increasingly more capable and accountable municipal governance system; (b) a foundation for sustainable and reliable urban services through more effective municipal management and finance; and (c) improved economic and social conditions in the five cities from investments in roads, drainage, sanitation, community water, solid waste disposal, markets, and other municipal facilities and services. The project would benefit several groups. Households and businesses in municipalities would benefit from a more accountable, responsive, and empowered local government, as well directly from improvements in urban services and investments, and in the urban environment. Elected municipal governments would gain from having their legitimacy enhanced, as a result of their improved ability to provide services and from greater financial and managerial autonomy. The urban poor would obtain health and productivity benefits from the investments in environmental infrastructure (drainage, sanitation, community water, solid waste disposal), as they suffer disproportionately from the ill effects of the lack of such services. Finally, predominantly local private contractors and their workers, as well as suppliers, would benefit from the flow of up to $25 million in contracts for municipal civil works and equipment over the four years of the project. About 4 million people, the total population of the 33 new municipalities, would benefit from changes in the legal and institutional framework and from the capacity building component. The populations of the five municipalities targeted for the Municipal Grants amount to just under 2 million. 4. Institutional and implementation arrangements: An organization chart of the project's implementation arrangements appears in Annex 13. - 10 -  The Ministry of State Administration (MAE), through its Directorate for Municipal Development (DNDA), would be the responsible central government agency for the project. The Legal and Institutional Reformn Component would be managed directly by an official of MAE, nominated by the Minister and reporting to the Director of DNDA. This component would have a Steering Committee composed of officials from MAE, the Ministry of Planning and Finance, and a sample of municipalities. The Capacity Building component would be implemented by the semi-autonomous Intermediate Institute for Public Administration (IMAP), under a Memorandum of Understanding signed with MAE/DNDA. IMAP already has been designated as the training arm of the Government's new civil service training system (Sistema de Formacao da Administracao Publica/SIFAP). Under the project, IMAP would create a new, permanent unit within its structure, the Gabinete de Capacitacao Municipal (GCM), to manage the component. The GCM would be staffed by seven specialists, two of whom would be counterpart staff from IMAP and five who would be contracted through a specialized consulting firm. The GCM manager would report to the Director of IMAP. This component would have its own Steering Committee composed of the Director of DNDA, the Director of IMAP, and municipal officials. The GCM would operate its own budget for the implementation of the component. The five municipalities participating in the Municipal Grants would be implementing agencies in their own right for the activities funded by the MG. The municipalities would sign contracts, operate bank accounts with project funds, carry out procurement, make payments, and be accountable for their financial and technical performance. The obligations of each party would be specified in a Grant Participation Agreement signed between each Municipality and MAE. Each municipality would be required to establish a project team consisting of a Council member (Coordinator), a qualified civil engineer, a qualified accountant, and a technician. A consulting firm under contract to the Project Coordination Unit (see below) would provide technical assistance to municipalities on request to help irnplement contracts and transfer skills. A Project Coordination Unit (PCU) would be established within DNDA to administer the project's finances, oversee procurement, manage contracts, and supervise technical assistance. The PCU would be headed by a full-time Project Director reporting to the Director of DNDA. The other staff of the PCU would be a Senior Financial Controller, a Senior Procurement Specialist, and a three-person Grants Unit (see below). The Terms of Reference for the PCU appear in Annex 11 of this PAD. The PCU would provide administrative, financial management, and procurement support for the Legal and Institutional Reform component. For the Capacity Building component, the PCU's role would be limited to the provision of advice on administrative and procurement matters. An ad-hoc sub-unit within the PCU would be established to manage the Municipal Grants. This arrangement is temporary. It is expected that, as a result of the policy dialogue to be carried out during the project on "mainstreaming" of the MG and reforms of the fiscal transfer system, (see section B.3, Long-Terrn Sector Issues to be Addressed by the Project, points a. and b.), a more permanent and sustainable institutional "home" for the MG will have been agreed on. The responsibilities of this Grants Unit would be: (i) to assist the municipalities to meet the requirements for funding activities; (ii) to review the eligibility of municipalities and grant-funded activities (see Annex 2 for review mechanisms); (iii) to supervise the consulting firm providing technical assistance to municipalities; (iv) to compile annual data on the technical and financial performance of the municipalities; and (v) and to manage disbursements of grants to the municipalities. The Grants Unit would be staffed by a Grants Manager, a Civil Engineer, and - 11 -  an Accountant. A Municipal Grants Board would be established to annually review the performance of the MG and of the participating municipalities and to hear appeals from municipalities concerning decisions of the Grants Unit. The Board would consist of the Director of Municipal Development (chair), two representatives of civil society nominated by the municipalities participating in the Municipal Grants, one official of MAE, and one official of the Ministry of Planning and Finance. The Project Director would be hired on an individual, long-term contract. The remaining staff of the PCU would be contracted through a consulting firm. D. Project Rationale 1. Project alternatives considered and reasons for rejection: No intervention: The situation described in Section B.2 cries out for amelioration. The legislative reforms of 1997 that created the municipalities and the municipal elections of 1998 have produced a major opportunity to support Mozambique's emerging local government system. The GOM and local leaders have been expecting the World Bank to follow up the PROL project (1994-1999) with a new operation covering both investment and capacity building. Reforming the public sector is a priority for the Government Decentralization, including the development of autonomous municipalities, is one of the three major pillars of the Government's public sector reform program. Some bilateral assistance agencies have begun to provide limited support to selected cities and towns. The World Bank is in a good position to collaborate with other donor agencies on a comprehensive policy and capacity-building program. Improving governance is a central pillar of the Bank Group's CAS, and the project will also contribute in important ways to the other CAS pillars. For these reasons, the "no intervention" option was rejected. Centrally-imlemented. multiple-city traditional investment project: A centrally implemented, multiple-city traditional operation was considered undesirable for two reasons. First, it was agreed-and the Bank's operational experience clearly showshat, with few exceptions, investment programs for municipal infrastructure and services should be implemented by the municipalities themselves in the interest of (a) building capacity through "learning by doing" and (b) ensuring the sustainability of the investments, by making the institution responsible for operation and maintenance-the municipal government-also responsible for implementation. It was therefore decided that, for the investment component, decentralized implementation should be the priority approach in this new operation. This would, therefore, preclude large-scale infrastructure works which could neither be managed nor maintained locally. Second, the Government felt very strongly that the investment component of the proposed project should cover at least five cities in order to meet expectations generated under PROL and to have a reasonable degree of impact. The Bank's traditional investment approach is cumbersome when extended over multiple local governments because it requires too much ex ante planning and review. More importantly, the traditional investment approach does not lend itself to being expanded to more cities in future phases of the program. Therefore, a program-type approach was needed. Small grant Mrogram for municipal investments with development of long-tern framework: The Municipal Grants described in C. I above and in Annex 2 would be, in principle, an agile and replicable mechanism for financing municipal infrastructure in multiple municipalities. As a pilot program, the Municipal Grants would be part of a first stage of support for municipal infrastructure and services, focused on building capacity at the municipal level, ensuring that the municipalities are suitably empowered, and developing a long-term framework for further support. The Municipal Grants would be introduced as part of the proposed project, and, if successful, could be expanded as a key element of the long-term municipal development program. The Municipal Grants would mitigate implementation risks by releasing only - 12 -  modest amounts of money at one time to each municipality and by requiring acceptable use of the previously allocated funds before further allocations. This approach would also tie in with long-term capacity-building, in that the eligibility of municipalities for subsequent annual grants and the size of these allocations would be based on municipalities' performance in implementation and finances. 2. Major related projects fmanced by the Bank and/or other development agencies (completed, ongoing and planned). Latest SupervisJon Sector Issue Project (PSR) Ratings .___________________________ .______1X,_________._ t (Bank-financed projects only) ImplementatIon Development Bank-financed Progress (IP) Objective (DO) Technical assistance for municipal Local Government Reform and S S government policy and capacity Engineering (PROL), Cr. 2530. building in three areas: legal, financial (Completed) and administrative, and technical. Technical assistance to strengthen legal Capacity-Building: Public S S institutions and build legal capacity; Sector and Legal Institutions assistance to MAE to formulate and Development Project, Cr. 2437 implement civil service reform policies, (Completed) improve public sector personnel management, and build administrative capacity within the ministry and its provincial offices Support for establishing private sector National Water Development II S S management of urban water supply in Project, Cr. 3247. (Ongoing) the five main cities; rehabilitated and new water supply facilities; support for policy, regulatory, and monitoring measures. Institutional development of water National Water Development I S S sector; development of regulatory Project, Cr. 3039. (Ongoing) capacity for the sector; preparation for private management of urban water in five main cities; other measures in water resource management and rural water. Support for the Technical Unit Building Capacity to Guide and S S (UTRESP) charged with elaborating, Coordinate Public Service launching, and coordinating a strategy Reform - World Bank support for broad, long-tern, public sector through IDF Grant. (Ongoing) reforn - 13-  Other development agencies USAID: Local Empowerment in Strengthening of participatory Governance Activity (LEGA) in towns governance in Zambezia Province (completed 2000). Finland (FINNIDA): Nacala Integrated Municipal capacity building, Urban Development Project (completed emergency works, urban 1999). planning and land management. Sweden (SIDA): Public administration Strengthening of framework for reform and decentralization (national municipalities and local level) (ongoing to 2003). administration Austria: Promotion of District Capacity building in local administration and municipalities in planning and infrastructure Dondo and Marromeu (ongoing to rehabilitation. 2001). Netherlands: Urban Environmental Capacity building and small Management Program (PROGAU) in investments. Nampula through Centro de Desenvolvimento Sustentavel with MICOA (completed 2000). DANIDA: Support to the PROGAU in Same. Montepuez, Pemba, Ilha de Mocambique, Mocuba and Quelimane (ongoing through 2003). France: Addressage in Beira, Nampula, Mapping and geographic Quelimane, and Pemba (ongoing information bases for the four through 2003). cities (as was done in Maputo). Germany (GTZ): Decentralization and Capacity building. Municipal Development Project (PDDM) in Angoche, Monapo, Catandica, Manica and Vilankulo (ongoing through 2006). Swiss Agency for Development and Capacity building of Cooperation: Program of Support to municipalities and civil society; Decentralization and Municipalization improvement of services. (PADEM) in Cabo Delgado, Niassa, and Nampula Provinces (pilot phase ongoing through 2001; main phase through 2004). IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 14 -  3. Lessons learned and reflected in the project design: Africa and Other Regions: The proposed operation incorporates the main lesson of the World Bank's experience in urban development from the region and worldwide. The main lessons on decentralization and urban management are drawn from (i) the Africa Urban Assistance Strategy prepared for the World Bank's Urban Strategy of 1999; (ii) the Operation Evaluation Department's Evaluation Summaries; and (iii) the report "Fiscal Decentralization and Sub-national Finance in Africa" (DANIDA and World Bank, 2000). The project team examined four operations in the region designed to channel funds to local governments for investments through grant systems: the Zimbabwe Rural District Council Pilot Capital Development Project (closed in June 2000); the Zimbabwe Local Government Capital Development Project (negotiated but "on hold"); the Uganda Local Government Development Program (active); and the Senegal Urban Development and Decentralization Project (active). The Bank has financed numerous municipal grant mechanisms in other regions; two examples which were examined in the preparation of the present project are the Parana Municipal Development Project in Brazil and the Municipal Development Projects I and 11 in the Philippines. Among the key lessons that have been incorporated in the design of the proposed project: I1. Long-term approach. The project takes into account the fact that the development objectives in the local government area are inherently long-termn and must be pursued not on a project-by-project basis but in the framework of an extended program. This gives rise to the conceptualization of this project as the first stage of a hoped-for long-termn program, which would be an output of the project. 2. Realistic objectives. A further lesson is that local government projects should establish realistic development objectives, taking into consideration (i) the long-term nature of the fundamental objectives and (ii) that it takes a "critical mass" of technical assistance, training, and investments, supported by a positive "enabling environment, to produce real results. The project's development objectives (see A. 1) have thus been forrnulated as modest, concrete, and specific objectives which are considered achievable within the span of the project's life. 3 . Municipal implementation. As mentioned in D. 1, the project incorporates the lesson that investment programs for municipal infrastructure and services should be implemented by the municipalities themselves in the interest of (i) building capacity through "learning by doing" and (ii) promoting the sustainability of the investments. 4. Ownership and sustainability of investments. In line with the previous point, the Municipal Grants mechanism is designed with several features which, according to experience, should promote ownership and sustainability of investments by municipal governments. One is the requirement for an annual average of 10% counterpart fund contribution from municipalities toward all activities financed by the MG. Another is the requirement for an operation and maintenance plan for each activity financed and the monitoring of the actual performance of O&M once investments are completed. 5 . Attention up front to implementation. The Govemment's main client agency, the Ministry of - 15 -  State Administration, and the Bank have invested considerable time working out the details of effective institutional arrangements during the preparation phase. Such "up front" attention to implementation details has been shown to be key for project impact and sustainability. 6. Demand and performance-based approaches. Prior experience has shown that strengthening sub-national governments should be a demand-driven process, to ensure that the interventions are truly effective and sustainable. Ideally, the grant system should operate with self-selection of municipalities based on meeting criteria for participation. Mozambique's municipalities and the legal framework are too new and weak for such an approach, and the Government has insisted that five municipalities be pre-selected for the pilot. Nevertheless, the MG does incorporate an initial" performance incentive" approach whereby a municipality's eligibility for an annual grant is dependent on its performance in using the previous year's grant, and the amount of the subsequent grant varies in proportion with the municipality's ability to improve its financial position. 7. Mitigating risks of political factors. Previous local government projects in other countries have shown that there is a risk of political interference in the operations of capacity-building programs and municipal funds. The ideal approach is to try to institutionalize such mechanisms outside of Government ministries and to provide steering committees or boards with non-political members. In this project, the Capacity Building component would be housed in a semi-autonomous body, the Intermediate Institute of Public Administration, whose vocation is public sector training. It would have been desirable to establish the Municipal Grants as a separate entity, but the institutional friamework in Mozanbique is not sufficiently developed to allow it at this point. The possibility of setting up a new Municipal Development Institute was raised during project preparation, but the Govermnent considered the idea premature. Therefore, for the pilot phase under the project, the MG would be managed by an ad hoc unit in the Project Coordination Unit. The expectation is that once the MG mechanism is tested and proven, its permanent institutionalization would be examined as a key issue for the long-term municipal development program. Mozarnbique: The Bank has supported two prior urban projects in Mozambique, the Urban Rehabilitation Project (PRU, Cr. 1949), effective from 1989 to 1996, and the Local Government Reform and Engineering Project (PROL, Cr. 2530) which became effective in 1994 and closed in 1999. PRU financed mainly infrastructure in Maputo and Beira. The main outcome of PROL was the set of laws, known collectively as the Pacote Autairquico, that comprise the legislation creating the first 33 autonomous municipalities. The recently completed First Roads and Coastal Shipping Project (ROCS I, Cr. 23740), which became effective in 1992 and closed in 1999, also provides useful lessons. The lessons from these projects which are reflected in the MDP's design include: 1. Definition of responsibilities. The MDP reflects the lesson that project design should be well focused and simple, with clearly defined institutional responsibilities. MAE, through its Directorate for Municipal Development (DNDA), would be the main central government counterpart agency for the project (see Section C4 above). The Legal and Institutional Reform component falls clearly within MAE's main mission, which is policy formulation and legal oversight of municipalities. Both the Capacity Building and MG components require implementing agencies with specialized vocations in the respective areas. In both cases these are existing institutions (IMAP and the municipalities) with the appropriate mission. 2. Trust and ownership. The previous projects showed that the success of efforts toward - 16 -  governance reforms are especially dependent on a high level of trust between the Bank and the borrower and "ownership" by the client agencies. This lesson came particularly forcefully from the PROL project, and it has strongly affected the project preparation process. The Government's commitment and ownership are discussed in Section D.4 below, while Section D.5 indicates the importance the Bank placed on building the relationship with the borrower. 3. Institutional reform and investment reinforce. The PRU focused on physical investments with little attention to institutional or policy measures while the PROL aimed to bring about policy and institutional changes without accompanying investments. Both projects fell short. The MDP attempts to give due weight to both aspects, recognizing that (i) investments provide a good vehicle for local institutional reform and capacity building and (ii) the sustainability of investments at the local level depends on a conducive policy and legal framework at the central level. 4. Demand driven technical assistance. Some technical assistance interventions for local authorities in the PROL project were not successful because they were supply-driven and top-down. The new project incorporates features to correct this. The Capacity Building component includes annual beneficiary assessments as well as include a Steering Committee of representatives from the municipalities who will meet twice a year to approve action plans and strategies. The Municipal Grants also includes a Municipal Grants Board with municipal officials on it. Also, technical assistance for the municipalities is to be supplied by a consulting firm which will operate on a demand-driven basis. This firm would be evaluated annually for the technical quality of its outputs as well the promptness and consistency of its responsiveness to the Municipalities. 5. Early skill training. Experience has shown that, where implementation capacity is especially scarce (as in Mozambique), projects should ensure that project personnel have the necessary skills from the start. Appointment of qualified staff, and their training in administrative procedures and Bank guidelines, are a key part of the project preparation process and the early stages of implementation. - 17 -  4. Indications of borrower commitment and ownership: The borrower's commitment at the policy level is demonstrated by the National Assembly's enactment of the municipal legislative package in early 1997, the holding of municipal government elections in June 1998, and the drafting of some complementary regulations and decrees. Ownership of the proposed project has grown throughout the preparation period. MAE requested a project to support the new municipalities even before PROL closed, and the Ministry has guided the development of the project from the start. The basic project design was established under the previous Minister for State Administration, and his successor, who assumed his post in February 2000, reconfirmed his support for it. The Ministry's and the Bank's project preparation teams have together gone to unusual lengths to ensure ownership from the various implementing agencies. The municipal council leaders of the five main municipalities have been included in the core project preparation group. Three workshops in Maputo plus two sets of major missions to each city during the course of project preparation have enabled municipal officials and their technical staffs to fully understand and participate in the design of the project. Consultations also were held with members of the municipal assemblies and representatives of civil society. Finally, extensive discussions with the Director of IMAP and his staff have contributed greatly to the design of the Capacity Building component. In 2000 the previous Director of IMAP was appointed as head of MAE's National Directorate for the Public Service (Direccao Nacional para Funcao Publica, DNFP, the other in MAE apart from DNDA), responsible, inter alia, for SIFAP. This ensures the full ownership of the relevant parts of the project by DNFP as well as DNDA, and would help coordination between the project and SIFAP. 5. Value added of Bank support in this project: The Bank is the only extemal assistance agency in a position to provide significant resources for a national program in urban policy, capacity-building, and investrnent. While a number of other agencies are supporting activities in the sector, their interventions are limited in scope, mostly focusing on particular urban centers or specific aspects of urban development. The Bank's comparative advantage is to operate simultaneously at the center and local levels, linking both capacity building and investment to policy reform and the strengthening of municipal autonomy, enabling an iterative and cumulatively reinforcing process. The Bank's 10 years of experience in urban development in Mozambique (through the PRU and PROL projects) give it credibility and a mature understanding of the issues. Moreover, throughout the duration of these projects, as well as other projects related to reform of the public sector, the Bank has built up a relationship of confidence with MAE in particular and the Government more broadly. As a result, the Bank is leading the support for the next stages of public sector reform, now in the design stages, which will also be supported through a Bank-funded project. As a multilateral agency, the Bank is in a position to serve as a focal point for establishing a programmatic framework for urban development with the concemed Mozambican institutions and other assistance agencies. Developing a program of support over the long-term will be an output of the project. The other main agencies active in the public sector reform sector are UNDP, through its support of SIFAP among other initiatives, and Swedish SIDA, through its long term support for the institutional development of MAE. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): O Cost benefit NPV=US$ million; ERR = + % (see Annex 4) o Cost effectiveness * Other (specify) The legal and institutional reforms to be undertaken with the support of the project would lead at the national level to the introduction of regulations and guidelines for municipal budgeting and accounting, - 18-  municipal personnel management, and other elements of municipal finance and management. These reforms would lead to local improvements in municipal taxation, fee collection, financial administration, and service provision. These reforms are important not only for improved municipal management but also the national economy. The value added from urban-based activities must grow faster than the economy as a whole as countries develop economically. Urban services are essential for commercial and industrial enterprises to modernize. In the long term, successful municipal development can reduce the dependence of local governments on the national budget. The above also applies to the municipal capacity building program proposed under the project. The benefits of the training of municipal assembly members, council officials, and staff would only be realized over time. However, in both the short and the long term it will improve the contribution of cities to economic growth and reduce the burden of municipal governments on the national budget. The Municipal Grants would provide an opportunity for capacity building at both the national and local levels. The investments financed by the MG are expected to yield high economic benefits. Small and medium scale capital investments in infrastructure rehabilitation and expansion generally yield high rates of return compared with larger-scaled investments in new infrastructure. There have been nurnerous examples of high economic rates of return elsewhere in Africa from these types of programs. Economic rates of return of 20% to 60% have been common in such projects throughout Africa. Under the Municipal Grants, each municipality would select and prepare individual investments according to its own priorities. This would be done on a programmatic basis each year during the project period. The investment programs for the five cities for the first three years of the project have been identified, with their approximate costs. Detailed designs and costs for the first year's investments have been prepared. The infrastructure sub-projects for the first year range in value from US$40,000 (sanitation facilities and solid waste containers) to US$250,000 (upgrading of roads and drains in a lower-income area of Maputo). The maximum size of individual works in the second and third years would approach US$450,000 in Maputo and Beira. The small size of the investments to be financed and the need for agile, simple procedures in the capacity-constrained Mozambican context make it difficult to justify the time effort, and expense of calculating conventional economic rates of return. In addition, many investments (e.g. community water supply, sanitation, drainage and street lighting) would not lend themselves to quantification of benefits, even if the skills to do so were readily available. Therefore, the MG would use a checklist designed to assess the economic justification and cost effectiveness of each type of investment. This would serve as an adequate proxy method for economic evaluation. This approach is explained in Annex 4 of this PAD and would be set out in detail in the Project Implementation Manual. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR= % (see Annex 4) A detailed analysis ("Municipal Finance and Fiscal Impact Analysis", by Roy Brockman and Lauren Wojtyla, October 2000) was undertaken of the fiscal situation and potential for financial improvement in the five municipalities (Maputo, Beira, Quelimane, Nampula, and Pemba) which would participate in the Municipal Grants. The cities have limited resources and are dependent on transfers from the central governnent. Own source revenues are from fees and licenses, mostly market fees. As municipalities were elected in 1998, comparisons of data before and after that year are difficult. The 1997 Municipal Finance Law allows municipalities to collect several taxes (property tax, head tax, economic activity tax, and commerce and industry tax), but municipalities have not started collecting them because regulations have not yet been passed. Cities use most of their revenue for recurrent expenditure, mainly for personnel and - 19-  goods and services. This leaves very little for capital improvements. The project would provide supplemental funding to the cities for new investments through the Municipal Grants (MG). The "Municipal Finance and Fiscal Impact Analysis" study made projections of possible municipal finance performance in the five cities over the 2001-2005 period. Because trend projections could not be made due to the lack of time series data, two scenarios were developed, the "status quo" projection and the "financial improvement" projection. Based on these, the study applied a financial model to analyze the potential impact of the annual MG allocations on the financial situation of each city. The objective was to deternine the extent to which the municipalities could absorb the projected grant amounts, while ensuring that sufficient funds were set aside each year for operation and maintenance of the investments. Under the "status quo" scenario, the amounts of investments that municipalities can afford decline dramatically after the first year of the MG on account of the increasing maintenance costs associated with the program and the limited net revenues generated. The "financial imnprovement" scenario, however, shows that all the municipalities would be able to afford growing investment programs while making adequate provisions for O&M. The financial improvement scenario is a realistic one, in which municipalities improve their revenues, control costs, and have growing surpluses which can be used for the annual average of 10% counterpart contribution they would pay toward MG financed activities. Municipalities that gradually introduce reforms would afford a growing capital development program under the project. The need for significant improvements in the collection of additional revenues is clear for each municipality to be able to participate and for the MG's success as a program. This implies a key link with the Legal and Institutional and Capacity Building components of the MDP. Under the financial improvement scenario, some MT 532.8 billion in investments are possible in total for the five municipalities over the four years of the MDP. This is equivalent to about US$33.4 million over a four-year period. The financing plan for the project assumes a somewhat lower, though still optimistic, outer envelope of US$25 million. Fiscal Impact: See above. 3. Technical: Works and equipment financed by the Municipal Grants should be cost effective, with functional engineering standards in accordance with sector norns. The project would incorporate the following premises for the assessment of capital investments: (i) rehabilitation and upgrading of existing infrastructure would normally take precedence over new infrastructure investment; (ii) the expected impact of proposed investments on service levels and the consequences of deferring the investments should be assessed; and (iii) the relationship of sub-projects to other sectors (e.g. increases in water supply requiring improvements in wastewater collection and treatment) should be assessed. The checklist that has been prepared for evaluating sub-projects eligible for financing under the MG (see E. I above) presents specific questions and requests specific information to be used by the municipalities and the Project Coordination Unit to assess the cost effectiveness and technical viability of each sub-project. The limited capacity of domestic civil works contractors is an important constraint. The possibility of supporting capacity-building of works contractors through the project, as has been done under ROCS, will - 20 -  be assessed. Some of the smaller civil works would be designed with labor-intensive specifications to keep costs down and make it easier for domestic construction firms to qualify and perform. 4. Institutional: The institutional arrangements for the project are being put in place before the expected effectiveness of the credit. The Ministry of State Administration (MAE) has been the Government's lead agency and is responsible for the preparation of the project. MAE delegated this responsibility to its National Directorate of Local Administration (DNDA). The Director of DNDA has the authority for political and strategic guidance of the project. However, he/she would not be involved in the day-to-day management of the project. A full-time Project Director (PD), directly responsible to the Director of DNDA, would be appointed. The PD would head a Project Coordination Unit (UCP) which would oversee the three components and their respective implementing agencies. 4.1 Executing agencies: The Ministry of State Administration (MAE), through its Directorate for Local Administration (DNDA) would be the implementing agency for the Legal and Institutional Reform component. The Intermediate Institute for Public Administration (IMAP) a semi-autonomous organization accountable to MAE, would be the implementing agency for the Capacity Building component, via a Memorandum of Understanding between MAE and IMAP. A new unit, the Office for Municipal Capacity Building (Gabinete de Capacitacao Municipal/GCM), would be created within IMAP to manage the component. The GCM would be staffed by seven specialists, two of whom would be counterpart staff from IMAP and five who would be contracted through a specialized consulting firm. The GCM manager would report to the Director of INAP. The GCM would operate its own budget for the implementation of the component. Details on the operation of the GCM appear in Annex 2 of this PAD. The five municipalities participating in the Municipal Grants would be implementing agencies in their own right for the activities funded by the MG. The municipalities would sign contracts, operate bank accounts with project funds, carry out procurement, make payments, and be accountable for their financial and technical performance. The obligations of each party would be specified in a Grant Participation Agreement signed between each Municipality and MAE. Each municipality would be required to establish a project team consisting of a Council member (coordinator), a qualified civil engineer, a qualified accountant, and a technician. A consulting firm under contract to the Project Coordination Unit (see below) would provide technical assistance to municipalities on request to help implement contracts and transfer skills. 4.2 Project management: To assist DNDA in project management, a Project Coordination Unit (PCU) would be established to provide specialized, technical, and project-specific administrative skills which MAE does not have in-house. A full-time Project Director (PD) responsible to the Director of DNDA would be appointed to head the PCU. The other staff of the PCU would be a Senior Financial Controller, a Senior Procurement Specialist, and the three members of the Grants Unit (see below). The PCU would provide administrative, financial management, and procurement support for the Legal and Institutional Reform component. For the Capacity Building component, the PCU's role would be limited to the provision of advice on administrative and procurement matters. - 21 -  As explained in Section D.3, it would have been desirable to establish the Municipal Grants mechanism as a separate entity, but the institutional framework in Mozambique is not sufficiently developed to allow it at this point. The possibility of setting up a new Municipal Development Institute was raised during project preparation, but the Government considered the idea premature. Therefore, for the pilot phase under the project, the MG would be managed by an ad hoc unit in the Project Coordination Unit. The expectation is that once the MG mechanism is tested and proven, its permanent institutionalization would be examined as a key issue for the long-term municipal development program. The Grants Unit would be staffed by a Grants Manager, a Procurement Officer/Municipal Engineer, and an Accountant. The Terms of Reference for the PCU as a whole and the individual positions in it appear in Annex 11 of this PAD. Following careful, detailed discussions between the Bank and MAE, it was decided that the Project Director would be hired on an individual, long-term contract based on advertised, competitive recruitment. The remaining staff of the PCU would be contracted through a consulting firm, to ensure better cohesion in the unit, the flexibility to change, replace or increase staff as needed, and because a firm is likely to have access to a wider selection of qualified personnel. The PD would be engaged separately to make him or her directly responsible and accountable to the Ministry. 4.3 Procurement issues: The PCU will include a Senior Procurement Specialist to conduct procurement and to provide advice, training and quality control. Details of procurement arrangements appear in Annex 6 of this PAD. 4.4 Financial management issues: The Financial Controller of the PCU will be responsible for ensuring that financial management and reporting procedures will be acceptable to the Government, the World Bank and other Cooperating Partners. The principal objective of the Project's financial management system (FMS) will be to support management in their deployment of limited resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes, that will serve the needs of the people of Mozarnbique. Specifically, the FMS must be capable of producing timely, understandable, relevant and reliable financial information that will enable management to plan, implement, monitor and appraise the project's overall progress towards the achievement of its objectives. For the Project to deliver on the aforementioned objectives, the financial management system will be developed in accordance with the Financial Management Action Plan presented in Annex 5. Salient features of the Action Plan include: retention of a Financial Management Consultant to develop and install the Project's FMS and to prepare the Project's Financial Procedures Manual; quarterly financial reviews by the project's Management Team; recruitment of the PCU, Municipal accounting staff and the availability of support staff; capacity building; establishment of a Fixed Assets Register and a Contracts Register; monthly bank reconciliations and quarterly reporting of financial information; cash flow management including variance analysis; and an annual external audit undettaken on terms of reference acceptable to the Bank. By credit effectiveness, the Project will not have in place a FMS that can provide, with reasonable assurance, accurate and timely information as required by the Bank for PMR-based disbursements i.e. the Project Management Report (PMR). However, the successful implementation of the Project's FMS and Financial Procedures Manual should facilitate the introduction of PMR-based disbursements within 18 - 22 -  months of credit effectiveness. In that regard, a financial management review of the Project will be undertaken by a World Bank Financial Management Specialist within 12 months of credit effectiveness to assess progress. In the short-term, existing disbursement procedures, as outlined in the Bank's Disbursement Handbook, will be followed i.e. Direct Payment, Reimbursement and Special Commitments. 5. Environmental: Environmental Category: F (Financial Intermediary Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. An environmental analysis (EA) was delivered in October 2000, reviewed by the Africa Safeguard Policies Enhancement Team (ASPEN), and subsequently submitted to the World Bank's Infoshop. The EA assessed the environmental management capacity at Mozambique's five major municipalities, namely Maputo, Beira, Nampula, Quelimane, and Pemba. These municipalities will implement the civil works planned under the project's Municipal Grants (MG) component. The EA also assessed the environmental management capacity at four minor municipalities (Cuamba, Manica, Angoche, and Maxixe). In conjunction with the above assessments, the EA report noted in detail Mozambique's numerous efforts to address environmental issues. For example, there are two existing agreements between the Municipality of Maputo and the Eduardo Mondlane University that support environmental studies important to the municipality (study on mangroves and studies related to the management of waste oils generated in the petrol stations of the city). The Municipality of Pemba has developed an environmental strategy for the MDP and the general urban environment. Some key components include the identification of risks related to civil works; the need for environmental impact assessment in relation to large-scale civil works; sewerage treatment prior to discharge at the coast; and dune stabilization. The Nampula Municipality recently renewed a partnership with a Danish NGO (MS) which will provide support in the areas of community education, training of extension workers at the Directorate of Environment, Water and Sanitation, and with regard to sanitation-related activities. The results of the EA indicate that there are currently substantial variations between municipalities with regard to their ability to identify, manage, and monitor the environmental impacts of civil works as well as any other environmental problems for which municipalities are directly responsible. Despite these variations, the EA report notes that it will be possible to establish the degree of capacity building required to ensure the effective implementation of the Municipal Development Program (MDP). This is due to the fact that the scope of civil works envisaged by the MDP is broadly comparable across all municipalities. In this context, the level of knowledge required to establish municipal-level capacity for environmental management of the civil works progran will be similar across municipalities. Thus, the EA report recommends short/medium term and long term capacity building measures as follows: * The short/medium term training would take the form of one-week (minimum) training workshops for technical staff responsible for day-to-day activities and the monitoring of civil works, and who regularly engage in dialogue with the workforce. These workshops would be facilitated by Provincial MICOA and independent specialist consultants. The curriculum should focus on (i) the environmental impacts of the civil works program and province-specific environmental problems; (ii) relevant Mozambican environmental legislation; and (iii) the importance of adopting a multidisciplinary approach to EA and the forging of strong institutional links. * The long-term training program is proposed for technical staff already tasked with environmental responsibilities. Those staff selected would register for masters-level specialist training in an appropriate environmental discipline, i.e. environmental impact assessment or environmental - 23 -  management. Independent specialist consultants would be contracted to engage in a process of dialogue with municipal governments to identify personnel suitable for specialist training, and to identify the most appropriate specialist training courses for the selected personnel to attend. The consultants should also act as technical advisors on environmental issues over the duration of training and until functioning environmental units, run by suitably qualified staff, have been established. The proposed training program will be revisited during project implementation. In addition, the EA report provides an environmental mitigation plan designed to address potential environmental impacts under MDP (see Annex 12). The environmental mitigation plan will be included in the Project Implementation Manual. 5.2 What are the main features of the EMP and are they adequate? The main features of the mitigation plan are the identification of potential environmental impacts of civil works (surface water drainage channels, waste disposal and management facilities, public latrine construction, sewage disposal and treatment, minor road construction and rehabilitation, construction and maintenance of footpaths, water supply, hand pump and mechanized bore hole water supply, street lighting) and recommendations on how to prevent or mitigate against potential impacts. Institutional responsibilities, timeframe, and cost estimates for implementation of the mitigation plan will be added during implementation. The purpose of this mitigation plan is to assist (i) the municipal governments in determining the scope of civil works permissible for funding under the MG; and (ii) the MDP project coordination unit in reviewing proposals for civil works scheduled for funding under the MG. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: Final EA report received October 2000 Not applicable 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? To ensure that comparable infornation was obtained for the major and minor municipalities, a questionnaire was prepared and forwarded to the municipal offices prior to the site visits. The responses contained in these questionnaires formed the basis for the information presented in the EA report. First, the EA report describes the organizational structure of the major and minor municipal councils, and second, current capacity for managing and assessing environmental components of civil works is highlighted. Finally, the EA report provides an assessment of the capacity of the municipalities to incorporate environmental considerations in the planning and implementation of investment projects. Furthermore, relevant officials and staff of the Ministry of State Administration, the Ministry of Environmental Coordination, and the municipal governments were consulted during the preparation of the EA. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The environmental guidelines developed by the EA (see Annex 12 of this PAD) would be converted into a procedural checklist which would become part of the Project Implementation Manual. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. - 24 -  About 4 million people, the total population of the 33 new municipalities, would benefit from changes that the project will help to achieve in the legal and institutional framework and from improved municipal governments performance through the capacity building component. In particular, households and businesses in municipalities would benefit from a more accountable, responsive, and empowered local government, as well directly from improvements in urban services and investments, and in the urban environment. Elected municipal governments would gain from having their legitimacy enhanced, as a result of their improved ability to provide services and from greater financial and managerial autonomy. The urban poor would obtain health and productivity benefits from the investments in environmental infrastructure (drainage, sanitation, community water, solid waste disposal), as they suffer disproportionately from the ill effects of the lack of such services. Major risks of negative social impacts are not foreseen. Physical investments will be demand-driven, and the details of the social impact cannot be assessed at this stage. However, as explained elsewhere in this PAD, the physical investments would be small and would be in built-up urban areas. It would be the policy of the Municipal Grants to avoid or minimize any adverse impact such as involuntary resettlement; in any cases where an infrastructure sub-project is likely to cause negative impact on people or property, the numbers of households affected would be very small. Due diligence will be applied to ensure compliance with Bank safeguard policies. 6.2 Participatory Approach: How are key stakeholders participating in the project? MG The key stakeholders in this project are the municipal governments and the Ministry of State Administration which has primary responsibility for the municipal policy framework at the central level. Please see Section D.4 of this PAD regarding their ownership and commitment. Overall participation in the decision process at the local level will be improved by the increased accountability of elected local officials that is a developmental goal of the project. Regarding the ultimate users of the investments under the Municipal Grants, the PCU would ensure that affected communities are consulted from an early stage and will provide guidance on World Bank standards during the design of physical investrnents, in particular social assessments and resettlement frameworks when needed. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Civil society organizations will participate in the investment selection process through their representatives in the MG Board. The MG would also include a requirement in its operational procedures that communities affected by any physical sub-project be consulted regarding site selection and design. Municipalities would have to document such consultations in their application for funding. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The primary, long-term development objective of the proposed project is to strengthen the capacity of municipal governments in the areas of management, finance, and the provision of infrastructure and services. Positive social development outcomes will consist of improved living conditions in the municipalities as described above. All institutional arrangements designed for the project are therefore targeted towards achieving improved social development in municipalities. 6.5 How will the project monitor performance in terms of social development outcomes? The Project Coordination Unit/Grants Unit will ensure that each dossier with a sub-project proposal adequately documents any impact on local communities and incorporates relevant mitigation measures. The PCU will provide annual reports on ex-post compliance with the measures. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? -25-  7777 7 : LSS0 ;L Poity: App-ic:bility Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes * No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OD 4.30) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. See section 5 above regarding environmental screening provisions for small- and medium-sized urban infrastructure investments in five municipalities financed under the Municipal Grants. F. Sustainability and Risks 1. Sustainability: The question regarding the project's Legal and Institutional Reform component is the extent to which the government would promptly enact the new decrees, regulations, and other legal instruments that would be produced under this component. This is difficult to predict, because the enactment of legal instruments is a political process. Past experience-as in the case of the Municipal Tax Code which was sent to the Council of Ministers in mid-1998 but was only approved in December 2000-shows that there is a lot of uncertainty as to the timing of reforms. The project finds assurance of the government's commitment to extending the legal and institutional framework in two factors. One is that the Legal and Institutional Reform component was prepared entirely by the Ministry of State Administration. The work plan for the component is therefore fully "owned" by the client. The other is that municipal governments, as autonomous political entities, have been and should continue exerting pressures on the central government to implement the "enabling" legal instruments for municipal finance and management. There is a risk that changing political circumstances might lead the government to not create additional municipalities or to not extend the competencies of the existing municipalities beyond the core urban services. Either of these situations would represent a blockage in the decentralization program. The project aims to promote conditions in which this would be less likely to happen by enabling the municipalities to show some concrete results through the Municipal Grants, thereby enhancing their legitimacy; by creating a framework for further donor support; and by building support for the municipalization process among the affected populations. There are two aspects to the sustainability of the Capacity Building Component. One is the sustainability of the institutional framework for providing in-service and pre-service training to officials and staff. This faces few risks, as the new Capacity Building Office will be fully integrated into the existing IMAP from the start. The other aspect is the sustainability of the benefits of the training. MAE's priority for the training program under this project is to provide as many officials and staff as possible in the 33 municipalities with basic knowledge; i.e., a strategy of training widely and broadly for the many rather than deeply for the few. It is likely, therefore, that the benefits of the training program would likewise be broad but not deep, in the sense of substantially implanting new technical skills. Even so, as with all training programs for the public sector, some of the benefits could be lost to the public sector (but not to the economy as a whole) because of the government's difficulty in retaining skilled staff. The mitigation - 26 -  measures for this are long-term. The govermment is launching the next phase of civil service reforn to help address this problem, and the project would work closely with these initiatives. The Legal and Institutional Reform component would seek to consolidate the autonomy of municipal governments to manage their own staff, thus freeing them to adjust their staffing tables, salary scales, and employment conditions to local needs and the local environment. The project would also encourage contracting private enterprises to deliver services, as well as local consultants to complement the regular municipal staffs. Nevertheless, in the short term, as economic growth continues to fuel demand for scarce skills, losses to the public sector of recently-trained staff will be difficult to avoid. The Municipal Grants mechanism also poses sustainability issues at two levels. One is the sustainability of the MG as an institution. The MG would require outside funding (from the World Bank and/or external assistance agencies) for its medium/long-term continuation. It is hoped that, if successful, the MG can be moved, in the next phase of the municipal development program, from its initial ad hoc status to a more permanent institutional "home". The expectation is that once the MG mechanism is tested and proven, its permanent institutionalization would be examined as a key issue for the long-term municipal development program. The other aspect concerns the sustainability of the capital investments funded by the MG. The Municipal Grants would require all proposals for sub-projects to include evidence of community consultation on their selection and design and an acceptable operation and maintenance plan covering institutional responsibilities for O&M and a financing plan based on user fees and/or general revenues. Making municipalities responsible for proposing and implementing the investments and the requirement that municipalities contribute an annual average of 10% from their own budgets to each investment are also designed to promote sustainability. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk T Risk Rating Risk Mitigation Measure From Outputs to Objective Objective 1: Develop the legal and institutional framework for municipalities Failure by the government to enact S Design of the Legal and Institutional Reform necessary decrees, regulations, legal component of the project has been carried out by amendments, or other legal instruments DNDA under the guidance of its Director and in needed to "enable" municipalities. response to leadership and support from the Minister. Their "ownership" of the work plan for this component maximizes the chances for pro-active follow-up on the enactment of the reforms. Also, the component incorporates a steering committee and better consultative mechanisms with MFP and other ministries than in the past (PROL). Objective 2: Institutionalize capacity for municipal training and begin training program - 27 -  1. The Capacity Building Office (GCM) M The GCM would be integrated into IMAP, an in IMAP is not sustainable. existing institution funded through the central budget and itself a part of the SIFAP initiative; SIFAP includes training for municipalities; the project is closely coordinated with SIFAP. IMAP would provide two full-time professional counterparts to the GCM. 2. Resources for longer-term support of N Ample donor support is available, provided that municipal capacity building are not the component's first stage is successful and available. macro-economic and political stability are maintained. 3. Municipalities are unable to retain S The Legal and Institutional reform component trained officials and staff. would promote measures to improve the ability of municipal governments to retain and attract qualified personnel. Government is launching the next phase of civil service reform to help address this problem, and the project would work closely with these initiatives. Objectives 3 (pilot test the MG) and 4 (implement investments with tangible benefits and provide municipalities with opportunity for capacity-building through practice): 1. Municipalities are unable to M Project would provide technical assistance successfully complete an adequate number directly to municipalities on demand. of activities for a replicable model. MG rules provide that if a municipality does not meet eligibility by satisfactory performance within six months of the beginning of the next cycle, it would be disqualified and another municipality invited to participate. 2. Municipalities fail to make sufficient S Same as previous. efforts to improve revenues to maintain a rising MG investment program. 3. Municipalities are not empowered by S See Objective 1 above. national legal framework to improve revenues and therefore qualify for grants in subsequent years. 4. Sizes of the grants are not large M Thorough consultations with municipalities enough to provide an incentive for during project preparation; possibility of municipalities to perform under the MG. modifying the grant amounts if justified by annual or mid-term reviews. - 28 -  From Components to Outputs 1. Personnel assigned to manage the N PCU to be staffed by an international/national project and its components not competent consulting group; Project Director to be or qualified. recruited on contract separately and answerable to the DNDA Director; Capacity Building Office to be staffed mainly by an international/national consulting group; TORs and qualifications established for counterpart staff from central agencies and municipalities. 2. Lack of effective support and M High project "ownership" by MAE established coordination from MAE. during project preparation. 3. Political interference in the smooth M Project Director and PCU hired separately with operation of the project. detailed TORs. Careful annual and mid-term reviews. 4. Lack of counterpart funds from GOM S High project "ownership" by MAE established during project preparation should produce pro-active counterpart funds mobilization. 5. Project personnel unfamiliar with N Detailed Project Implementation Manual under procurement and financial management preparation; training of MAE, PCU, IMAP, and procedures. municipal personnel to be provided through pre-effectiveness period. 6. Consultants, works contractors, or S Project managers would be trained to follow suppliers fail to perform effectively. procurement guidelines; technical assistance would be provided to help them with supervision of consultants and contractors. 7. The quality of training courses under M Course evaluations; annual reviews; the Capacity Building component is twice-annual meetings of Steering Committee to inadequate or courses do not respond to ensure course quality; periodic monitoring of municipalities' needs. cost-effectiveness of training courses. 8. Central unit for MG (Grants Unit in M PCU and Grants Unit to be staffed by qualified PCU) fails to operate in a "facilitating" professionals hired on contract; detailed TORs manner. and Implementation Manual establish facilitating modus operandi. 9. Municipal councils and assemblies M High level of ownership by Municipal Council unable to agree on meeting eligibility Presidents and other officials established during requirements or to provide adequate project preparation; Municipalities would be leadership and technical staff. provided orientation on Grant Participation Agreements before effectiveness. 10. Municipalities unable to provide M Work with municipalities during project counterpart funds preparation is assuring that 2001 municipal budgets will include allocations for MG counterpart funds; Municipal finance study has shown that counterpart contributions are affordable. - 29 -  11. Municipalities fail to implement S Project would provide technical assistance revenue and financial improvements. directly to municipalities on demand; financial and revenue improvements shown to be feasible by municipal finance study; results of study being disseminated and discussed with municipal officials. Except for Maputo, it is expected that grant amounts are sufficiently high to constitute a meaningful incentive for municipal leaders to make revenue and financial improvements. 12. Municipalities fail to supply timely M See previous three risks; Project would finance and reliable data to establish their annual independent audits of each municipality. eligibility for subsequent grants. 13. Municipal staff fail to adequately M Each municipality required to establish project manage procurement or to supervise unit consisting of council member, procurement contractors, suppliers, or consultants. officer/municipal engineer, accountant, and technician with acceptable qualifications; technical assistance will be provided to municipalities on demand. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) While most of the risk factors are rated "M", some combinations occurring at once -- particularly those risks related to political conditions (such as the Government's enacting the enabling legal instruments, the municipalities' councils and assemblies being able to take effective decisions, or the municipalities' improving their revenues) -- would pose a substantial risk to the project. Therefore the overall risk rating is li59I* 3. Possible Controversial Aspects: The project has no controversial aspects. G. Main Loan Conditions 1. Effectiveness Conditions 1. Grant Participation Agreements signed by at least three municipalities. 2. Memorandum of Understanding between IMAP and MAE signed. 3. Project Director and PCU staff mobilized. 4. Project account opened. 5. Municipal Grants Board members officially designated and first meeting held. 6. External auditors appointed - 30 -  7. Project financial management system established, including financial manual within PIM and appointment of financial management staff in PCU and Municipal nucleos. 2. Other [classify according to covenant types used in the Legal Agreements.] None. Conditions of Disbursement for each municipality under the Municipal Grants: 1. Municipal Project (counterpart) account opened, signatories designated, and initial deposit made. 2. Municipalities comply with MG eligibility requirements: (i) qualified staff in place, (ii) signature of the Grant Participation Agreement, (iii) audits of 1999 accounts, and (iv) funds budgeted in following year's municipal budget. Conditions of disbursement for Legal and Institutional Reform component: 1. Official of MAE officially appointed to manage component. 2. Steering committee for Legal and Institutional Reform component officially designated. H. Readiness for Implementation [ 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 3 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. 3 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. Ol 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Alan G. Carroll S. R; k ~ Darius Mans Team Leader Sector Manager/Director Country Manager/Director - 31 -  Annex 1: Project Design Summary MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT Hi; arhy of Objctve Indiato Monhitoin& vluation CriticaC l lAssmptioWs; Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) 1. Improving govemance and (a) Additional building blocks Surveys of municipalities' Municipal governance is empowerment of GOM's decentralization indicators. integrated with overall public policy put in place (human sector and governance reform. resources and fiscal transfer system for autonomous municipalities). (b) Institutional capabilities of autonomous municipalities strengthened. (c) Foundation laid for extension of autonomy to new municipalities. (d) Improvements in selected municipal indicators including (i) increased own source revenue collections per capita; (ii) operating surpluses in current budgets; (iii) staff levels per 1,000 of population decline; (iv) numbers of professional and technical staff increase. 2. Increasing economic (a) Improved technical and National economic indicators. Municipalities gradually but opportunities through private financial capacity of steadily assume significant sector led growth municipal governments to responsibilities for provision provide urban infrastructure of infrastructure and services. and services; (b) Increased productivity of economically strategic cities through infrastructure investments; (c) Reforms of local regulatory framework enabled. 3. Increasing human (a) Alleviation of ill health National social indicators. Municipalities gradually capabilities and low productivity of urban assume a significant role in residents, especially those of reducing poverty through lower incomes; (b) Improved provision of infrastructure and knowledge and skills among services. municipal officials and staff. - 32 -  Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: 1. Assist the govemment to (a) Long-term policy and Annual and mid-term project To Goals 1 and 3: extend the legal, institutional, institutional reform program reviews. (a) Political stability and fiscal framework for for municipalities agreed and continues. municipal govemance, approved. (b) Political commitment to focusing on the municipal (b) Decrees, regulations, legal decentralization, public sector finance and human resources amendments, and other reform, and accountable systems. instruments drafted for govemance is sustained. enactment by higher political (c) The political framework of authorities. the municipalities is adequate (c) Studies, guidelines, and and robust enough for manuals conceming effective decision-making. municipal human resources, finances, and management completed and disseminated. 2. Create an institutional (a) Permanent unit (a) Annual and mid-term To Goal 2: framework for training of established in IMAP to project reviews. (a) Favorable macroeconomic elected and appointed manage training for (b) Periodic reports from conditions for private municipal official and municipalities, with IMAP to MAE. sector-led growth continue. municipal employees and substantive involvement of (c) Annual course evaluations. (b) Autonomous begin training officials and IMAP management and (d) Annual independent audits municipalities are empowered staff of all municipalities in counterparts. of courses (efficiency and legally, politically, and basic administrative and (b) Strategy for training for costs). financially to invest in technical subjects. municipalities developed and improvements in urban under implementation with infrastructure and services. linkages to the govemment's public sector reform and SIFAP. (c) Target numbers of municipal officials and municipal staff trained (per targets set in project). 3. Pilot test a Municipal (a) MG is closely monitored Annual and mid-term project Grants mechanism to finance quarterly and evaluated reviews. investments by the annually, based on which it is municipalities, with a view to "de-bugged" and modified. laying a foundation for a (b) By the end of the project, a mechanism which would refined MG is available for eventually become a part of replication and eventual " the intergovemmental transfer mainstreaming" within the system. Government's institutional and fiscal framework. - 33 -  4. Implement, through the Impacts: (a) Impact measurement MG, capital investments (a) Roads: improved access; surveys. which would have tangible more efficient circulation. (b) Municipal performance economic and social benefits (b) Sewerage and sanitation: data collection and analysis. while also providing an new facilities adequately opportunity for municipalities maintained and used. to improve their technical and (c) Drainage: alleviation of financial capacities. ponding and flooding in affected areas. (d) Solid waste: reduction of indiscriminate dumping of refuse. (e) Markets and bus terminals: improved efficiency and environmental conditions. Capacity: (a) Increased own source revenue collections per capita. (b) Operating surpluses in current budgets. (c) Eligibility of municipalities for subsequent annual grants. (d) Effective procurement and supervision of works and goods. (e) Numbers of professional and technical staff increase. -34 -  Key Pemormance Hierarchy of Objectives Indicators Monitorln & Evaluation Critical Assuptons Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Component 1. Legal and (a) Pacote Autarquico (a) Quarterly and annual Outputs to Objective 1: Institutional Reform: reviewed for conflicts or gaps progress reports. (a) New legal instruments (a) Decrees, regulations, and and appropriate amnedments (b) Annual and mid-term enacted by higher political other legal instruments based drafted and submitted to reviews. authorities. on the Pacote Autarquico of higher authorities for passage. (b) New legal instruments 1997, focusing on the areas of (b) Decrees, regulations, and enacted are adequate. municipal finance, municipal other legal instruments (c) MAE effectively mobilizes human resource management, drafted and submitted participation and support of and transfer of new concerning recruitment, Ministry of Planning and responsibilities to municipal management and mobility of Finance and other governments. municipal staff; municipal stakeholders for new legal (b) Models, guidelines, and revenue collection, budgets, instruments. manuals to help municipal financial management, governments to perform their accounting, and expenditure functions, with particular management; and the transfer emphasis on improving of responsibilities and delivery of urban services and resources (e.g. for primary better financial management. education and primary health) (c) Studies and guidelines to to the municipalities. assist municipalities in (c) Diagnostic study of the securing and managing the current staffing situation in appropriate staff. municipalities completed. (d) Models and guidelines for (d) Manuals on recruitrnent, improved revenue and selection and employment expenditure management conditions of municipal staff; systems, accounting practices, preparation, execution and and budgeting. monitoring of municipal budgets; improving existing municipal financial management systems; expenditure management;implementing a tax cadaster; and preparation and execution of municipal development plans and municipal annual action plans (e) Case by case analyses for transfer of responsibilities for primary education and primary health in at least the five major municipalities, and necessary legal instruments for transfer drafted. - 35 -  (f) Guidelines and proposals for private sector participation and municipal public enterprises disseminated and adopted in at least 2-3 municipalities (g) Methodology developed and discussed for community participation in municipal decision-making 2. Component 2. Capacity (a) GCM established in IMAP Outputs to Objective 2: Building: at project effectiveness and (a) The GCM and IMAP are (a) A permanent unit (GCM) plans in place for continued maintained in place. in IMAP for planning and existence of GCM at project (b) The resources for future management of training and close. training of municipalities will technical assistance for (b) Strategy developed and be available from donors and municipalities. under implementation. government. (b) A strategy for short-to (c) Targeted numbers of (c) Municipalities can retain medium-term in service municipal elected and trained officials and staff. training and annual action appointed officials and plans. municipal staff trained (see (c) Training courses per the detailed project description for project plan for elected and exact targets). appointed municipal officials (d) Technical assistance on and staff. demand and research studies (d) Technical assistance and carried out. research according to TA (e) Standard courses for action plan. pre-service training identified (e) Standard courses for (f) Archive of short- and pre-service training identified. medium-term courses (f) Archive of standard short- established. and medium-term courses. (g) Links with foreign (g) Links with training boards training boards established. of other countries. 3. Component 3. Municipal (a) Unit to manage MG Outputs to Objectives 3 and 4: Grants: established and in operation. (a) Municipalities are able to (a) A unit to manage the MG. (b) Sub-projects designed and complete an adequate number (b) Sub-projects (small to implemented. of activities to develop a medium infrastructure, (c) Municipalities effectively replicable model. equipment, or consultants) manage activities from (b) Amounts of grants are identified, designed, identification to maintenance. large enough to provide an implemented, and maintained (d) Municipalities integrate incentive for municipalities to by municipalities using grants costs and revenues of perform. from MG and their own investments into their (c) Municipalities are funds. budgets. empowered by national legal (c) Municipalities use private framework to improve works contractors, suppliers, revenues and thereby qualify and consultants effectively. for grants in subsequent years. (d) Municipal budgets (d) Municipalities make incorporate costs and sufficient efforts themselves to revenues of investments. improve revenues. - 36 -  - 37 -  Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) (a) Progress reports from each Applicable to all Components: implementing agency (b) Annual and mid-term (a) Qualified and competent project reviews. personnel assigned to manage the project and its components. (b) Effective support and coordination by MAE. (c) Absence of political interference in the operation of the project. (d) Project personnel trained in Bank procedures. (e) Required counterpart funds provided by GOM. (f) Adequate project supervision. 1. Legal and Institutional US$ 3.6 million Specific to Legal and Reform Institutional Reform component: (a) Consultants perform effectively. (b) Coordination by MAE is effective. 2. Municipal Capacity USD 5.2 million Specific to Capacity Building Building component: (a) IMAP's management treats GCM as a part of the institution. (b) Appropriate candidates for training provided by municipalities. (c) IMAP and other institutions are capable of providing appropriate courses. (d) Consultants perform effectively. - 38 -  3. Municipal Grants Fund US$ 24.9 million Specific to Municipal Grants: (a) Municipal councils and assemblies are able to agree on signing Grant Agreements, to settle on investment plans, to allocate funds, and to provide adequate leadership and technical staff. (b) Municipalities are able to provide 10% annual average counterpart funds. (c) Contractors, suppliers, and consultants perform effectively. (d) Municipalities implement revenue and financial improvements. (e) Government releases counterpart funds for IVA. (f) Project management adopts a facilitating approach. (g) Municipalities supply timely and reliable data to establish their eligibility for subsequent grants. - 39 -  Annex 2: Detailed Project Description MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT By Component: Project Component I - US$3.37 million LEGAL AND INSTITUTIONAL REFORM COMPONENT Introduction I . The process of decentralization currently under way in Mozambique began in the 1980s. During this period, the Mozambican Government was seeking solutions to the increasingly complex problems of urban management in the country. The debate surrounding this issue culminated, in September 1988, in a seminar on the Reform of Local Government Administration (financed by the World Bank.) In November 1991, with the conclusion of a further seminar, on the Reform of the Local Organs of the State, the Government launched a series of studies in a sample of towns and cities with the aim of gaining a better understanding of the issues concerning urban infrastructure, municipal administration, municipal finance, and urban environment. 2. The Governuent's analysis led it to define, broadly, a course of decentralization in Mozambique. In 1990 and in 1996 the Government amended the Constitution to allow for the devolution of powers. This created the conditions for new, autonomous actors to add their efforts to seeking solutions to Mozambique' s growing urban management problems. In March 1993, the Council of Ministers launched a program of decentralization. The process of decentralization was to be gradual, both from the perspective of the rate at which it would create new autonomous authorities and enlarge the territory under autonomous control, as well as from the perspective of increasing the areas of responsibility of the autonomous authorities. 3. To put this program into effect the Government began carrying out the extensive studies and revising the necessary legislation that would lead to the legal, institutional, and administrative changes for creating autonomous municipal govemments and holding local elections. This work was made possible with the support of the World Bank through the Local Govermment Reform and Engineering Project (PROL) and of the Swedish International Development Agency (ASDI) through their pilot district governments program. The objective of the assistance of these two development partners was the elaboration of a new legal framework for municipal govermment, and the creation of autonomous local public authorities with legal identities independent from the state. These authorities would have autonomous responsibility for public administration, finances and public property within their authority. The first stages of the process of gradual decentralization, since 1997, were the following: * Elaboration and approval of the Law of Municipalities (Law 2/97). Elaboration and approval of complementary legislation - Legal instruments 4,5,6,7,8,9,10,11, and 12/97. Creation of a first set of 33 municipalities. * Undertaking the first municipal elections. Installation of the first municipal governments. Holding of the first training seminar for the heads of new municipal governments. Training of the heads, elected and appointed officials, and staffs of the new govemrnments. Monitoring and support of the activities of the municipal governments and identification of emerging problerns. 4. The process of decentralization is taking place against the backdrop of a country undergoing rapid -40 -  change, from war to peace and from a centrally commanded economy to one driven by market forces. The Government hopes that, by harnessing the greater ability of communities to solve their problems and improve their well-being locally, the process of decentralization will help to soften the negative impacts of the changes taking place at the national level. The decentralization program is expected to expand slowly to incorporate a growing number of autonomous municipalities. The Government and the Bank are preparing the current Project within this strategic context. The primary, long-term development objective of the proposed project is to strengthen the capacity of municipal governments in the areas of management, finance, and the provision of infrastructure and services. It is expected that this project will constitute a first stage of a longer term program of support for Mozambique's decentralization program. Objectives 5. The main objective of this component is to undertake the institutional and legal reforms needed to allow the municipalities to exercise fully their powers and responsibilities as defined by the law. At the same time, the component will integrate and harmonize the ongoing process of administrative deconcentration and decentralization to local authorities within the broader process of reform of the public sector now under way. 6. The specific objectives of this component are: a. Complete and refine the legal and institutional framework based on the Pacote Autarquico of 1997 (the Law of Municipalities and complementary legislation), particularly in the areas of municipal fiscal management, municipal human resource management, and transfer of new responsibilities to municipal governments. b. Develop new administrative models, consistent with the capacity available within each municipality, that will allow the new municipal governments to perform their functions (with particular emphasis on improving the delivery of urban services and on better financial management). c. Assist the municipalities, through studies and technical support, in securing the appropriate municipal staff, including training of existing staff in coordination with the Capacity Building Component of the Project, and in parallel with the development of new legal instruments being elaborated governing municipal human resource management. d. Develop improved revenue and expenditure management systems, including better municipal taxation systems, improved accounting practices, and greater transparency for municipal expenditures. e. Provide technical assistance to the municipal governments in areas of common concem such as financial management, municipal administration, and coordination with the other components of the Project. f. Provide institutional support to the central, provincial and local levels of government in their relationships with the municipalities, in particular to the ministries with oversight responsibility for the municipal governments. Activities and Expected Outputs 7. The Legal and Institutional component comprises four sub-components: (a) Human Resources, (b) Municipal Finance, (c) Municipal Management, Administration and Service Provision, and (d) Technical Assistance. Activities and expected outputs from each sub-component are outlined below. Staffing necessary for each component, denominated in person/months (p/m) are indicated in each. - 41 -  Sub-component (a): Human Resources 8. Activities and outputs from this sub-component will include: a. Undertaking a diagnostic study of the current staffing situation and structure in the municipalities. This activity will include collecting data from all 33 of the municipalities, comparing that data with the records of MAE and the MPF., and holding seminars with representatives of the central, provincial and municipal authorities. The output of this activity will be a detailed study of the current staffing situation in the municipalities, including the number of staff, their roles and positions, the level of education and training, and other pertinent data. b. Developing alternative model staffing tables for the municipalities as guidelines for municipal governments and to facilitate review and ratification of new staffing tables proposed by the municipalities. These guidelines will be developed in collaboration with MPF and the municipalities, and the activities will also include seminars with representatives from these authorities. c. Elaborating manuals for the management of human resources of the municipalities, in coordination with the Ministry of Planning and Finance (MPF) and the municipalities. Outputs will include the manuals themselves, as well as their distribution to all municipalities and to other organs of government involved with municipal staffing (e.g. provincial offices of MAE.) d. Elaborating drafts of the following legislation: the law goveming the mobility of personnel between government and the municipalities, and decrees on recruitrnent, management, rights and duties of municipal staff, and also municipal staffing structures This will include a study of the existing legislation to establish the legal instruments that need to be revised and the new legal instruments that need to be passed. e. Elaborating draft legal standards for the training of elected and appointed municipal officials and municipal staff. 9. It is expected that the bulk of these activities will be under way during the first and second years of the project. The human resources specialist, the lawyer and the public administration specialist will have primary responsibility for them. Total time spent on this sub-component is estimated at 38 p/m of principal staff (4 p/m of national staff and 34 p/m of international staff) and 4 p/m of short term consultants. Sub-component (b): Municipal Finance 10. Activities and outputs from this sub-component will include: a. Revising the model municipal ordinances and elaborating the draft of the relevant decree. b. Elaborating the regulations and manuals required for putting into practice the complementarv legislation to Law 11/97. c. Undertaking studies with a view to possible alterations or corrections to the Pacote Autairquico. d. Revising the Municipal Tax Code (Codigo Tributario) on the basis of practical experience of municipal governance. e. Improving the existing municipal finance system in order to satisfy the requirements of the present municipal functions, in particular: - Proposing improvements to the current procedures for municipal expenditure, in particular with regard to accountancy and internal control; - Elaborating manuals for the preparation, approval, execution and control of municipal budgets, including tesouraria; - Designing the procedures necessary to enable the municipalities to start collecting taxes and fees, once the complementary decrees have been approved, and elaborating a manual on the creation of databases on taxpayers; - 42 -  f. Undertaking studies and defining operational guidelines for public investment in the municipalities and the assignment of responsibility for public investment between the state and autonomous municipalities; g. Elaborating manuals on designing programs of municipal investment; h. Elaborating a draft of the legislation on contratos-programa between the state and municipalities 11. These activities will take place throughout the project, and the lawyer, the economist and the public administration specialist will have primary responsibility for them. Total time spent on this sub-component is estimated at 58 p/m of principal staff (23 p/m of national staff and 35 p/m of international staff) and 24 p/m of short term consultants. Sub-component (c): Municipal Management, Administration and Service Provision 12. Activities and outputs from this sub-component will include: a. Undertaking a diagnostic study of the existing management structures and operational practices of municipal governments and proposing improvements. b. Undertaking studies of the provision and administration of municipal services and proposing improvements, including elaborating draft legal instruments concerning autonomous municipal services (Servicos Autonomos) and municipal public enterprises (Empresas Publicas Autarquicas). c. Undertaking studies and developing instruments and methodologies for the elaboration, supervision, and execution of a) municipal development plans; and b) annual action plans, and mechanisms for their adjustment. d. Revising the draft decree governing the transfer of responsibilities (e.g. for primary education, primary health). e. Undertaking case by case analyses of proposals for transfer of responsibility, and drafting the legal instruments necessary in order to effect the transfer. 13. The public administration specialist, lawyers, economist, and municipal development specialist will take primary responsibility for these activities, which will take place mainly during the first two years of the project. Total time spent on this sub-component is estimated at 54 p/m of principal staff (10 p/m of national staff and 44 p/m of international staff) and 10 p/m of short term consultants. Sub-component (d): Technical Assistance 14. Activities and outputs from this sub-component will include: a. Providing institutional support to the MPF and MAE, in order to create capacity for dissemination of approved laws and regulations to the municipalities and other bodies, and for interpretation and clarification of the laws. b. Developing a mechanism for securing the participation of conmmunities and other relevant groups in municipal management, including ways of disseminating municipal legal instruments and regulations and of receiving community input. c. Creating capacity for provision of technical support to the municipalities at the start of implementation of new laws and regulations, and for systematic monitoring of the work of the municipal organs. 15. Activities for this sub-component will take place throughout the project, and the lawyer and the public administration specialist will take primary responsibility for them. Total time spent on this - 43 -  sub-component is estimated at 21 p/m of principal staff (11 p/m of national staff and 10 p/m of international staff) and 11 p/m of short term consultants. Implementation Arrangements 16. The implementing agency for this component will be The Ministry of State Administration (MAE). A senior official of MAE will be the Component Coordinator. The Minister of MAE will appoint this official, who will be subordinated to the Director of DNDA. He or she will submit the required periodic reports to the Project Director. The Component Coordinator's responsibilities will include: The day-to-day management of the component. * The development of effective communication and coordination mechanisms with the municipalities and other state institutions involved; The production of the required periodic reports. 17. The Legal and Institutional Reform component will be managed as an integrated whole. The various activities listed above will be implemented in such a way that they reinforce each other. The Component Coordinator will therefore be responsible for ensuring that the various activities are fully coordinated with each other, and that there is a free flow of information between them. 18. The Project Coordination Unit will be responsible for procurement and financial management of the component, payment of operating costs from the MDP funds and logistical support. 19. DNDA, through the Project Coordinating Unit, will secure the service of a firm to provide the staff to undertake the component activities. The firm will be engaged by MAE, and will report to the Component Coordinator. The firm will provide the professional staff, as well as the secretarial and logistical support staff needed for the component. MAE will provide the necessary office space, if possible, within the MAE main office. 20. The Component Coordinator will seek frequent coordination meetings with the MPF and the municipalities. The component will establish links with other relevant institutions, such as: a) the Unidade Tecnica para Reforma do Sector Publico, the inter-ministerial technical group for public sector reform; b) the Ministry of Planning and Finance; c) the National Directorate for Public Administration in MAE; d) the Direc,coes Provinciais de Apoio e Controle and the Direc,ces Provinciais de Plano e Finan,as, the provincial offices of MAE and MPF; e) NGOs; and f) civil society. The Component Coordinator will establish fortnal consultation processes with these institutions, and will ensure that staff of the component adhere to them. 21. The Ministry of State Administration will establish a Steering Committee (SC) consisting of the National Director for Municipal Development (chair), two representatives of the municipalities, one representative each from the Ministry of Planning and Finance (MPF) and the Ministry of Public Works and Housing (MOPH), one representative from the Directorate for Public Administration in MAE (DNFP), and one representative of civil society. The Component Coordinator will attend Steering Committee meetings, but without voting rights. 22. The representatives of the municipalities will be designated by the Minister of State Administration after consultation with the 33 municipalities. The representative of civil society will also be designated by the Minister of State Administration. 23. The Steering Committee will meet ordinarily every six months, and extraordinarily when necessary. - 44 -  Its functions will be to provide advice on the component implementation strategy, to help coordinate the work between Ministries, and to review implementation of the component. The costs of Steering Committee meetings will be supported by the Project. It should be noted that the Project will not pay honoraria to members. Staffing 24. Aside from the Component Coordinator, who will be a senior MAE official, a consulting fimn will provide the professional/technical specialists for the component. The staff needed is indicated below and in Annex A. Allowance for short term consultants (including administrators, accountants, programmers, sociologists, engineers, tax experts, public expenditure experts, urban planners, lawyers, and facilitators), international and national, are also included. This will permit the consulting firm and DNDA to access a range of different skills as needed throughout the project. Staff needed is as follows: a. One national lawyer, full time for the duration of the project (48 p/m). b. One international Public Administration Specialist, full-time for the full duration of the project (48 p/m). c. One intemational economist (36 p/m), who will work for three years starting midway through the first year of the project. d. One international Hunan Resources Specialist, for an estimated total of 21 p/m. e. One international Municipal Development Specialist, for an estimated total of 18 p/m. f. International short term consultants in various areas of specialization for an estimated 24 p/m. g. National short term consultants in various areas of specialization for an estimated 25 p/m. h. Secretarial and logistic staff to be provided throughout the consultant contract. 25. The following table illustrates the possible allocation of staff resources during the project. Staff Allocations for the Legal and Institutional Reform Component Year I Year 2 Year 3 Year 4 1 2 1 2 1 2 1 2 Lawyer Public Admin. Specialist P- Economist - Human Resources Specialist - Municipal Devt. Specialist Budget -45 -  26. The overall budget for the component is estimated at US$ 3.3 million equivalent base cost (without price/inflation contingencies). Of this, it is estimated that US$ 3.0 million will go to consulting services, to be provided by consultants. Training is budgeted at $120,000; vehicles and equipment will require $180,000. A summary budget is attached as Appendix A - 46 -  Appendix A Budget for Legal and Institutional Item Cost Staff Consultants Sub-component (a) 702,000 Sub-component (b) 922,500 Sub-component (c) 1,017,000 Sub-component (d) 333,000 Secretarial and logistic staff 25,500 Sub-total 3,000,000 Training 120,000 Equipment 180 Total 3,300,000 Project Component 2 - US$4.77 million CAPACITY BUILDING COMPONENT Objectives I . The Capacity Building component of the MDP will provide in-service training to municipal staff, elected and appointed officials, and other groups which support the municipalities. It will also develop materials for pre-service training and provide technical assistance to develop and improve systems and processes. 2. The overall objective of the component is to improve capacity among the municipal government members and staff to perform their respective tasks, through training and technical assistance in the 33 existing municipalities, and in any new municipalities that are created during the life of the project. The project will develop a strategy for training and technical assistance that encompasses training in the municipal government system and public administration in Mozambique in general, as well as essential technical skills needed by the municipal authorities, such as municipal finance and delivery of basic services. This strategy will begin by focusing on those skills most urgently needed by municipalities during the project period that will enable them to manage the municipal development grant system and improve the delivery of services. The project will fund some of the training and technical assistance within the strategy, and will link with other donors and institutions who are currently providing or planning to provide support for programs that could come within the strategy. - 47 -  3. A secondary objective is to build capacity at the national level to design and manage programs of training and technical assistance for the municipalities over the long term. Outputs 4. The following indicative outputs would be expected by the end of the four years of the Municipal Development Project. A definitive set of outputs would be developed during the start-up phase of the project: a. A permanent unit established for planning and management of training and technical assistance for the municipalities b. A strategy for short and medium term in-service training to be implemented under the MDP, elaborated during the start-up phase of the project and reviewed and amended annually; and annual action plans to realize the strategy. c. A target of 75 (7-8 per province) staff of the municipalities and relevant provincial directorates trained as trainers, to create a pool of local trainers for municipal training activities funded under the MDP and beyond. d. A target of 740 existing elected and appointed municipal officials (80 percent) provided with basic training in the functioning of the municipal government system. e. A target of 340 new elected and appointed officials coming in with the municipal elections of 2003 (up to 50 percent) provided with at least one introductory course in the functioning of the municipal government system (the precise number to be defined at mid term in accordance with the number of new municipalities, the government's capacity for training within the component, and the resources remaining). f. Each Municipal Assembly President provided with basic training in their specific functions and duties. g. A target of 225 Council Presidents and members (7 per municipality) provided with one course in planning and management of basic public services and infrastructure. h. A target of 225 Presidents and members (7 per municipality) provided with one course in the principles of financial planning and budgeting for municipalities. i. A target of 135 Council Presidents and members (4 per municipality) provided with one course in environmental management. j. A target of 160 management and senior technical employees (80 percent) provided with basic introductory courses to municipal government in Mozambique. k. Each municipal assembly secretary provided with one specialized course in the duties and responsibilities of the post. 1. A target of 50 management and senior technical employees of new municipalities created between 2001 and 2003 provided with basic introductory courses to municipal government in Mozambique. m. A target of 160 management and senior technical staff involved in municipal finance and delivery of basic services (sanitation, road maintenance, waste management, etc.) (80 percent) provided with at least one course to upgrade their technical skills. n. All financial and project management staff of cities participating in the Municipal Grant Program (40 people, 8 per city) provided with the training and technical assistance necessary to implement this component of the project. o. A target of 80 staff (8 per province, 4 each from DPAC and DPPF) of institutions which interact with the municipalities (such as DPAC and DFFP) provided with training relating to their roles and responsibilities with regards to the municipalities. p. Two support staff or junior technicians from each existing and new municipality (140 individuals) provided with a course in basic administrative skills (e.g. filing) and or computer skills (e.g. -48 -  word-processing) q. Technical assistance, focusing on improving systems and processes for financial management, delivery of key services, and public accountability, previded according to the technical assistance action plan. r. Periodic reviews of needs and impacts of training and technical assistance by central and municipal authorities leading to new work programs; these reviews to be continuing and institutionalized. s. Preparation of materials for a series of standard courses to be offered at vocational school, university and graduate level to qualify candidates for management and technical staff positions in the municipalities (pre-service courses). Courses would consist of up-to-date and relevant curricula available at various existing institutions in Mozambique. The courses would constitute standard preparation for entry into the municipal civil service. The project would help identify and develop such courses, but their implementation would not be supported by credit fands. t. Links with training boards in other countries established and yielding results in terms of exchange programs, participation of Mozambicans in programs abroad, and inputs into the design of courses in Mozambique. u. Research studies undertaken as necessary. v. An archive of standard short and medium term courses established. Training Programs 5. The training courses supported by the project will be detailed as part of the strategy and work program development just prior to the start of the project and during the first phase. However, training programs are expected to consist of the general types below. In total, it is estimated that the project will support 15 to 20 different courses, offered in an average of 17 sessions per year, for a total of about 77 sessions with an average participation of 30 at each session. 6. It is estimated that the training program will reach some 1,400 individuals for an average of 1.5 courses each. This amounts to approximately 80 percent of the total estimated target group of 1,700 individuals. All existing municipal council presidents will receive basic training. Eighty percent of existing elected and appointed personnel will receive basic training. Six senior technical employees in each existing municipality will also receive basic training. As many as 50 percent of elected and appointed personnel and career staff in the new municipalities will receive basic training. While not all senior staff will receive basic training, and some will not receive specialized training in their field of responsibility, the project will support basic training for all and specialized training for a majority of those with critical responsibilities in such areas as municipal finance, planning and budget, procurement of goods and services, urban services provision, and human resources management. These targets are high, but they are estimated to be achievable considering the available time and implementation capacity. It is expect that some of the officials and staff not reached by this program will receive training through projects sponsored by other donor agencies. a. Training of Trainers. This course would be provided for staff of the municipalities and relevant provincial directorates, in order to create a pool of trainers for municipal training activities, thus ensuring long-term sustainability of the project outputs. Participants would be carefully selected from staff working in the areas of finance and accounting, administration and technical professions, so as to provide a balanced group in each province. The course would be offered in each region (North, Center and South) at the beginning of the project. b. Basic course in Municipal Legislation. Organization and Operations for Municipal Elected and Appointed Officials. This course would be for the presidents and members of the municipal - 49 -  assemblies, and the presidents and members (vereadores) of the municipal councils. Given the large number of the target audience, this will probably need to be taught by a number of trainers. It is expected, therefore, that during the first year of the project brigadas, or teams, of trainers - possibly three teams of two - would be trained. Between them these brigadas would be able to give as many as twelve or more courses per year. The courses themselves could take the form of five day seminars, given in each of the municipalities. The training schedule attached includes 36 such courses. In 2003 and 2004 the courses would include officials from the new municipalities. c. Government Policies. Basic General Law, and Democratic Participation for Municipal Presidents. A specialized course for presidents of the municipal assemblies. In the training schedule attached two five-day long national seminars are included. d. Planning and Management of Public Services and Infrastructure for Municipal Presidents and Elected and Appointed Officials. Specialized course for municipal council presidents and vereadores. These course could be offered at regional centers (North, Center and South). In the training schedule attached this course, lasting five days, is offered five times. e. Principles of Financial Planning and Budgeting for Municipalities. Specialized course for municipal council presidents, vereadores and members of the Assembly. This course could be offered at regional centers (North, Center and South). In the training schedule attached this course, lasting five days, is offered five times. f. Municipal Legislation. Organization and Operations for Managers. Basic courses in municipal legislation, organization and operation for municipal permanent staff. These could be five day courses, at which a selected number of key municipal staff members attend. This course is offered seven times in the training schedule attached, and it is expected that and average of six staff from each municipality would attend altogether. g. Specialized Courses for MG cities in Financial Management. Procurement. Infrastructure Project Management and Supervision of Works. Specialized courses for technical staff in the five main cities (Maputo, Beira, Quelimane, Nampula and Pemba) who will be beneficiaries of the Municipal Grants Program. These courses will need to be offered towards the beginning of the project. The training schedule attached includes four such courses, lasting up to one month. h. Specialized courses in technical subjects for technical staff (not MG cities). Specialized courses in technical subjects for municipal permanent staff, in such areas as municipal finance; planning and budget; procurement of goods and services; management information systems and document handling; environmental management and land use planning; solid waste management; roads maintenance; surface drainage; supervision and inspection of works; building management and maintenance; human resources management; and public service and public orientation. The training schedule attached includes 15 such courses, on a regional basis, with a maximum duration of one month. i. Specialized course for Municipal Assembly Secretaries. A course aimed at Municipal Assembly Secretaries, who are elected members of the assemblies with the task of managing the assemblies' agenda, organizing assemblies' activities, and ensuring the assemblies fulfill their legislative functions. The training schedule attached includes two such courses, lasting up to one month. j. Specialized course for Provincial Government Personnel. A course aimed at the staff of the - 50 -  provincial offices of the Ministry of Planning and Finance (DPPF) and the Ministry of State Administration (DPAC), for example, who have duties and responsibilities towards the new autarkic municipalities. This course is offered three times in the training schedule attached, and lasts up to one month. 7. The estimated training schedule includes a total of 490 training days, or 29 weeks during the first year of the project, 28 weeks during the second, 20 during the third and 21 weeks during the last. 8. Beyond the training listed above, the project would support basic courses for support staff and junior officials in basic administrative skills (such as filing and office administration) and computers (such as in word processing, spread sheet and budget management programs). It is estimated that about 150 people, roughly three people per existing and new municipality would benefit from these courses. The courses would be offered in regional centers, relying on existing firms to provide it. The extent of the need for such programs will be established with a needs assessment, and a program will be developed during the first year of effectiveness. These courses are therefore not included in the attached training schedule. 9. The project will also seek to identify and develop programs of technical and professional training in disciplines needed by the municipalities. Such programs might cover land management, municipal management and planning, project management, water resources management, education management, etc. These courses should be of a type and quality to be recognized in the career and remuneration system for municipal employees. The project will seek programs at existing institutions which could be adapted to meet these needs. It would not support any of these courses directly. 10. Phases of Work. While the details of the annual work programs will be established during implementation, they are likely to bear close resemblance to the estimated program described above. The project will consist of a start up phase that will last from NDF Board approval to nine months after project effectiveness. During this time the project will establish the unit for the management of the component (see paragraphs 17-19 below) develop strategies for training and technical assistance, elaborate a first annual work program, and prepare the curricula and materials for the first year's courses. The immediate priorities for training are fairly clear, but, to confirm the priorities for the second and subsequent years, the project will support a needs assessment for training and technical assistance during the first year of project effectiveness, to be updated periodically as necessary. Also during this period, the capacity-building unit of the MDP will recommend and the Steering Commnittee (see below) will approve the lists of training activities to be undertaken by the Instituto Medio de Administracao Publica (IMAP) and those to be carried out by outside contractors. The second phase of the project will last from nine months after project effectiveness to six months prior to project closing. During this time work programs will be developed and implemented annually, as well as annual assessments of the previous year's progress and revision of the strategies and work programs. Organizations which will carry out the training not provided by IMAP will need to be selected. During the final six months of the project, plans will be made to carry training and technical assistance activities into the expected longer-term Municipal Development Program. 11. Technical Assistance. This component will support a limited amount of technical assistance for improving systems and processes in municipal governments. The project would not support technical assistance to individual municipalities, but to all or groups of municipalities. For example, the project could decide to assist a group of municipalities in privatizing their waste collection services. The capacity building unit will develop a strategy and program for technical assistance during the first year of the project, and renew it annually. This component of the MDP will not provide support to the five cities that will participate in the Municipal Grants; they will receive separate technical assistance for implementation. - 51 -  12. Annual work program. The capacity-building component will require an annual work program. At the end of each year, an evaluation of the effectiveness of the previous year's program and the changing needs of the beneficiaries will be carried out. The program evaluation would be based on independent evaluations and audits of each training activity, and could include an annual update of the needs assessment, summarized in an annual report. Institutional and Implementation Arrangements 13. The Instituto Medio de Administracado Publica (IMAP) will be the implementing agency for the Capacity Building component of the MDP. It has been agreed that a separate unit within IMAP will be established to manage the component. This unit, to be named Gabinete de Capacitacdo Municipal (GCM), will be established through a Memorandum of Understanding between DNDA and IMAP. The memorandum will define the services to be provided by IMAP and the support IMAP will receive from the project. It will also define the roles and responsibilities of the respective authorities, including the Project Director (DP) and the Director of IMAP. 14. The GCM, under the orientation of the Director of IMAP, would be responsible for the coordination and execution of all the activities of the component, in close collaboration with the Directorates and Departments of IMAP. The GCM would provide the basis for establishing a permanent unit for the promotion and coordination of training for municipalities (in IMAP or, eventually, as part of another organization). 15. The training and technical assistance for Municipalities envisioned by the MDP component go beyond the legal and technical competence of IMAP. While IMAP focuses on in-service training in public administration, the MDP proposes also to support both in-service and pre-service training and technical assistance in other skills areas needed by the municipalities. Many of these, such as general financial management, accounting, and infrastructure management, will not be exclusive courses for municipal govenmuents and are already provided by training institutions inside Mozambique. Thus, the GCM will also be responsible for the procurement of training courses and technical assistance to be provided outside IMAP. The GCM will select, for approval by the Steering Comnmittee, which courses will be provided by IMAP and which will be procured elsewhere. Courses procured outside IMAP could be provided by another specialized institution, by private firms, or, in rare cases, by individuals. 16. To guide the work of the GCM, the Project Implementation Manual will include a section on the Capacity Building component. It would include details of (i) the responsibilities of the various actors; (ii) the requirements to be fuilfilled by firms and institutions providing training services under the project; (iii) the requirements to be fulfilled by the municipalities so that their staff can take part in the training activities; and (iv) the requirements for evaluations and audits of training activities, including specific performance indicators (see paragraph 30). 17. The GCM's activities would include preparing the implementation strategies for the training program and action plans; preparing annual budgets and work plans for training and technical assistance; preparing terms of reference for and overseeing the procurement of technical assistance and training services to be provided outside IMAP; managing the contracts for services provided by other institutions or individuals; coordinating the certification of finns and training institutions providing services under the project; informing the municipalities of the program of training activities and selection criteria for participants in training programs. The GCM would also be responsible for the continuous monitoring and evaluation of the component's training program, including hiring independent services for the audit and evaluation of each training activity, in terms of their efficiency and cost, whether provided by IMAP or - 52 -  other bodies. Moreover, the GCM would prepare an annual evaluation of the training program as a whole. 18. In addition, the GCM would be responsible for the coordination of the MDP's training and technical assistance activities with those of other donors and with other municipal training activities of IMAP. It should also maintain an inventory of local and regional training capacity and identify international study opportunities. 19. Under the Memorandum of Understanding, the GCM would have delegated responsibility from the Director of IMAP to manage the funds relating to the component, and to purchase goods and services in the execution of the project-supported activities. While action plans and budgets will be approved annually by the Steering Committee of which the DP is a member (see below), the GCM will have responsibility for day-to-day financial management of the component. GCM will establish a separate bank account for this purpose. GCM would present financial accounts directly to NDF. GCM will be responsible for ensuring that NDF's procurement and financial management rules are followed as they relate to this component. The GCM will include staff to provide financial management, procurement and logistical support for the component. IMAP would provide office space and secretarial support to the GCM. 20. Steering Committee. The Capacity Building Component will have a Steering Committee (SC) consisting of the Director of IMAP, the Director of the Directorate within MAE which supervises the municipalities, one representative from among the five municipalities included in the MDP grants component, three Municipal Council Presidents (one from each of the south, center and north regions of the country), and one representative from the National Directorate for Public Administration (DNFP/MAE, responsible for SIFAP). The GCM Manager and the Project Director (DP) would be ex-officio non voting members of the SC. The Steering Committee should meet at least every six months, and will provide guidance during the preparation of training strategies. Once each year, the Steering Committee will review and approve the implementation strategy, action plans and budgets for the component. The costs of travel and subsistence of SC members attending SC meetings, and other operational costs of holding SC meetings, will be paid by the Component's operating costs budget. The Project will not fund honorariums for SC members. 21. Procurement. The GCM will be responsible for procurement of goods and services for the implementation of the component. These will include equipment, auditing services, and the services of training course providers other than IMAP. The GCM will prepare bidding documents and terms of reference as necessary, and will undertake the bidding process and selection. Contracts for goods and services will be made between IMAP and the provider, and signed by the Director of IMAP. Some prior review of procurement actions by the NDF would be required in line with the procurement rules established in the Credit Agreement. The GCM will provide the PCU with an annual report on its procurement activities for the previous year. 22. Reporting and approval. IMAP will provide the SC with the implementation strategy for the training program, annual action plans and accompanying budgets for final approval in an annual meeting chaired by the Director of the Directorate within MAE which supervises the municipalities. IMAP will also provide both the SC and the PCU with summarized findings of the needs assessments, its annual updates, and with course evaluations. IMAP will report on progress to the DP via the PCU. Plans and budgets for programs provided in-house by IMAP will be reviewed and approved by the PCU (the project will support a qualified staff member of the PCU for this purpose.) - 53 -  Staffing 23. The GCM will consist of seven staff overall, plus secretarial and other assistants. Other staff could also be engaged, as consultants, from time to time as required. Manager - a senior individual with considerable experience in management and training. The Manager's job will be to direct the activities of the GCM and ensure the successful implementation of the component. The Manager reports to the Director of IMAP with regard to technical questions, and to the Project Director of the MDP with regard to matters of finance, accounting, procurement and general project administration. * Training Program Coordinator - a senior individual with experience in training and management, who will be a staff member of IMAP, and employed within IMAP's formal quadro de pessoal. This individual will be responsible for the day-to-day management of the annual work program and its budget. The Training Program Coordinator will report to the GCM Manager. * Technical Assistance Coordinator - a mid-level individual with experience in management and administrative systems and processes, who will be a staff member of IMAP, and employed within IMAP's formal quadro de pessoal. This individual will be responsible for the technical assistance program supported by the project. The Technical Assistance Coordinator will report to the GCM Manager. Senior International Consultant - a senior individual with considerable experience in management and training. The Senior International Consultant will support the Manager, providing advice based on experience in other countries and regions, and will work closely with the Manager particularly in the areas of developing the annual training strategy and work program for in-service training, undertaking periodic beneficiary surveys, developing the strategy for pre-service training, and accrediting programs other than those offered by IMAP for both in-service and pre-service training. The Senior Consultant will report to the GCM Manager. Senior National Consultant - a senior individual who will work closely with the Training Program Coordinator and who will serve as the procurement specialist for the GCM.. A Financial Manager, who will manage the expenditures of the Component, maintain accounts in accordance with the Project's requirements, and carry out the needed financial reporting. The Financial Manager will report to both the GCM Manager and the Financial Controller in the PCU. * An Administrative Assistant/Secretary, plus two clerical staff or office assistants. 24. The GCM Manager, the Senior Foreign Consultant, the Senior National Consultant, the Financial Manager, and the Administrative Assistant will be provided through a contract with a consulting firm or consortium of firms. IMAP will provide four full-time counterpart staff: the Training Program Coordinator, the Technical Assistance Coordinator, and two Office Assistants. Budget for the Component 25. The overall budget for the component is estimated at US$4.0 million equivalent, base cost (without price/inflation contingencies). Of this, about 49 percent (US$1.96 m.) would go for the GCM. Vehicles and equipment and incremental operating costs for the GCM would comprise another US$400,000 (10 percent). The cost of the training program is estimated at about US$1.48 million (37 percent of the total), including course materials, participants' travel and subsistence, training contracts to outside organizations, and other training-related costs. Performance Indicators 26. The following indicators will be used for evaluation and monitoring of the implementation of the - 54 -  Component: a. The GCM will be established in IMAP at project effectiveness and plans will be in place for its continued existence at project close; b. By the end of the first year of the project, one course for training of trainers will have been held in each region (North, Center and South) and at least 75 staff of the municipalities and/or provincial governments will have been trained as trainers for municipal capacity building activities; c. By the end of the first year of the project, 740 existing and appointed municipal officials will have been provided with basic training in the functioning of the municipal government system. By the end of each year: a. According to the annual training plans, certain number of courses in specified subjects will have been held with targeted numbers of municipal elected or appointed officials and municipal staff trained, in accordance with the annual training plans; b. Technical assistance activities will have been provided to the municipalities, in accordance with the annual work plans for technical assistance. c. Cost-effectiveness criteria will have been established for the main types of training, and courses carried out during the previous year will have been evaluated as to their cost effectiveness. By the end of the project: a. A general strategy for training for the municipalities will have been developed and be under implementation; b. with assistance from MDP, curricula and up-to-date teaching materials will have been developed for standard courses to be offered by existing training institutions in Mozambique, at 'tecnico medio' and/or undergraduate level in at least 4 professional areas, to qualify candidates for management and technical staff positions in the municipalities (pre-service courses); c. An archive of short and medium-term courses will have been established; d. Links with foreign training boards will have been established and research studies undertaken. Project Component 3 - US$ 22.75 million MUNICIPAL GRANTS Introduction 1. The MDP includes a Municipal Grants (MG) mechanism to provide municipalities with resources to implement high-priority civil works, equipment, and consultant services. The MG is based on the idea that investments for municipal infrastructure and services should be implemented by the municipalities themselves in the interest of (a) building local-level capacity and (b) ensuring the sustainability of the investments, by making the institution responsible for operation and maintenance-the municipal government-also responsible for implementation. The Municipal Grants mechanism is designed on a modest scale for "learning by doing" (aprendizagem pela pratica). 2. It has been agreed that, during the first four-year phase, the MG will be initiated with five municipalities (Maputo, Beira, Nampula, Quelimane, and Pemba). Objectives 3. Within the context of the Government's decentralization program, the objectives of the Municipal Grants are: - 55 -  a. To provide resources to municipalities for small and medium sized infrastructure investments, equipment, and consultant services. b. To enable the municipal governments to develop capacity to (i) plan, implement, and manage basic infrastructure investments, purchases of equipment, and utilization of consultants and (ii) to integrate the expenditures (municipal contributions averaging 10% of the annual investment costs; operation and maintenance costs) and revenues associated with the MG-funded investments into their budgets. c. To test and refine the MG, identifying problems, hrying different solutions, and, to the extent possible, laying a foundation for a sustainable, expandable municipal grants mechanism. 4. It must be emphasized that the philosophy of the MG is one of learning by doing. This inherently assumes that mistakes will be made, analyzed, and rectified in the interest of establishing an effective program. The five municipalities that will receive grants under the MG will be "pioneers" facing many unforeseen problems and outcomes. It is hoped that the experience gained by the five municipalities participating in the initial stage of the MG will be used by the Government and the intemational community in designing a program to be implemented by a larger number of municipalities in the future. Expected Results from the MG 5. Results expected from the initial four-year pilot phase of the MG are: a. Central Government establishes a unit to effectively manage the MG. b. Municipalities hold consultations with affected communities and the public about the selection and design of infrastructure investments. c. Municipalities identify and prepare proposals for activities (small/medium infrastructure, equipment, or consultants) to be fnanced with the municipal grants. d. Municipalities provide the required counterpart funds (average annual 10%) from their resources for the grant-funded activities. e. Municipalities procure the services of civil works contractors (firms) to build the infrastructure; contract with suppliers for the purchase of equipment; and enter into contracts with consultants to provide technical assistance. f. Municipalities supervise the execution of the works, control the quality of goods and services provided, and make payments to contractors, suppliers, and consultants. g. Civil works contractors gain capacity to meet adequate construction standards. h. Municipalities ensure operation and maintenance (O&M) of the works and equipment financed by the MG. i. Municipalities integrate the expenditures (municipal contributions of 10% of the investment costs; operation and maintenance costs) and revenues of investments into their budgets. - 56 -  Functioning of the MG 6. Grant Participation Agreements: In order to receive financial resources from the MG, each municipality will have to sign a Grant Participation Agreement with MAE. The Agreement will specify the rules of the MG and the obligations of all parties. The draft Grant Participation Agreement was reviewed with MAE and the five Municipalities at appraisal. 7. Eligible activities: The MG will finance the following activities: a. Small/medium infrastructure investments selected from a "menu" of road rehabilitation, community water supply (but not larger-scale water facilities), sewerage, sanitation facilities, surface drainage, solid waste facilities, street lighting, upgrading of markets and bus terminals, and small-scale, community-level facilities such as bus shelters, foot paths and foot bridges, etc. b. Equipment needed for the provision of basic services or their management. Eligible equipment includes tipper trucks, tractors and wagons, small excavation equipment, small equipment for road maintenance (but not large items such as graders or bulldozers), mini-buses for Municipal staff, pickups for technical departments, and office equipment for Municipal departments. No sedan (saloon) cars or 4x4 vehicles will be financed. c. Consultancy services to improve municipal management, finances, or service provision. 8. Grant allocations: Each municipality will receive an initial grant allocation at the beginning of the project. Subsequent allocations will be made on the basis of performance. Municipalities will be accountable for the proper use of the initial grant allocation in order to qualify for subsequent allocations. When each municipality has shown that it has made satisfactory progress toward using its previous grant allocation, it would be assigned the next one. In principle, the grants will be planned for yearly allocation, but it will probably take longer to effectively utilize the initial grant allocations. See the section below on" Determination of Amounts of the Grants" for details. 9. Required matching contribution: The grants will cover 85% of the total cost of each activity fmanced, except imported equipment which the MG will finance at 100% of foreign exchange costs. Each municipality will be required to finance 15% of each activity except imported equipment as a counterpart contribution from its own resources. For each municipality in any year, the total value of imported equipment may not exceed 25% of the total value of investments (MG plus counterpart contribution) financed through the MG. 11. Eligibility of municipalities to receive grants: In order to receive grants, municipalities must meet the following requirements: 11.1 To be fulfilled at the beginning of the project (Note: these are NOT conditions of credit effectiveness): a. The municipality must present to the Grants Unit of the MDP (see para. 17) a three-year investment program of works and equipment with estimated costs. The items in the program must be prioritized based on their economic and social benefits. b. The municipality's organizational/staffing arrangement must be submitted and verified by DNDA - 57 -  (see paragraphs 18 and 19 below), and qualified staff must be in place at the Municipal nucleos. c. The municipality must have signed a Grant Participation Agreement. d. The Municipality's financial accounts for the year 2000 must have been audited by independent auditors. The costs of such audits will be covered by the MDP. e. The municipality must submit its budget for the following year showing that the annual 10% matching contribution is allocated. 11.2 To be fulfilled annually: a. The Municipality's financial accounts for the previous year must have been audited by independent auditors. The costs of such audits will be covered by the MDP. b. The Municipality's accounts for the previous year must show that the municipality had an excess of total revenues over operating (recurrent) expenditures. C. The municipality must submit its budget for the upcoming year showing that the annual 10% matching contribution is allocated. 12. Conditions of disbursement of the MDP: The satisfactory completion of all six items in para. 11.1 will be conditions of disbursement of Project (Credit) funds to each municipality. 13. Time limit for meetinz eligibilit requirements: If any of the five selected municipalities does not meet the eligibility requirements within six months of credit effectiveness, it will be dropped from the MG component, and another municipality will be invited to participate. 14. Requirements for funding of activities: For each activity to be funded, a municipality will submit to the Grants Unit a proposal covering all of the following requirements. The Grants Unit will review the proposals for completeness and adequacy of content. For each civil works and equipment proposal: a. An adequate physical design or specifications, a cost estimate, and a procurement document according to the procurement guidelines in the Project Manual. For force account works, a description of the work, a bill of quantities, an itemized budget for materials, labor, and equipment, and a work plan. b. For civil works, a brief report giving evidence of community consultation on the selection of the investment. c. A simple financial/economic justification or cost-effectiveness justification according to the requirements of the Project Implementation Manual. d. An implementation plan & payment schedule. e. An operation and maintenance (O&M) plan including institutional and financing provisions - 58 -  (designation of the responsible Department; an allocation of the Municipal budget funds for O&M for the new facilities; tariffs or user fees, if any, and a plan for how user fees will be collected) and f. A simple environmental assessment according to the requirements of the Project Implementation Manual. For each consultant services proposal: a. A briefjustification of the importance of the consultant assignment. b. Terms of reference. c. Qualifications of specialists required and their estimated days, weeks, or person-months. d. A preliminary work schedule. e. A short list of consultants or a justification for selection in the case of an individual. 15. Municipal Grants Implementation Cycle: To allow time for the municipalities to comply with the eligibility requirements (see paragraph 12), the Grants will operate on a 12-month cycle from July 1 to June 30. 16. Time limit for Grants Unit to respond to proposals: Upon receipt of a proposal for an activity to be funded by the MG, the Grants Unit must respond within 10 working days with (i) a clearance or (ii) a clear, detailed request for additional information which would be needed for clearance or (iii) a disapproval-which could only be given when the proposed activity is not an eligible activity according to paragraph 8 above or the activity clearly cannot meet the financial/economic, O&M, or environmental requirements on paragraph 15 above-with the reasons clearly explained. Any proposal which does not receive a response within the time limit will be considered approved. Submissions of additional information to the Grants Unit also must receive a response within 10 working days. A municipality may appeal a disapproval to the Grants Board by sending a letter to the MDP Project Director (see paragraph 28). The Grants Manager will prepare a complete file on each appeal and circulate it to the members of the Grants Board at least one week in advance of the Board's next quarterly meeting. The Board will review and issue decisions on all appeals at its quarterly meeting immediately following the filing of the appeals. 17. Central Unit to manage the Grants: A Grants Unit to manage the MG will be established under the MDP's Project Coordination Unit. It will consist of a Grants Manager, a Grants Accountant, and a Civil Engineer. The Grants Manager will report to the MDP's Project Director. The Grants Accountant will report to the Grants Manager and coordinate closely with the MDP's Financial Controller. The functions of the Grants Unit are (i) to assist municipalities to meet the requirements for funding of activities; (ii) to review and clear the proposals for activities submitted by municipalities; (iii) to supervise the consulting firm providing technical assistance to municipalities; (iv) to collect and compile quarterly and annual data on the technical and financial performance of the municipalities; (v) to manage disbursements of grants to municipalities; (vi) to collaborate with the PCU's Procurement Specialist to carry out quarterly and annual reviews of procurement by municipalities; (vii) to collaborate with the PCU's staff on carrying out quarterly and annual reviews of performance of the MG (see Reviews of Performance section below, paragraphs 28 to 33); and (viii) to provide assistance and advice to municipalities in managing their bank accounts for the MG and in providing timely financial reports to the PCU. - 59 -  18. Municipalities' management of their grants: Before it can receive its first grant allocation, each municipality must establish a team of persons, with qualifications and experience acceptable to MAE/DNDA and the World Bank, consisting of a Council member (coordinator), a procurement official/municipal engineer, an accountant, and a technician. This team will be responsible for implementing the municipality's responsibilities under the Grant Participation Agreements. Job descriptions have been prepared for the procurement official/municipal engineer and accountant positions. Each municipality must indicate the names of the specific persons who will be occupy the four positions and must submit the curriculum vitae of the individuals nominated for the engineer and accountant positions. 19. Technical assistance for municipalities: The Project Coordination Unit will engage an international consulting firm (staffed by international and Mozambican specialists) to provide technical assistance at the request of municipalities to help them to carry out financial management, prepare designs and cost estimates, implement procurement, and supervise activities under the MG. Terms of Reference of the consulting firm will be disseminated to all municipalities. The performance of the firm will be evaluated annually by a special committee composed equally of representatives of DNDA/PCU and the municipalities. The firm will be held accountable for the technical quality of its assistance and outputs as well as the promptness and consistency of its responsiveness to the municipalities. However, the firm will not be accountable for the application of its assistance, which will remain the full responsibility of the municipalities. 20. Proiect Implementation Manual: All the rules and procedures for operation of the MG will be compiled in the MDP's Project Implementation Manual. The Manual will provide specific project identification and appraisal procedures, procurement, disbursement and implementation guidelines, and monitoring and evaluation processes. It will be prepared with the participation of Govermment and Municipal officials. The full contents of the Manual will be agreed at project negotiations. It is essential that each of the municipalities completely understands the content of the manual and formally agrees to participate in the program as described in the Manual. Determination of Amounts of the Grants 21. Total amount for Year 1: The MG will start with a fixed allocation of funds for all of the five cities in Year 1 (the first 12 months of operation, not necessarily a calendar year). The total amount for the five cities in Year 1 will be US$3.9 million including the contributions of the World Bank (IDA), the Municipalities, and the Government. This is judged to be (i) sufficient for a reasonable number and scale of investments within the capacity of the five municipalities to manage and supervise in a one-year period; (ii) within the financial capacities of the municipalities to provide the annual average 10% matching contribution; (iii) in proportion to the financial and technical capacity of the municipalities to adequately operate and maintain new investments; and (iv) within the capacities of available civil works contractors and consultants. 2. Allocation of grants among municipalities for Year 1: Of the total amount for Year 1, 50% (US$1.95 million) will be allocated equally to all five municipalities, to provide a basic amount for all and to avoid large disparities in the allocations. The other 50% will be allocated proportionately on the basis of the municipalities' populations (except that the population of Maputo is given a 50% weight, again to avoid excessive disparities). The following table shows the basis for the MG allocations for Year 1: - 60 -  Population Year I Allocation (US$000) 0 Percen- 50% 50% Total tages** Fixed Proportional to Population** Pemba 85 5.9 390 116 506 Quelimane 150 10.4 390 203 593 Nampula 305 21.2 390 413 803 Beira 400 27.8 390 542 932 Maputo 1,000 34.7 390 676 1,066 Total 1,940 100( 1,950 1,950 3,900 *From 1997 Population and Housing Census **Giving Maputo a 50% weight; i.e. 500,000. 23. Eligibility of municipalities for subsequent year allocation: A municipality becomes eligible to receive a new allocation for the next 12 month period by meeting the following criteria: a. The municipality submits its financial accounts for the previous financial year, audited by independent auditors. b. The difference between the municipality's total revenues and operating (recurrent) expenditures in the previous year, as documented in its audited accounts, is positive. c. The municipality has signed contracts (commitments) for 90% of the previous year's allocation. d. The Grants Unit has disbursed 80% of the previous year's allocation. e. The municipality has paid out 800/o of the its average required matching fund. f. The municipality has submitted all documentation on procurement for the previous year to the Grants Unit. g. The municipality has submitted all quarterly financial reports for the previous year to the Grants Unit. h. The municipality has generally complied with the project's financial management, disbursement, and procurement procedures. i. The municipality has agreed to a plan approved by the Grants Board for preventing the recurrence of any problems in the municipality's management of its activities under the MG (e.g., procurement, financial management, supervision, payments, etc). 24. Time limits and appeals: The municipalities will submit the information required in a, c, e, f and g to the Grants Unit by no later than April 30 of each year. By no later than May 31 of each year, the Grants Unit will (i) inform the municipalities of their eligibility for subsequent grant allocations and (ii) submit a report on the municipalities' eligibility to the Grants Board . The Grants Unit must provide a complete -61 -  and clear explanation, in writing, to each municipality concerning its eligibility for the subsequent grant allocation. Municipalities may appeal decisions on their eligibility to the Grants Board. The Board will review any such appeal once, at its next quarterly meeting, and its decision will be final. 25. Determination of amount of subsequent year allocation: If a municipality meets the eligibility criteria for a subsequent year's grant (see para. 24), the amount of the next year's allocation is determined by the municipality's performance on (i) generating an excess of revenues relative to recurrent expenditures and (ii) operation and maintenance. At the end of each 12 month period, the Grants Board will evaluate the municipalities and rank them in one of two performance categories as follows: Category 1: The municipality receives a higher grant allocation, based on meeting the following performance criteria: a. The municipality has achieved an increase in its excess of revenues relative to recurrent expenditures during the previous year, as documented in its audited accounts. b. O&M is satisfactory for all the grant-funded activities as measured by implementation of the O&M plan. A Category I municipality will be eligible for an increased grant allocation proportional to the percentage increase in its excess of operating revenues over recurrent expenditures compared to the previous year, reflecting the municipality's improved fnancial situation. The formula for determining the amount of the subsequent year's allocation is: {[OR(y) - OR(y-1)] / OR(y-1)} x 100 A(y+1)= ------------------------------------------- x A(y) {[RE(y) - RE(y-l)] / RE(y-l)} x 100 A(y+1) = Allocation in subsequent year A(y) = Allocation in current year OR(y) = Operating revenues in current year OR(y- 1) = Operating revenues in previous year RE(y) = Recurrent expenditures in current year RE(y-1) = Recurrent expenditures in previous year {[OR(y) - OR(y- 1)] I OR(y- l)} x 100 = Percentage change in Operating Revenues {[RE(y) - RE(y-1)] /RE(y-l)} x 100 = Percentage change in Recurrent Expenditures Category 2: The municipality receives the same or a reduced grant allocation compared with the previous year, based on meeting the following performance criteria: a. The municipality's excess of revenues relative to recurrent expenditures has stayed the same or declined during the previous year, as documented in its audited accounts. b. The O&M plan has not been carried out satisfactorily for one or more of the MG-funded activities, but a plan is greed to improve it. A Category 2 municipality will be eligible for the same or a reduced grant allocation proportional to the percentage change in its excess of revenues over recurrent expenditures compared to the previous year, reflecting the municipality's lack of improvement in its financial situation. 26. Total amount for the four years: The financial analysis of the five municipalities prepared for the - 62 -  MDP shows that, with maximum efforts to improve their finances and control their expenditures, the five municipalities as a group could perform well enough to receive, under the most optimistic conditions, about 25% more in grants each year from 2002 to 2005. This would produce a maximum total Municipal Grant program of about US$22.75 million (equivalent) for 2001-2005. This amount will be allocated for the MG component in the MDP financing plan. However, it will be agreed in the Credit Agreement that the actual disbursement of the MG component will depend strictly on the performance of the municipalities as specified above. Reviews of Performance of Municipal Grants and Municipalities 27. Grants Board: A Grants Board will be established to carry out quarterly and annual reviews of the performance (i) of the management of the Municipal Grants by the PCU/Grants Unit at the center and (ii) of the municipalities in using the grants. The Board will not verify or approve the eligibility of municipalities for grants; this will be done in a technical and impartial manner by the PCU/Grants Unit in accordance with paragraphs 22-26 above. The Board will only intervene in case of an appeal (see paragraph 25). The Board will be composed of the National Director of Municipal Development (chair), two representatives of civil society nominated by the municipalities participating in the Municipal Grants, one official of MAE, and one official of the Ministry of Planning and Finance. The Grants Board will meet once each quarter to review and discuss the reports submitted to it by the Project Director. The costs of the Board's meetings will be paid by the MDP. 28. Quarterly Reviews and Reports: At the end of each quarter, the Project Director will ensure that a review is carried out of the central Grants Unit and the municipalities covering (i) the status of disbursements by the MG and of implementation by each municipality; (ii) compliance with financial management, disbursement, and procurement procedures; (iii) compliance with other significant provisions of the Municipal Grants Manual; (iv) identification and analysis of any significant problems in the performance of the Grants Unit, the performance of the municipalities, or the application of the procedures of the MG; and (v) recommendations and action plans for solving the problems. The Project Director will submit quarterly reports no later than 30 days after the end of each quarter to the members of the Grants Board, Director of MAE/DNDA, the Presidents of each Municipal Council receiving grants, and the World Bank. 29. Intervention by the Grants Unit to Assist Municipalities: If a quarterly review shows that a municipality is having difficulties and is falling behind in implementation, the Grants Manager will mobilize the staff of the Grants Unit, the PCU, and the technical assistance consultants to provide help. In such cases the Grants Manager will also evaluate whether there are problems in the procedures or the administration of the MG that need to be addressed, and will take the necessary action. 30. Annual Evaluations: Every 12 months the Project Director will ensure that an annual evaluation of the performance of the MG is carnied out. The annual evaluations will be prepared by the Grants Manager for review by the Project Director, who will in turn present them as technical reports to the Grants Board. The annual evaluations will contain assessments and recommendations for the Grants Unit. each municipality, and the technical assistance consultants covering: (i) financial management and accounting; (ii) audits; (iii) disbursements; (iv) municipal contributions; (v) procurement; (vi) payments to contractors, suppliers, and consultants; (vii) performance of contractors, suppliers, and consultants; (viii) supervision of contractors, suppliers, and consultants, (ix) quality and timeliness of works, equipment, and consulting services obtained with the grants; (x) comparison of the final costs of the activities with the original contract amounts; and (xi) operation and maintenance by municipalities; (xii) effectiveness and efficiency of the Grants Unit in performing its functions; and (xiii) quality and timeliness of the technical assistance - 63 -  consultants. Each year, one of the Grants Board meetings will be devoted to a review of the findings and recommendations of the annual evaluation of the MG. Changes in any aspect of the MG will be recommended by the Board to MAE and the World Bank for their concurrence. 31. Data for Ouarterly and Annual Reviews: The Project Director will be responsible for ensuring that the needed data are collected and that complete quarterly and annual reports for the Grant Board's reviews are produced. Reports will be submitted no later than 30 days after the end of each quarter. 32. Suspension of disbursements: The Grants Unit may suspend disbursements to individual municipalities in case of evidence of major irregularities (e.g., the use of grant funds for purposes other than those approved, fraud; or corruption). In such cases the Grants Unit will submit the evidence to the Project Director, who will review it and transmit it to the other members of the Grants Board within 30 days. The Board will evaluate whether the suspension is justified and whether it should cover only the specific contract or the entire grant allocation of the municipality. Disbursements will be suspended until the municipality and the Board agree on a plan for rectifying the irregularities (including cancellation of a procurement process, repayment of funds, changes in personnel, etc). If a suspension of disbursements lasts more than 90 days, the Project Director will refer to case, in the form of a written report, to the Director of DNDA and the World Bank. Financial Management, Disbursements and Procurement 33. Financial management and disbursements: The Project Implementation Manual contains a section on detailed financial management and disbursement rules for the MDP, including the Municipal Grants. Each municipality will establish two separate bank accounts. One will be for IDA funds and the other for municipal and GOM contributions. Actual transfers of funds to the local municipal bank accounts will be on the basis of identified, eligible expenditures. When a municipality has satisfied the disbursement requirements (see point 11.1), including the deposit of its 60 day advance of budgeted municipal funds, the PCU/Grants Unit will make an initial disbursement for 90 days of payments. Subsequent transfers are made on the basis of disbursement applications which provide documentation on payments for works completed, goods received, or consulting services provided. 34. It is important to note that municipalities must manage the financial accounts of the MDP separately from their general finances. Municipalities must maintain separate financial records and reports for the MDP's Municipal Grants based on transactions in the two bank accounts established exclusively for the MDP and must submit these reports monthly and quarterly to the Project Coordination Unit. 35. Procurement by municipalities: The Project Implementation Manual contains a section on procurement rules for the MDP, including the Municipal Grants. This covers procurement methods for works, goods, and consultants and the limits for using the different methods; prior review of procurement actions by the PCU and the Bank; and reporting, supervision, and auditing of procurement. Audits 36. Audits of Municipal Grants: The MG will be subjected to extemal audits annually along with the rest of the MDP's components. Municipalities must submit all of their financial records and reports related to their Municipal Grants activities to the MDP auditors and cooperate with the project audits. 37. Audits of each Municipalitv's Accounts: The audits referred to in 11.1 e and 11.2 a and b above are of the accounts of the Municipality as a whole; i.e., of the Municipality as a corporate body. -64 -  Project Component 4 - US$6.97 million PROJECT MANAGEMENT AND TECHNICAL ASSISTANCE I . A Project Coordination Unit (PCU) would be established within DNDA to administer the project's finances, oversee procurement, manage contracts, supervise technical assistance, carry out monitoring, and produce quarterly and annual progress reports. The PCU would be headed by a full-time Project Director reporting to the Director of DNDA. The other staff of the PCU would be a Senior Financial Controller, a Senior Procurement Specialist, and a three-person Grants Unit (see below). The Project Director would be hired on an individual, long-term consultant contract. The remaining staff of the PCU would be contracted through a consulting firm. The Terms of Reference for the PCU appear in Annex 11 of this PAD. The PCU would provide administrative, financial management, and procurement support for the Legal and Institutional Reform component. For the Capacity Building component, the PCU's role would be limited to the provision of advice on administrative and procurement matters. 2. An ad-hoc Grants Unit within the PCU would be established to manage the Municipal Grants. This arrangement is temporary, for the duration of the MDP. It is expected that, as a result of the policy dialogue to be carried out during the project on "mainstreaming" of the MG and improvements of the fiscal transfer system, (see section B.3, Long-Term Sector Issues to be Addressed by the Project, points a. and b.), a more permanent and sustainable institutional "home" for the MG will have been agreed on. The functions of the Grants Unit are (i) to assist municipalities to meet the requirements for funding of activities; (ii) to review and clear the proposals for activities submitted by municipalities; (iii) to supervise the consulting firn providing technical assistance to municipalities; (iv) to collect and compile quarterly and annual data on the technical and financial performance of the municipalities; (v) to manage disbursements of grants to municipalities; (vi) to collaborate with the PCU's Procurement Specialist to carry out quarterly and annual reviews of procurement by municipalities; (vii) to collaborate with the PCU' s staff on carrying out quarterly and annual reviews of performance of the MG (see Reviews of Performance section below, paragraphs 28 to 33); and (viii) to provide assistance and advice to municipalities in managing their bank accounts for the MG and in providing timely financial reports to the PCU. The Grants Unit would be staffed by a Grants Manager, a Civil Engineer, and an Accountant. The Grants Manager will report to the MDP's Project Director. The Grants Accountant will report to the Grants Manager and coordinate closely with the MDP's Financial Controller. 3. The Project Coordination Unit will engage an intemational consulting firm (staffed by intemational and national specialists) to provide technical assistance to the municipalities participating in the Municipal Grants. The consulting firm would provide assistance at the request of municipalities to help them to develop investment proposals, prepare designs, cost estimates, specifications, and terms of reference, elaborate tender documents, analyze tenders and prepare final contracts, supervise civil works and the provision of goods, and carry out financial management. The technical assistance team will be staffed by a full-time team leader, two full-time engineering specialists, two full-time financial specialists, and 36 person-months of short-term specialists in various fields. Terms of Reference of the consulting firm will be disseminated to all municipalities. The performance of the firm will be evaluated annually by a special committee composed equally of representatives of DNDA/PCU and the municipalities. The firm will be held accountable for the technical quality of its assistance and outputs as well as the promptness and consistency of its responsiveness to the municipalities. However, the firm will not be accountable for the application of its assistance, which will remain the full responsibility of the municipalities. 4. Each Municipality would establish a small, dedicated team (Nzicleo) to manage the municipality's work under the Municipal Grants. Each Nicleo will consist of a Municipal Council Member - 65 -  (Coordinator), a Civil Engineer, an Accountant, and a Technician. The Technician would in all cases be a staff member of the Municipality. In all cases except Maputo, the Civil Engineer and Accountant would be hired as long-term consultants. Maputo would provide an Engineer and an Accountant from its own staff. - 66 -  Annex 3: Estimated Project Costs MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT Local Foreign Total Project Cost By Component US $million US $million US $million 1. Legal and Institutional Refonn 0.94 2.43 3.37 3. Municipal Capacity Building 2.90 1.87 4.77 2. Municipal Grants 7.92 14.83 22.75 4. Project Management TA 3.08 3.89 6.97 5. Project Preparation Facility 0.00 0.85 0.85 Total Baseline Cost 14.84 23.87 38.71 Physical Contingencies 0.00 0.03 0.03 Price Contingencies 1.30 2.02 3.32 Total Project Costs 16.14 25.92 42.06 Total Financing Required 16.14 25.92 42.06 Local Foreign Total Project Cost By Category US $million US $million US $million Goods 0.62 5.78 6.40 Works 6.66 9.99 16.65 Consulting Services 5.78 9.30 15.08 Training 2.09 0.00 2.09 Operational Costs 0.99 0.00 0.99 PPF Refinancing 0.00 0.85 0.85 Total Project Costs 16.14 25.92 42.06 Total Financing Required 16.14 25.92 42.06 Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 42.06 (US$m). Therefore, the project cost sharing ratio is 79.89% of total project cost net of taxes. - 67 -  Annex 4 MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT ECONOMIC AND COST-EFFECTIVENESS JUSTIFICATION ECONOMIC JUSTIFICATION FOR MAIN PROJECT COMPONENTS Legal and Institutional Reform 1. Legislation to support municipal reform was an important component of the previous IDA-supported Local Government Reform and Engineering Project (PROL). The legislation established a national framework to create autonomous elected municipal governments, and it was an important first step in giving municipalities administrative and financial autonomy. However, regulations and other legal instruments are still needed to enable the municipalities to collect fees and taxes and to allow them to recruit and develop adequate staff to undertake their new functions. At the national level such regulations would include guidelines for municipal budgeting and accounting, a municipal tax code, and rules for municipal personnel management. At the local level, this would include improving the management and provision of municipal infrastructure and services, improving cost recovery, preparing budgets for operation and maintenance, and reforming municipal revenue collection and financial management. 2. The Legal and Institutional Reform component of the project would make the earlier legislation operational by addressing the agenda described above. This is important not just for the improved management of cities but also for the national economy. National economic development requires the development of urban-based commercial and industrial activities. Typically, the value added from these activities must grow faster than the economy as a whole as a country modernizes and improves living standards. When urban infrastructure and services are not made available or are not managed efficiently, commercial and industrial activities cannot develop, which constrains national development. The policy reforms and institutional improvements that are proposed for this project should help cities to provide and maintain the infrastructure and services needed for economic growth. 3. The reforms would also contribute to fiscal stability. Presently the five largest municipalities obtain well over half their revenues from fiscal transfers, and their locally collected revenues are very low. The program of legal and institutional reform would seek to improve the local tax base and user fees. This would be a long-term process, but important first steps would be made under the proposed project. In time, this initiative is expected to reduce municipal dependence on the central government in order to free govermment revenues for other national priorities while at the same time increasing the total amount of revenues available locally for capital investments and operation and maintenance of services. Municipal Capacity Building 4. The Municipal Capacity Building component is expected to yield economic benefits similar to those of the Legal and Institutional Reform component. The targets of this component are municipal assembly members, municipal council members and career staff. The project would support the development of a strategy for training and technical assistance and fund a training program during the project period. This training would include the enhancement of the administrative skills of elected and - 68 -  appointed officials (municipal management and operations, government policies, democratic participation, etc.). It would also include improvement of technical skills for the provision and maintenance of urban infrastructure and services (infrastructure planning, environmental management, land use planning, solid waste management, etc.) and financial skills (financial planning, budgeting, accounting, municipal taxation, etc.). The full impact of this program would only be realized over the long term. However, in both the short and long term it should improve the contribution of cities to economic growth and reduce the burden of municipal governments on the national budget. Municipal Grants 5. Municipal infrastructure investments would be made through the Municipal Grants. These small and medium-scale investments in urban infrastructure and equipment are expected to relieve many present infrastructure and urban service constraints. More importantly, the program is expected to build experience at the national and municipal levels in managing a municipal funding system. Officials and technicians at all levels would gain experience with grant program administration, project identification, design, appraisal and implementation. In addition the grants would provide an incentive for improved financial management at the municipal level. 6. One approach considered would have been to pre-select and pre-appraise a large proportion of the sub-projects, especially those to be undertaken in the early years of the project. While such an approach would have allowed much of the sub-project design and economic analysis to be done in advance by consultants, it would have precluded an important opportunity for capacity building within the municipalities. Under the Municipal Grants, each municipality would select and prepare individual investments according to its own priorities. This would be done on a programmatic basis each year during the project period. The investment programs for the five cities for the first three years of the project have been identified, with their approximate costs. Detailed designs and costs for the first year's investments have been prepared. The infrastructure sub-projects for the first year range in value from US$40,000 (sanitation facilities and solid waste containers) to US$250,000 (upgrading of roads and drains in a lower-income area of Maputo). The maximum size of individual works in the second and third years would approach US$450,000 in Maputo and Beira. 7. The small size of the investments to be financed and the need for agile, simple procedures in the capacity-constrained Mozambican context make it difficult to justify the time effort, and expense of calculating conventional economic rates of return. In addition, many investments (e.g. community water supply, sanitation, drainage and street lighting) would not lend themselves to quantification of benefits, even if the skills to do so were readily available. Therefore, the MG would use a checklist designed to assess the economic justification and cost effectiveness of each type of investment (see Cost Effectiveness and Cost/Benefit section below). This would serve as an adequate proxy method for economic evaluation. This approach would be set out in the Project Implementation Manual. 8. Small-scale projects involving limited investments in infrastructure rehabilitation and extension generally have high rates of return compared with larger-scaled investments in new infrastructure. For example, the cost required to restore existing infrastructure such as road surfaces and drainage is usually small in relation to the large benefits realized from the rehabilitated facilities, as measured by reduced vehicle operating costs and reduced flooding. Likewise, the cost of extending existing water supply and sewerage systems to additional households by widening tertiary networks can be low in relation to the benefits, assuming there is sufficient bulk supply and an adequate trunk network to supply the new connections. - 69 -  9. There are numerous examples of high rates of return from urban rehabilitation works in African countries. Ex-ante economic analysis of small scale investments in the multi-city Ghana Local Government Development Project (1994) indicated that improvements in roads and drainage would produce economic rates of return (ERRs) ranging from 68% to 100%. Improvements in markets and bus stations were expected to yield ERRs of 15% to 30%. ERRs of 15% to 17% were expected for improvements in solid waste management, and ERRs of 35% were expected from improved sewerage. For the Public Works and Capacity Building Project in Chad (1994), estimated ERRs were 20% to 60% for drainage improvements 20% to 30% for urban road rehabilitation. Such high economic rates of return have been confirmed upon the completion of urban development projects in Africa. For example, the Second Urban Development Project in Djibouti was completed in 1999 with improvements in roads and drainage in several neighborhoods. At appraisal ERRs had been estimated between 20% and 30%, and it was confirmed at project completion that such rates had been achieved. Ex-post economic analysis of recently completed road rehabilitation works in Accra under the Ghana Urban Transport Project indicated that economic rates of return had been achieved of 41% for arterial roads and 45% for access roads to low income areas. Ex-post rates of return for road rehabilitation in a recently completed Social Fund II Project in Madagascar ranged from 41% to 349%. ALTERNATIVES TO THE PROJECT AND REASONS FOR REJECTION 10. The need for improved urban services is clear. The present service deficiencies and poverty in cities and towns need to be addressed urgently. Capacity is needed to cope with this situation on a larger scale in the future. With no project there would be no opportunity to follow up on the initiatives begun under the PROL project, and opportunities for investment and capacity building at the local level would be lost. Present initiatives by bilateral agencies are limited to smaller cities and towns and are unlikely to have the necessary impact on national capacity and policy. The World Bank is the only agency in a strong position to take leadership in this field. 11. A traditional, centrally implemented, multiple-city investment project was considered but was not recommended for two reasons. First, it was agreed-and the Bank's operational experience clearly shows-that, with few exceptions, investment prograns for municipal infrastructure and services should be implemented by the municipalities themselves in the interest of (a) building capacity through "learning by doing" and (b) ensuring the sustainability of the investments, by making the institution responsible for operation and maintenance-the municipal government-also responsible for implementation. It was therefore decided that, for the investment component, decentralized implementation should be the priority approach in this new operation. This would, therefore, preclude large-scale infrastructure works which could neither be managed nor maintained locally. Second, the Government felt very strongly that the investment component of the proposed project should cover at least five cities in order to meet expectations generated under PROL and to have a reasonable degree of impact. The Bank's traditional investment approach is cumbersome when extended over multiple local governments because it requires too much ex ante planning and review. More importantly, the traditional investment approach does not lend itself to being expanded to more cities in future phases of the program. Therefore, a program-type approach was needed. FISCAL IMPACT 12. A detailed analysis ("Municipal Finance and Fiscal Impact Analysis", by Roy Brockman and Lauren Wojtyla, October 2000) was undertaken of the fiscal situation and potential for financial improvement in the five municipalities (Maputo, Beira, Quelimane, Nampula, and Pemba) which will - 70 -  participate in the Municipal Grants. The cities have very limited resources and are dependent on central government transfers for more than half their revenues. Own source revenues, which are very low, are from fees and licenses, mostly market fees. As municipalities were elected in 1998, comparisons of data before and after that year are difficult. The 1997 Municipal Finance Law allows municipalities to collect several taxes (property tax, head tax, economic activity tax, and commerce and industry tax), but municipalities have not started collecting them because regulations have not yet been passed. 13. Fiscal transfers to the five cities were about 62% of total revenues in 1999. The transfers, largely from the Fondo de Compensacao Autarquico (FCA) and the Fondo de Investimento de Iniciativa Local (FIIL) and project specific grants, are mainly based on population. These transfers provide a growing source of revenue to the municipalities without the costs associated with local revenue generation. However, as presently structured they provide little incentive to the municipalities to increase local resource mobilization. While transfers from central government are likely to remain important, it will also be important for the municipalities to focus on local revenue collection in order to improve and maintain services over time. 14. The cities use most of their revenues for recurrent expenditure, which mainly includes expenditure for personnel and for goods and services. These expenses are expected to average about 66% of total municipal expenditures in 2000 in the five cities. This leaves limited funds available for capital expenditure. Spending for maintenance is very low and is not increasing as a proportion of municipal expenditure, which poses the danger of infrastructure and service deterioration at a time when the cities are growing rapidly. Significant increases in revenue are needed to ensure that infrastructure can be provided and investments can be adequately maintained. 15. The project would provide supplemental funding to the cities for new investments through the Municipal Grants (MG). The "Municipal Finance and Fiscal Impact Analysis" study made projections of possible municipal finance performance in the five cities over the 2001-2005 period. Because trend projections could not be made due to the lack of time series data, two scenarios were developed, the " status quo" projection and the "financial improvement" projection. Based on these, the study applied a financial model to analyze the potential impact of the annual MG allocations on the financial situation of each city. The objective was to determine the extent to which the municipalities could absorb the projected grant amounts, while ensuring that sufficient funds were set aside each year for operation and maintenance of the investments. 16. The status quo scenario is based on the assumption that revenues from existing taxes and fees would grow slowly and the new taxes enabled by earlier legislation would not be fully exploited. There would also be little real increase in fiscal transfers. Under this scenario, recurrent expenditure would also increase slowly with a -2% real growth in personnel expenditure and limited growth in maintenance and other categories. Municipalities would continue largely with the same cost structures, and there would be no increase in net income to use as counterpart funding for the MG. 17. The more optimistic scenario assumes a decisive effort towards financial improvement. At the national level, regulations would be enacted to enable municipalities to collect new fees and taxes, as called for in the municipal legislation. At the local level, the new taxes and fees would be introduced, and budgeting and financial management would be improved. Local taxes and licenses would be collected more efficiently. The municipalities would take active steps to further improve services and to control excessive personnel costs. Fiscal transfers are assumed to increase in real terms. New taxes would contribute positively to net income. This strategy implies active intervention at both levels of - 71 -  governance, central and local, to insure effective change. The improved levels of financing available to municipalities would enable greater expenditure increases in all categories. Capital expenditure under the MG would be allocated according to the same formula as under the first scenario. However, because of municipalities would have much greater net income to use for its counterpart contribution required for MG grants, their capital expenditures under the second scenario would be higher. 18. The grant allocations to each city in the first year of the MG have been pre-set and agreed with the municipalities and the government. In subsequent years MG allocations would be established by a performance formula which is linked to the improvement of the financial capacities of the municipalities. The following year's grant amount would increase or decrease by a factor calculated by multiplying the current year's allocation by the ratio of the percentage increase in the previous year' s operating revenues divided by the percentage increase in the previous year's recurrent expenditures, including maintenance. An annual average of 10% municipal counterpart contribution is required for all funds disbursed from the MG. If the municipality produces an excess of operating revenues over recurrent expenditures large enough to afford the full 10%/o of the amount allocated by the above formula, the entire allocation can be used. If the municipality's net revenues are below the 10% required to leverage the entire amount of the grant allocation, the grant is limited to the amount the municipality can afford based on its 10%. 19. Under the "status quo" alternative, the amounts of investments that municipalities can afford decline dramatically after the first year of the MG on account of the increasing maintenance costs associated with the program and the limited net revenues generated (see graph below). The "financial improvement" scenario, however, shows that all the five MG municipalities would be able to afford growing investment programs while making adequate provisions for O&M. The financial improvement scenario is a realistic one, in which municipalities improve their revenues, control costs, and have growing surpluses which can be used for its counterpart contribution toward MG grants. Municipalities that gradually introduce reforms would afford a growing capital development program under the project. The need for significant improvements in the collection of additional revenues is clear for each municipality to be able to participate and for the MG's success as a program. This implies critical linkages with the Legal and Institutional Reform and Capacity Building components of the MDP. 20. Under the financial improvement scenario, some MT 532.8 billion in investments are projected in total for the five municipalities over the four years of the MDP. This is equivalent to about US$33.4 million over a four-year period. The financing plan for the project assumes a somewhat lower, though still optimistic, outer envelope of US$25 million. - 72 -  MGF-Talti 25MA W7tm453 0.~~~~~~~~~~~~~~~1 0DI 20 23 20 1 COST EFFECTIVENESS AND COST/BENEFIT Program Approach 21. Compared to more traditional filly defined investment programs, the Municipal Grants would enable the municipalities to develop investment planning and budgeting capacity and set the stage for a more comprehensive and broader municipal development program in the future. Municipal governments would learn to plan and evaluate basic investments and equipment purchases, supervise consultants, and integrate the related costs and revenues into their budgets. They would develop their capacity to identify proposals in consultation with conmmunity groups. They would learn procedures for procuring and supervising works, equipment and consultants. Assessment of Benefits and Cost Effectiveness of Investments 22. Most of the Municipal Grants would be directed to the rehabilitation and upgrading of existing infrastructure. This type of investment generally yields much higher rates of return than investrnent in new infrastructure and facilities. Nonetheless, the benefits and costs of each proposal need to be evaluated to assure that they would'be economically sound. 23. A detailed checklist has been prepared for evaluating sub-projects proposed by the municipalities for financing under the Municipal Grants. It covers the main types of sub-projects that are eligible for financing under the MG. Given the relatively small size of the investments to be financed, the need for agile, simple procedures in the capacity-constrained Mozambican context, the large expense and effort of calculating conventional economic rates of return, and the difficulties of quantifying the benefits of many of the sub-projects, this checklist provides an adequate proxy method for the economic evaluation of sub-projects. The checklist is summarized in the table below and will be elaborated in more detail in the Project Implementation Manual. 24. The checklist in the Project Implementation Manual outlines the main objectives to be sought for each type of sub-project. Proposed investments would be required to demonstrate that they meet these - 73 -  objectives. The checklist also presents detailed questions and requests specific types of information that would be used jointly by the municipalities and the Project Coordination Unit in order to assess the economic benefits and cost effectiveness of each sub-project proposal. 25. The economic justification of proposed investments would be reviewed in terms of the Benefit Assessment Criteria given for each category of sub-projects. Most investments are expected to improve and extend critical urban services in the project cities, with particular emphasis on improving services in poor areas and in areas of critical economic activity. The checklist calls for the assessment, at least in qualitative terms, of how well the proposed improvements would meet these ends. 26. The Cost Effectiveness Criteria given for each type of sub-project would be used to assure that the proposed investments achieve appropriate least-cost solutions. As part of the preparation of their proposals, the municipalities would compile data to show whether the standards and costs proposed are economical. This would include a comparison of the unit costs of proposed investments with unit costs for similar investrnents in Mozambique. A data base of such baseline cost data would be collected and maintained by the Project Coordination Unit and disseminated to the municipalities to facilitate this analysis. Specific technical questions are posed for each sub-sector, such as whether there is adequate bulk capacity to complement any proposed additional investments in water supply, sewerage and street lighting. In addition to assuring that low cost designs and unit costs are used, adherence to proper procurement procedures should help ensure economical costs. Creating mechanisms to operate and maintain the investments is also important to ensure efficiency and sustainability over time. Therefore, in most cases the checklists suggest the consideration not only of more effective municipal management practices, but also private sector participation to provide, manage and/or maintain services. 27. In the case of proposed investments in markets and bus terminals, data on the amounts of additional fees which vendors and bus operators would pay would be used together with cost data to calculate a financial rate of return. Rates of return should be at least 12%. - 74 -  Economic and Cost Effectiveness Checklist for Municipal Grants Fund Projects (Summary List Benefit Assessment Criteria Cost Effectiveness Criteria Community What type of improvement is Unit cost estimates of boreholes, wells Water proposed? and standpipes? (wells and bore- Income levels of beneficiaries? Additional bulk supply required? At holes, How much do they pay for water what cost? standpipes, home supply? O&M arrangements? Private sector role? connections) What will new water supply cost them? Sanitation How is target community now Unit costs of latrines/sewage connection? (latrines, septic served? Cost of any additional sewage network tanks, sewerage What types of facilities are required? with treatment) proposed? Cost of additional treatment capacity Income levels of beneficiaries? required? What do they now pay? O&M arrangements? Private sector role? Cost to them of new supply? Road Need, economic importance, Technical specifications/unit costs of Rehabilitation traffic surveys of roads to be road rehabilitation? and Paving rehabilitated? Unit costs of bridges, culverts, drains, Reduced travel time and vehicle etc. operation costs? O&M arrangements? Private sector role? How will improvement prevent Unit costs of proposed improvements by Surface damage to roads, property and type of drain? Drainage businesses? Improvements required in secondary and How will improvements increase primary drains and discharge points? property values? O&M arrangements? Private sector role? Reduction in disease? How much solid waste is not What is the proposed frequency of Solid Waste collected? collections? Facilities What do users currently pay for Number and capacity of existing (New collection service? vehicles? equipment, What is additional service How many additional/rehabilitated landfill required by group? vehicles? What are unit costs? management and What do beneficiaries now pay? How and at what cost could collection equipment) What will they pay under new and disposal be better organized? arrangement? Landfill site capacity, proposed improvements, equipment. O&M arrangements? Private sector role? Improved lighting priorities in Location and spacing standards? Street commercial and residential? Specifications for fixtures? Lighting How would improved lighting be Sufficient power capacity in areas to be paid for? serviced? O&M arrangements? Private sector role? Demand for new/improved Standards and unit costs for paved and markets? How much are unpaved surfaces? Markets beneficiaries willing to pay for Number and costs of stalls? new/improved market? Standards and unit costs for access roads, Demand for additional facilities? water supply, public toilets, drainage, How will economic development solid waste management? - 75 -  Annex 5: Financial Summary MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT FINANCIAL MANAGEMENT ACTION PLAN General 1. Under the supervision of the Project Director, the Senior Financial Controller (Controller) of the Project Coordination Unit (PCU) will be responsible for ensuring that financial management and reporting procedures are carried out in a manner acceptable to the Government, the World Bank and other cooperating partners. Therefore, the Financial Management System (FMS) will be coordinated by the PCU. The responsibility for the transactions and control of funds for the Municipal Grants rests with separate implementing agencies (lAs), which will be the five municipalities. These entities will provide financial reports to the PCU, which will in tum handle consolidated reporting to and disbursements from the World Bank. The Capacity Building component will be fully financed by the Nordic Development Fund. This component is not included in the FMS and will have its own financial accounting and reporting system for the NDF. The NDF-funded Capacity Building Office to be established in IMAP will have full responsibility for implementing the training and technical assistance program. The PCU would provide advice and support to the Capacity Building component in the areas of procurement and contracting. 2. The principal objective of the PCU's financial management system (FMS) will be to support management in their deployment of limited resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes, that will serve the needs of the people of Mozambique. Specifically, the FMS must be capable of producing timely, understandable, relevant and reliable financial information that will enable management to plan, implement, monitor and appraise the Project's overall progress towards the achievement of its objectives. 3. For the PCU to fully deliver on the aforementioned objectives, its FMS will be developed in accordance with the Financial Management Action Plan presented in Section B below. Quarterly Review 4. On a quarterly basis, the Project Management Team (the Team), comprising the Director of DNDA (chair) and the PCU staff, will meet to review project management. The reports that will be reviewed will consist of: a. Financial Statements, as discussed below. Members of the Team will review and approve Quarterly and Annual Financial Statements; they will also examine material variances between budget/actual figures, seeking remedial action as appropriate within an agreed timeframe. b. A Progress Report on the technical and physical implementation of the Project. c. A Procurement Report (including Goods, Works and Services). The format and details of the Procurement Report is detailed in the PIM. - 76 -  Staffing 5. The Controller will direct and guide the financial operations of the PCU. The GU Accountant at the PCU and the Accountants at the municipal nucleos will report to the Controller on all financial matters. A diagram of the organizational structure of the Project is included as Annex 13. 6. Varying levels of staff training will be required in financial, management and accounting; information systems and computer applications; and procedures relating to the utilization of funds (e.g. Special Accounts, SOEs, Special Commitments, Procurement, etc.). On-the-job coaching will also be provided. Financial Procedures ManuaUlAccounting System 7. A Financial Management Consultant has been retained to develop and install the Project's FMS (manual and spreadsheet-based) and to prepare the Project's Financial Procedures Manual. The accounts will initially be maintained using a conventional spreadsheet package, supported as appropriate with manual records. In due course, if it is decided that a fully computerized system is the best outcome for the project, the PCU will have the responsibility to convert the initial system into an integrated, computerized Project Management system. 8. Provision has been made in the budget for hardware and software requirements. Planning and Budgeting 9. Counterpart Funding will be approved in line with Governnent (both central and municipal) budgetary processes. Quarterly and annual cash flow forecasts will be prepared by each IA (including the PCU for the Legal and Institutional Reformn component) in consultation with the relevant Procurement Officer and submitted to the PCU. At the PCU, the GU Accountant and the Controller will review the individual lAs' reports and prepare consolidated cash flow statements analyzed by quarter. These will be reviewed by the Project Director and approved by the Team at its quarterly meeting. All statements will be prepared in line with generally accepted accounting practice. Cash Basis of Accounting 10. For the foreseeable future, Project funds will be accounted for on a cash basis. Procurement of Goods, Works and Services I. World Bank and Government procurement regulations will be observed. The IA and PCU Accounting staff and support staff will be conversant with those procedures, as intemal control issues and the incurring of liabilities on behalf of the Project will be matters of concem to the financial management function. 12. Procurement procedures will be documented in the Project Implementation Manual. A Procurement Report, showing procurement status and contract commitments, will be prepared quarterly for consideration by the Team (see above). Banking Activities-Flow Of Funds - 77 -  13. The PCU will maintain three (3) accounts as follows: a. Project Account in Meticais with a commercial bank acceptable to IDA to which counterpart funds will be deposited. Initially, a three months float will be provided and, thereafter, it will be replenished monthly. b. Special Account with a commercial bank acceptable to IDA in US Dollars, which will show (i) Dollar/Meticais cost of transfers to Municipal and GCM IDA accounts; (ii) Dollar/Meticais cost of direct payments to suppliers; (iii) Dollar advances (Meticais equivalent cost) from the IDA Ledger Loan Account; and (iv) opening and closing balances. c. IDA Ledger Loan Account (Washington) in US Dollars/Meticais/SDR, which will show (i) cost of transfers to Bank X; (ii) cost of direct payments to suppliers; and (iii) opening and closing balances. 14. The Municipalities and the GCM will maintain two (2) accounts as follows: a. Municipal Project Account in Meticais with a commercial bank acceptable to IDA to which counterpart funds will be deposited. Initially, a three months float will be provided and, thereafter, it will be replenished monthly. Thereafter, the account will be replenished monthly. b. Municipal Account with a commercial bank acceptable to IDA in US dollars, which will show (i) Dollar/Meticais cost of direct payments to suppliers; (ii) Dollar transfers (Meticais equivalent cost) from the Special Account; and (iii) opening and closing balances. 15. All Project bank accounts will be reconciled monthly; identified differences will be expeditiously investigated. Control procedures will be documented in the Financial Procedures Manual. Withdrawals/Disbursements 16. By effectiveness, the PCU and the other lAs will not be ready for PMR-based disbursements (World Bank's Loan Administration Change Initiative Handbook, LACI, September 1998). Thus, in the short term, existing disbursement procedures as outlined in the World Bank's Disbursement Handbook will be followed, i.e. Direct Payment, Reimbursement and Special Commnitment. However, the development of the PCU's and the LAs' financial management systems should facilitate the introduction of PMR-based disbursements within 18 months of credit effectiveness or such later date as the World Bank shall agree. Fixed Assets/Consultants/Civil Works 17. Control procedures will be documented in the Financial Procedures Manual. A Fixed Assets Register will be prepared, regularly updated and checked. Regarding Construction/Capital Work in Progress, controls will be established to ensure that payments are made only for certified work (including physical verification). A Contracts Register will be maintained for all contracts with consultants. Contract Status Reports will be prepared quarterly by each IA for review by the Team as part of the quarterly progress report. Financial Reporting (Monthly, Quarterly, and Annually) - 78 -  18. Monthly: The Controller will be responsible for preparing a Monthly Return (Statement of Expenses - "Prestac6es de Contas") to the Ministry of Planning and Finance (MPF) for consolidation into the National Accounts of Mozambique. 19. Quarterly and Annually: The Financial Statements will include: a. A Consolidated Statement of Sources and Uses of Funds (IDA, Counterpart and Donor Funds); b. Project Balance Sheet as at the reporting date; c. Notes on significant accounting policies and accounting standards adopted by management when preparing the accounts; and on any supplementary information or explanations that may be deemed appropriate by management to enhance the presentation of a "true and fair view"; d. A Statement reconciling the balances on the various Bank Accounts (including the IDA Special Account) to the bank balances on the Statement of Sources and Applications of Funds; e. SOE Withdrawal Schedule, listing individual withdrawal applications relating to disbursements by the SOE Method, by reference number, date and amount; f. A Cash Forecast for the year, analyzed by quarter. 20. Indicative formats for Financial Statements are outlined in a number of World Bank publications - Financial Accounting Reporting and Auditing Handbook (FARAH, January 1995), The Loan Administration Change Initiative Handbook (LACI, September 1998) and the Draft Project Financial Management Manual (February 1999). The formats adopted by the Team will be documented in the Financial Procedures Manual. External Audit 21. Relevantly qualified, experienced and independent auditors will be appointed on approved terms of reference. Audited financial statements will be submitted to the Bank within six months after the financial year end. Besides expressing a primary opinion on the financial statements in compliance with International Auditing Standards (IFAC/INTOSAI pronouncements), the auditor will be required to include a separate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOE procedures and the extent to which these can be relied upon as a basis for loan disbursements. Regarding the Special Account, the auditor will also be expected to form an opinion as to the degree of compliance with World Bank procedures and the balance at the year-end. Additionally, the auditor will be required to prepare separate Management Letters for each IA, giving observations and comments, and providing recommendations for improvements of accounting records, systems, controls and compliance with financial covenants. - 79 -  MUNICIPAL DEVELOPMENT PROJECT Financial Management Review Risk Assessment Table 1. Organizational Structure/institutional Arrangements X_ 2. Project Structure angd Costing _ X 3. Internal Control Structure _ 4. Accounting Standards, Financial and Management Reporting X 5. Special Accounts, Disbursements and Supporting Documentation X 6. Staffing and Training X 7. Audit Arrangements X 8. Budgeting and Monitoring __ ___= =_x 9. Country Risk (corruption, poor govemance, etc.) X Notes: The Project Risk is considered low as the following measures will be taken to strengthen the control environment: 1 The financial management activities/transactions will be clearly identifiable and traceable. 2 Relevantly qualified staff will be recruited at the PCU and IA levels, including Accountants and Procurement Officers at each IA. 3 A Financial Management Committee will be established and will meet quarterly to monitor the Project's progress against financial performance indicators; Competent Program Management. 4 A Financial Procedures Manual will be developed. 5 Monthly bank reconciliations will be prepared and independently approved. 6 Quarterly Cash Flow Management; variances will be examined and remedial ac1tion will be taken. 7 Independent monitoring by external auditors (Appointment and TORs of the external auditors will be approved by the Bank: IFAC standards will be followed). 8 Financial statements will be prepared in compliance with International Accounting Standards. 9 The Budget will be approved in line with the Government process. Care must be exercised in ensuring the timely availability/release of Counterpart Funds. Conclusion: Provided the financial management proposals outlined in the Financial Management Action Plan are effected in practice, the overall Project Risk is assessed as being low. The challenge for Project Management will be to convert from the "drawing board" to practice. Care must be exercised in ensuring the timely availability/release of Counterpart Funds. - 80 -  I  Annex 6: Procurement and Disbursement Arrangements MOZAMBIQUE: MUNICIPAL DEVELOPMENT PROJECT Procurement 1. The project has three components: (i) Legal and Institutional Reforms, which will be implemented by the National Directorate of Municipal Development (DNDA) of the Ministry of State Administration (MAE); (ii) Capacity Building, which will be implemented by the Intermediate Institute of Public Administration (IMAP); and (iii) Municipal Grants, which will be managed by a small unit at the central level, but which will finance specific works, goods, and consultancies implemented by each municipality. 2. The Capacity Building component will be financed entirely by the Nordic Development Fund (NDF), and therefore the World Bank's procurement rules will not apply to it. This Annex pertains to the Legal and Institutional Reform component and the Municipal Grants component, both of which will be financed with IDA funds and are thus subject to World Bank procurement rules. 3. The Ministry of State Administration, which will have overall responsibility for the implementation of the project, will establish a Project Coordination Unit (PCU) to manage the project. The PCU, which will include a Project Director, a Financial Controller, and a Procurement Specialist trained in Bank's procurement rules, will be responsible for (a) carrying out the procurement of goods and services for the Legal and Institutional Reform component, (b) carrying out the procurement of goods, works and services, as needed, for the PCU, (c) carrying out the ICB based procurement of goods for the MDF grant funds, and (d) for reviewing and assuring the quality of procurement by the municipalities. Procurement of works, goods, and services financed under the Municipal Grants component will be carried out directly by the municipalities' implementing units (the municipal nucleos), with (i) technical assistance from a consulting firm specially contracted to support the municipalities, and (ii) oversight by the PCU. 4. Consulting services, goods and works financed by IDA under this project will be procured in accordance with the provisions of the World Bank Guidelines for Selection and Employment of Consultants by World Bank Borrowers (the Consultant Guidelines) published in January 1997, revised in September 1997 and January 1999, and the Guidelines for Procurement under IBRD Loans and IDA Credits, January 1995, revised January/August 1996, September 1997 and January 1999. For any International Competitive Bidding (ICB) for goods and works, the implementing agencies will use Standard Bidding Documents and contracts issued by the Bank. For the selection of consulting firms, the implementing agencies will use the Request For Proposal (RFP) for selection of consulting firms and contracts issued by the Bank. For works and goods under National Competitive Bidding (NCB) the implernenting agencies will prepare National Competitive Bidding (NCB) documents accepted by the Bank. For procurement of works under USS30,000 and goods under $30,000 by municipalities, fixed price contracts will be awarded on the basis of written solicitation issued to at least three qualified suppliers after evaluation of bids received in writing. Procurement Methods 5. It is not possible to detennine in advance the exact mix of works, goods, and consultant services to be procured under the Municipal Grants component, because the MG is designed to operate on a demand-driven basis in which the Municipalities will select their own packages of activities each year. - 82 -  However, an estimated projection of aggregate amounts of procurement under each category was made at appraisal for purposes of overall procurement planning. The methods to be used for procurement are described below, and the estimated amounts for each method are summarized in Table A after the appraisal. The proposed threshold contract values for the use of each method are shown in Table B. Procurement of Works 6. Works procured under the Municipal Grants may include road rehabilitation, community water supply (but not larger-scale water facilities), sewerage, sanitation facilities, surface drainage, solid waste facilities, street lighting, upgrading of markets and bus terminals, and small-scale, community-level facilities such as bus shelters, foot paths and foot bridges, etc. Works contracts equal to or above US$0.5 million are not anticipated. Consequently; the project would not be expected to use ICB procedures for works procurement. Works contracts larger than US$100,000 up to US$0.5 million equivalent will be awarded following NCB procedures, using standard bidding documents agreed in advance with IDA. Contracts estimated to cost US$100,000 or less will use simplified NCB documents consistent with the complexity of the work and the needs of the local works contract industry. For 7. Smaller works contracts estimated to cost less than US$30,000 equivalent be procured on the basis of at least three quotations received in response to a written invitation, which will include a detailed description of the works, including basic specifications, the required completion time, a basic form of agreement acceptable to IDA, and relevant drawings, where applicable. Procurement of Goods 8. Eligible goods under the Municipal Grants include tipper trucks, tractors and wagons, small excavation equipment, small equipment for road maintenance (but not large items such as graders or bulldozers), mini-buses for Municipal staff, pickups for technical departments, and office equipment for Municipal departments. Goods to be procured under the other components will include vehicles, computers, office equipment and furniture, etc. Where possible, contracts for the same goods will be grouped into bidding packages of more than US$200,000 equivalent and procured following International Competitive Bidding (ICB) procedures, using Bank-issued Standard Bidding Documents (SBDs). Goods with estimated values of US$200,000 or less per contract may be procured using National Competitive Bidding (NCB) procedures and standard bidding documents agreed with IDA. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$30,000 equivalent per contract may be procured using shopping procedures based on a model request for quotations satisfactory to IDA. Selection of Consultants 9. Consultant services will be contracted under this project in the following areas of expertise: institutional development, studies, training, design and supervision of civil works, and related subjects. 10. Firms: All contracts for fimns, except for small and simple contracts estimated to cost US$100,000 equivalent or less, would be procured using Quality and Cost Based Selection (QCBS) in accordance with Chapter II of the Consultant Guidelines. Services for tasks that meet the requirements set forth in paragraph 3.7 of the Consultant Guidelines and are estimated to cost US$100,000 equivalent or less per contract may be procured in accordance with provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. Shortlists of consulting firms for services estimated to cost - 83 -  US$100,000 equivalent or less per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines, unless intemational eligible consultants have expressed interest. 11. Individuals: Specialized advisory services would be provided by individual consultants selected on the basis of their qualifications for the assignment and hired in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines. Operating Costs 12. Operating costs such as office supplies, telephone charges, fuel and maintenance for project vehicles, in-country travel, document reproduction, and similar items may be procured using administrative procedures as set forth in the Project Implementation Manual and which are acceptable to IDA. The plan and budget for the PCU's Operating Costs will be reviewed and approved by the Bank annually. Prior Review of Procurement by the World Bank and the Project Coordination Unit 13. "Prior review" refers to the submission of procurement documents for "no objection" by the supervising and accountable entity, which may be the World Bank according to the Procurement Guidelines or the Project Coordination Unit. The proposed thresholds for prior review by Bank are summarized in Table B. The prior review by PCU is indicated after Table B. Procurement Management 14. Procurement activities will be carried out by the Project Coordination Unit (PCU) and the municipalities (under supervision of the PCU). The PCU will include a full-time Procurement Specialist whose responsibilities will include: (i) maintaining a data base on procurement actions for all contracts, (ii) carrying out and/or review of procurement actions for the PCU, the Legal and Institutional Reform component and the Municipal Grants component prior to their review by the World Bank, (iii) assist and facilitate procurement actions under the project, (iv) provide technical assistance and training to personnel of the PCU and the municipalities, (v) coordinate with and support the consultants who will provide direct technical assistance on engineering and finances to the municipalities, (vi) maintain files of all standard procurement documents, (vii) prepare quarterly procurement reports, (viii) assist the Bank to carry out annual procurement reviews, and (ix) arrange for periodic (preferably annual) procurement audits-including works completion and post review of procurement documentation-and take action on the reports arising there from. 15. To ensure adequate capacity, each municipality will have a dedicated project team (municipal nucleo) composed of a council member (coordinator), a Municipal and Procurement Engineer, a qualified accountant, and a technician. During the pre-effectiveness period these individuals will receive special training on procurement procedures and procurement documentation. 16. Actions that will be taken to minimize risks of procurement problems are: (i) provision of training in procurement to all staff of the PCU and the Procurement Officer and other staff of the project units of the municipalities; (ii) preparation of a procurement plan with the participation of all the relevant institutions and individuals; (iii) the contracting of a consulting firm to provide focused, on-site, technical assistance to the Municipalities during the life of the project in areas related to their management of the Municipal Grants, including advice and support in all the stages of procurement of - 84 -  works, goods, and services; and (iv) creation of a monitoring and filing system for all procurement actions which would be maintained by the PCU's Procurement Specialist. Procurement Plan 17. At appraisal, the World Bank and DNDA prepared the finalize version of the procurement plan for the project which will provide the basis for the aggregate amounts for the procurement methods (per Table A). At the beginning of each calendar year, the PCU will update the Procurement Plan with a detailed procurement schedule for the coming year. Procurement Reporting and Supervision 18. A Procurement Management Report, showing procurement status and contract commitments, will be compiled quarterly by the PCU for inclusion in the project's quarterly progress reports. 19. The Bank will cany out an annual ex post review of procurement actions not subject to prior review. This should cover a sample of not less than 50% of the contracts signed. Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCO othr . N.B.F. .TotCost 1. Works 16.32 0.33 0.00 16.65 (13.78) (0.28) (0.00) (14.06) 2. Goods 4.84 0.19 1.37 0.00 6.40 (4.62) (0.18) (1.35) (0.00) (6.15) 3. Services 0.00 0.00 12.00 3.08 15.08 _______=== ___________=______ (0.00) (0.00) (11.70) (0.00) (11.70) 5. Training 2.09 2.09 () iL.(C (0.00) -0.22