Tanzania - Local Government Support Project

Document o f The World Bank FOR OFFICIAL USEONLY ReportNo: 2975 1-TZ PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT INTHEAMOUNT OF SDR 35.6 MILLION(US$52.0 MILLIONEQUIVALENT) TO THE UNITEDREPUBLICOF TANZANIA FOR THE LOCALGOVERNMENTSUPPORT PROJECT October 26, 2004 Water and Urban 1(AFTU1) Tanzania & Uganda Country Department Africa Regional Office This document has a restricted distibution andmay be usedbyrecipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization  CURRENCY EQUIVALENTS (Exchange Rate EffectiveAugust 2004) Currency Unit = Tanzanian Shillings 1Tsh = US$O.OOl US$1 = Tsh1060 FISCALYEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ABP Area BasedProgram ACGEN Accountant Genera CAS Country Assistance Strategy CAG Controller and Auditor General CBG Capacity BuildingGrant CBO Community Based Organization CEMP Community Environmental Management Plan CF Consolidated Fund CFAA Country FinancialAccountability Assessment CGP Capital Grant Program ClUP Community Infrastructure Upgrading Program cso Civil Society Organization CUP Community Upgrading Plan DANIDA DanishInternational Development Association D C A Development Credit Agreement DCC Dar es Salaam City Council DLAs Dar es Salaam Local Govemment Authorities EIA Environmental Impact Assessment EMP Environmental Mitigation Plan ESIA Environmental and Social Impact Assessment ESMF Environmental and Social Management Framework FMR Financial Monitoring Report FPA FinancialPerformance Assessment GOT Govemment o f Tanzania IDA International Development Association IFMS Integrated FinancialManagement System JAS Joint Assistance Strategy KPI Key Performance Indicators LADP Local Authority Development Plan LGA Local Government Authority LGCDG Local Government CapitalDevelopment Grant LGRP Local Government Reform Program LGSP Local Government Support Program MDG MillenniumDevelopment Goals MIS Management Information System M o F MinistryofFinance MTEF MediumTermExpenditure Framework NAO National Audit Office NEMC National EnvironmentManagement Council NGO Non-Governmental Organization O&M Operation and Maintenance 2  FOROFFICIAL USEONLY PADEP Participatory Agricultural Development and Empowerment Project PEDP PrimaryEducation Development Program PO-RALG President's Office -Regional Administration and Local Government PPA Public ProcurementAct PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper PST Project Support Team RAP Resettlement Action Plan RE Revenue Enhancement RPF Resettlement Policy Framework SA Special Account SOE Statement of Expenditure TASAF Tanzania Social Action Fund UNCDF UnitedNations Capital Development Fund USRP Urban Sector Rehabilitation Project vc Village Council Vice President: GobindT. Nankani Country Managermirector: Judy O'Connor Sector Managermirector: Jaime Biderman Task Team Leader/Task Manager: Matthew Glasser This document has a restricted distributionandmay be usedby recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.   TANZANIA LOCAL GOVERNMENTSUPPORTPROJECT CONTENTS A.Project Development Objective Page 1. Project development objective ........................................................................ 7 2. Key performance indicators ........................................................................... 7 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ............. 8 2. Main sector issues and Government strategy ........................................................ 9 3. Sector issues to be addressedby the project and strategic choices................................ 9 C.Project DescriptionSummary 1. Project components..................................................................................... 11 2. Keypolicy and institutionalreforms supported by the project ................................... 11 3. Benefits and target population ........................................................................ 12 4 Institutionaland implementation arrangements . ...................................................... 13 D.Project Rationale 1. Project alternatives considered andreasons for rejection .......................................... 14 2. Major relatedprojects financed by the Bank and/or other development agencies ............. 16 3. Lessons learned and reflected inthe project design ................................................ 17 4. Indications ofborrower commitment and ownership .............................................. 18 5. Value added of Bank support inthis project ........................................................ 19 E Summary Project Analysis . 1. Economic ................................................................................................ 19 2. Financial ................................................................................................. 19 3. Technical ................................................................................................ 20 4. Institutional .............................................................................................. 20 5 Environmental . .......................................................................................... 22 6. Social ..................................................................................................... 24 7. Safeguard Policies ...................................................................................... 25 4  F.Sustainability and Risks 1. Sustainability ............................................................................................ 26 2. Critical risks ............................................................................................. 26 3. Possible controversial aspects ......................................................................... 28 G Main Conditions . 1. Effectiveness Condition ................................................................................ 29 2. Other ...................................................................................................... 29 H. Readiness for Implementation ............................................................................ 31 I.CompliancewithBankPolicies ........................................................................... 31 Annexes Annex 1: Project Design Summary ......................................................................... 32 Annex 2: DetailedProject Description ..................................................................... 37 Annex 3: Estimated Project Costs .......................................................................... 43 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary ............ 44 Annex 5: Financial Summary for Revenue-Eaming Project Entities, or Financial Summary ...... 49 Annex 6: (A) Procurement Arrangements ................................................................. 50 (B)FinancialManagement andDisbursementArrangements .............................. 56 Annex 7: Project Processing Schedule ..................................................................... 65 Annex 8: Documents inthe Project File ................................................................... 66 Annex 9: Statement o f Loans and Credits 67 Annex 10: Country at a Glance .............................................................................. 69 Annex 11 Letter o f Sector Policy ............................................................................ 71 Annex 12 Procurement Arrangement (First 18 Months) ................................................ 83 MAP:JBRDNo.33318 5  FOROFFICIAL USEONLY TANZANIA Local Government Support Project Project Appraisal Document Africa Regional Office AFTU1 Date: November 1,2004 Team Leader: Matthew D.Glasser Sector Managermirector: Jaime M.Biderman Country Director: Judy M.O'Connor ProjectID: PO70736 LendingInstrument: Specific Investment Loan(SIL) Sector(s): Sub-national government administration (90%), Central government administration (10%) Theme(s): Decentralization (P), Municipal governance and institutionbuilding(P), Access to urban services for thepoor (S) Project Financing Data [ ]Loan [XI Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Amount (US$m): USS52.0 million Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 GOVERNMENT(PO-RALG) I IAddress: P.O. Box 1923, Dodoma, Tanzania Contact Person: Permanent Secretary, PORALG Tel: 255-026-232-1607 Fax: 255-026-232-21 16 Email: ps@poralg.go.tz ~ This document has a restricteddistributionand maybe usedbyrecipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization I 6  Estimated Disbursements Bank FY/US$m): FY 2006 1 1 2007 I( 2008 11 Annual 11 ;:3:I Cumulati 1 1 Proiect implementation period: 3 1/2 Years Expected effectiveness date: 01/01/2005 Expectedclosing date: 06/30/2008 A. Project Development Objective 1. Projectdevelopmentobjective: (see Annex 1) The development objectives o fthe Local Govemment Support Project (LGSP) are: (1) to strengthen fiscal decentralization, improve accountability inthe use o f local government resources, and improve management o f intergovernmental transfers systems; and (ii) to increase access to infrastructure and services inunplanned areas o f Dar es Salaam and to improve revenueperformance for sustainable operations and maintenance. Component 1o f LGSP i s designed to support a new GOTLocal Govemment Capital Development Grant System, inter alia through provision system o f capital and capacity buildinggrants for local govemment authorities (LGAs).This component aims to support (i)sound intergovemmental fiscal framework and (ii) a capacity-building so that LGAs can better meet their service-delivery obligations. This Project will target 41 LGAs, and bilateral donors have recently committed, inprinciple, to support this new System inthe remainingLGAs.Component 2 o f LGSP focuses on Dar es Salaam, supporting the upgrading o f infrastructure and services inunplanned settlements, and improving local revenue collectionand systems for operation and maintenance o f infrastructure. Component 3 i s designed to strengthen capacity inthe President's Office -RegionalAdministration and Local Govemment (PO- R4LG) to performmonitoring, oversight andmanagement functions with respect to the grants supported by Component 1. 2. Key performance indicators: (see Annex 1) 0 Number of41 targeted LGAsreceivingLocal Government CapitalDevelopment Grants (LGCDGs) increased from 0 to 30 by 2007/08 (22 already qualify) 0 Number o fparticipating LGAswith "clean" audit performance records. 0 Proportion o fresources transferredto LGAswhich are made within the first 30 days o f each quarter increased to 100% by 2007/08 0 Access to services in 16beneficiary sub-wards (approx. 10% o fDar population) improved, as measured by': (a) Reduction intravel time from home to work/school/market/closest motor-able road (b) Reduction inincidence o f flooding o f household premises (c) Increase infrequency o f waste collection (d) Reduction inproportion o fplots with no sanitation facilities 0 Dar es Salaam Local Authorities (DLA) own source o f revenues increased by 50% by 2007/08 and adequate funds are disbursed for O&M. 'The impact evaluation study will provide estimates for several socio-economic outcome indicators, including income and consumption, health status, education, etc. 7  B. Strategic Context 1.Sector-relatedCountryAssistanceStrategy(CAS) goalsupportedbytheproject:(see Annex 1) Document number:20728-TAPIN42 Date of latest CAS discussion:06/15/00 Roughly one fifth o f total public sector expenditure inTanzania occurs at the local government level. The top four areas o f local capital investmentare education, water, roads, and health, inthat order. The current CAS covers the period 2001-03. The preparation o f the new CAS has been delayed to allow full alignment and consistency with the new Government o fTanzania's second Poverty Reduction Strategy Paper (PRSP), which i s expected to be ready toward the end o f 2004. It i s expected that current prioritieswill remain unchanged, although further emphasis will be givento economic growth and reduction inincome poverty. This i s consistent with the objectives o f the current CAS, which i s focused on helpingthe authorities reducepoverty by promotinghigher growth, and interventions that strengthen assets o f the poor, reduce their vulnerability, and promote better governance and accountability. It outlines four areas o f strategic importance, including public sector reform and institutionbuilding, to increase the effectiveness o f public service delivery and improve governance Inorder to enhanceharmonizationandcoherence ofdevelopmentpartners' (DPs') support for the PRS, the World Bank together with a number o f other DPs are working on a Joint Assistance Strategy (JAS), to replace the CAS. It i s expected that the JAS will be presented to the Bank's Board duringthe first halfo f 2005, together with the GOT'Ssecond PRS. Roughly one fiftho f total public sector expenditure inTanzania occurs at the local government level. The top four areas o f local capital investment are education, water, roads, and health, inthat order. The LGSP directly supports the CAS focus, and its objective to improve quality o f and access to public services at local level. Component 1o f LGSP supports strengthened financial capacity inLGAsto deliver public services and, through a new formula-based intergovernmental transfer scheme, finances priority local infrastructure services. The formulae for the two grants are described inAnnex 2. Strategically, this sets an important precedent for comprehensive and consistent treatment o f various sources o f funding, including external bilateral and multilateral funds, and intergovernmental fiscal transfers. Several key bilateral donors have agreed to join infundingthese grants immediately. Component 2 focuses on upgrading infrastructure and services inthe poorer unplanned and under- served areas. 70% o fDar es Salaam's population lives inthese areas. Decentralization strategies to empower LGAs and sector-wide approaches ina number o f sectors have been adopted to facilitate effective and efficient provision o f services withinthe PRSP and Millennium Development Goal framework. Sector development programs, which are inplace for primary and secondary education, apculture, and health, serve as instruments for enhancing sector-specific policy dialogue. Inaddition, these sector specific programs and projects have significant activities affecting LGAsthat need to be well coordinated at the LGA level. There are also a number ofprograms and projects o f a cross sectoral nature impacting LGAs, including the Tanzania Social Action Fund(TASAF), now entering a second phase covering all districts o f Tanzania. There are particularly important complementarities between LGSP and TASAF I1(which i s beingprocessed inparallel with LGSP) for improving governance and fiscal systems. The governance picture varies tremendously from Local Government Authority (LGA) to LGA -with some LGAshavingtransparent andparticipatory planning and budget processes, audited financial statements, adequate and well-trained staff, and other indices o f good governance and soundmanagement. At the same time, there are LGAs with inadequate planning and budgeting capacity, financial irregularities, and overall poor management. The LGSP and TASAF I1will work from two ends o f the "supply chain" leading from resources to on-the-ground investments: they meet inthe middle, at the LGA. While TASAF I1works directly with communities to helpthem identifytheir most critical needs anddirectly finances interventions that are needed to address them, the LGSP helps finance a new Capital Development Grant System which 'is a keystone o f the GOT'Slong term strategy for financing local infrastructure. LGSP will also finance Capacity BuildingGrants to help LGAsaddress capacity constraints, so that they can participate inthis new Grant System. InLGAswith well-functioning local governance systems as defined by the LGSP access criteria, TASAF I1will channelresources through the LGA systems. Inthose LGAswhich cannot yet qualify for the new Capital Development Grants, TASAF I1will provide supplementary implementation capacity as needed, channel resources to communities through the Village Councils (VCs), and assure transparency and accountability. While TASAF I1 8  i s not about buildingthe LG systems and capacities, it i s a part o f the LG strengthening because it makes the LG more accountable and responsive to the demands o f communities which TASAF I1i s targeting. As LGsbuildtheir capacities andbegin to performbetter, they will be tested by the communities that have builttheir own capacities and abilities to demand services through TASAF 11. Thus, the two projects are mutually reinforcing. 2. Main sector issues and Government strategy: LGSP development objectives are drivenby two elements o f the Government o fTanzania's (GoT's) overall development approach: the Poverty Reduction Strategy and the Local Government ReformPolicy. Inits Poverty Reduction Strategy Paper (PRSP), GOToutlines priority sectors inwhich improvedservice delivery is vital to the overall goal o f poverty reduction. These include education, health, roads and water -the main sectors for local government capital investment. LGSP supports investment inthese priority sectors by providing capital to LGAs for expansion and rehabilitation o f infrastructure, and targeted funds for Dar es Salaam LGAs to improve infrastructure inunplanned urban areas. GoT's Local GovernmentReform Policy identifies four main areas o f reform: political decentralization, financial decentralization, administrative decentralization, and changed central- local relations. LGSP supports local government reform across all four o f these areas. GOThas recognizedthat without substantial improvement inLGA institutional and fiscal capacity, effective and sustainable service delivery will not materialize, GoT's basic strategy to bringabout institutional and fiscal improvements i s embodied inthe Local Government ReformProgram(LGRP), which i s a means o f implementingthe Local GovernmentReform Policy. LGRP i s an integral part o f the President's Office - Regional Administration and Local Government (PO-RALG), and i s strongly supported by the donor community through a "basket fund." Over the last eight years, and especially since Cabinet's endorsement o f the Local GovernmentReform Policy in 1998, a number o f achievements have been seen, e.g. transfers o fresponsibilities from central to local government, restructuring and capacity buildinginLGAs, legalreforms aiming at harmonizing sector and local government legislation, and support from central government for improved financial management inlocal government. GoT's strategy for local investment i s based on enhancing LGAs' capacity to participatory plan and execute infrastructure projects. This requires an intergovernmental fiscal framework which provides LGAswith predictable, discretionary funding to support meaningful engagement with their communities. Component 1o f LGSP supports the initiation o f such a system, as will parallel financing to be providedby bilateraldonors (tentatively including the governments o f Belgium, Canada, Ireland, Finland, Netherlands, and the European Union). This capital development grant system has been developedby GOTinclose and ongoing consultation with IDAand developmentpartners andhas the fullbackingof, and strong financial support o fdevelopment partners. Withinthe context o fimproving infrastructure and services, GoT's PRSP identifiesurbanpoverty as an important challenge. The combination o f urbanpoverty and rapid urbanization have contributed to the rapid growth o f informal and unplanned settlements, characterizedby a lack o f appropriate infrastructure. Inthis context, the PRSP highlights the importance o f community-based approaches to address infrastructure deficiencies. Component 2 o f LGSP will enable Dar es Salaam's LGAsto upgrade infrastructure and services for some 170,000 residents o f 16 sub-wards spread out inthree municipalities. Investment choices have been driven by the affected neighborhoods. LGSP will also support a program to strengthenmunicipaloperation and maintenance o f infrastructure, and generate sustainable revenues to hnd O&M. 3. Sector issuesto be addressed by the project and strategic choices: LGSP addresses five key sector issues and makes a number o f strategic choices inrespect o f these: A primary sector issue is the needto buildlocal government capacity to strategically prioritize andexecute local investments. This cannot be done inthe abstract -without resources to invest ininfrastructure, LGAshave no incentive to buildcapacity, and no opportunity to learnby doing. To realize the potential advantages o f decentralization (e.g. increased efficiency inallocative decisions) LGAsmust actually be able to choose among 9  competing investment priorities, usingparticipatory community-basedprocesses. The most critical strategic choice made by the LGSP design i s to place capital - initially modest -directly inthe hands o f LGAsand to allow them to decide on boththe sectors (e.g. educatiodschools vs. healtldclinics) and the specific investments (e.g. classrooms vs. desks) to support. An important aspect of the project is that LGAsmustmeetbasic access criteria (including planning, financial management andreporting) to access these funds, and that allocations will be adjusted up or down based on past performance. To ensure consistency with GOT'S nationalpovertyreduction strategy, LGAs which do not investat least 80% o f the grant inPRS priority areas will face penalties. A second, related sector issue concerns the multiplicity o f fundingchannels through which donor and GOT support for local investment i s currently channeled. Some programs provide fundingto LGAstied to particular sectors (e.g. the Primary Education Project, and the District HealthBasket Fund). Some fund investment inlocal services but "off-budget'' (e.g. donors' area-basedprograms). The amounts available for capital investment tend to be very limited (e.g. most o f the District HealthBasket Fundsare spent on drugs and other operating costs, leaving little for clinic buildingand rehabilitation.) Thus, the local investment environment i s characterized by two overriding features: (i) LGAshave little fundingavailable for infrastructure, and (ii) are highlysector- funds conditional. Given LGAs' responsibilities for service delivery inpriority sectors, this i s a critical weakness -one which Component 1o f LGSP will address by initiating a non-conditional capital transfer -the Local Government Capital Development Grant (LGCDG). Extensive consultations with Government and bilateral donors have been undertakento ensure that the LGCDG systemi s well-supported and adequately financed. s A thirdsector issue concerns the risks ofprovidingnon-earmarkedinvestment funds to LGAs,giventhat local capacity and accountability are often weak. A mismatchbetweenresponsibilityand capacity i s typical o f decentralizationprocesses, particularly invery poor countries. Any project aimed at promoting the investment capabilities o f local authorities must confront it. Inthe case o f the LGSP, three design features address these risks. First,the LGCDG system (which will draw fundingbothfrom LGSP andfromparallel donor funding) will provide both incentives (through access conditions relatedto the Capital Development Grant) and resources (through the Capacity BuildingGrant) to buildcapacity, and strengthen accountability. Second, the levels o f capital funding initially providedwill be modest. They will be sufficient to make a tangible difference, but small enough to limit the possibility o f major wastage. Third, an Annual Performance Assessment system will ensure that funds are used appropriately, and to limit future flows ifthey are not. A fourth issue involvesthe rapid growtho fthe urbanpopulation, and the consequential expansion in unplanned areas inDar es Salaam. Most o f these areas lack basic infrastructure and are characterized by widespreadpoverty. The extremely rapid growth o f the urban population (6% per annum inrecent years) has placed enormous pressure on the services and infrastructure. Most o f Dar's populationlives inunplanned areas with poor environmental sanitation (lack o f clean water and seweragehanitation facilities; lack o f solid waste collection; poor drainage) and poor access (roads and footpaths). Component 2 o f LGSP i s designed to sustainably upgrade thisinfrastructure. Thisis arelatively large scaleintervention - itwill improve conditions for some 10% ofDar's population. This will provide an important demonstration effect for future exercises. Inaddition, effort will be focused on enhancing operation and maintenance o f infrastructure, including the mobilization o fresources to ensure sustainability o f these and other capital investments. Fifth,central government faces the challenge ofmanagingthe decentralization process, overseeing the emerging intergovernmental fiscal system, and maintainingpolicy coherence concerning decentralization. This involves changes to the roles and capacities o fcentral government -particularly PO-FL4LG. For example, the Public Service Act and implementingregulations were promulgated with provisions that limited LGAs' right to appoint their own staff. The Government has recognized that this i s inconsistent with effective decentralization, and agreement has been reachedinGovernment on legislationto correct this problem. Over the longer term, LGSP i s designed to help PO-RALG develop the policy, implementation, monitoring, and evaluation skills necessary to oversee and support a decentralized intergovernmental fiscal system. Finally, while GOThas beenpursuinga decentralization strategy on the mainland, this i s not the case with Zanzibar, and therefore the Project does not include Zanzibar. 10  C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for adetailed cost breakdown): The projectconsists ofthree components: Component'l: Supportfor Local Government CapitalDevelopment Grant System. The component supports an overall Local Government Capital Development Grant (LGCDG) system, which i s also being supported by GOT and bilateral development partners. The LGCDG system includes (a) a Capital Development Grant (CDG), and (b) a Capacity BuildingGrant (CBG). The LGCDG transfers will be non-sectoral, distributedon a formula basis to LGAs, who will invest inaccordance with localneeds as determined through localparticipatory planningand budgetary processes. The CBGwill provideresources to LGAsto help thembuildtheir capacity to access and manage the CDG. Component 2: Dar es Salaam Upgrading and Institutional Strengthening. This component will have two subcomponents, (a) the Community InfrastructureUpgradingProgram i s a community-driven infrastructure upgrading programtargeted at unplanned areas inDar es Salaam, (b) the Local Revenue Enhancemend O&M EnhancementProgramwill improve local O&M systems and local revenue collections to support O&M expenditure. Component 3: Support to PO-RALG. This component will support the President's Office -Regional Administration and Local Government (PO-RALG) inthe implementation, monitoring, evaluation and audits o f the Project and the transfer program supportedby Component 1while buildingthe capacity o f PO-RALG to execute the functions as part o froutine activities. Component * The amount ofthe credit has beenincreased from $40 million(as indicated inthe 2000CAS) to $52 millionas Tanzania i s an IDA scale-up country. 2. Key policy and institutional reforms supported by the project: The environment created by Government's Local Government Reform Program(LGRP) i s conducive to the introductionofan intergovernmental fiscal transfer systemsuch as the Local Government CapitalDevelopment Grant (LGCDG) system. LGRP i s focusing on a medium to long term process o f legal and institutionalreform, intergovernmental fiscal reform, capacity building, deepening o f local accountability and the promotion o f community involvement inthe planningand execution o f infrastructure and service-delivery projects. It i s housed inthe President's Office - RegionalAdministrationandLocal Government (PO-RALG) andis supportedbyawide and closely coordinated group o f donors who provide funding for its technical assistance and managementneeds through a Common Basket Fund. The purpose o f the LGRP i s to improve the quality, access and equitable delivery o fpublic services -particularlythe poor, provided throughreformed, increasingly autonomous LGAs. Systemically, Component 1gives substance to decentralization policy by making funds for capital investment available to LGAson a non sectoral basis for the first time. This breaks two patterns that are inimical to effective local governance: (1) purely sectoral grants which robbed LGAs and communities o f the right to decide for themselves what investments are most needed, and (2) area-based programs (ABPs), which have been supportedby various donors, and which provided somewhat random, ineffective, and off-budget support to particular districts. GOT'SLGCDG system, supportedinpart by LGSP and inpart bybilateral donors, is premisedonthe notionthat 11  LGAscan effectively work with their communities to strategicallyprioritize and implement investments, that formula-based predictability will enhance long-term planning, and that capacity-based access conditions will prevent wastage and preserve public confidence. The systemhas the enthusiastic support o fboth GOTand donors, many o f whom have recently evaluatedtheir previous assistancemodalities and found them seriously wanting. At the levelofinstitutionalcapacity, LGSP supports reforms by (1)buildinglocal government capacity to prioritize and effectively manage investments, through both capacity-building grants (CBGs) and learning-by-doing and (2) developing specific capacity to develop and implement large-scale community upgrading programs inDar es Salaam, and (3) buildingcentral government capacity to oversee, monitor, evaluate, and support LGAs as they take the initiative inimplementation. Capacity-building funds will be accessedby LGAswhich develop capacity- buildingplans. These plans mustemphasize skills development, though upto 20% o fthe grant may be spent onre- tooling. Training materials will be developed and certified through PO-RALG, for delivery by any qualified institution, inorder to ensure the availability o f adequate and appropriate training materials. Through the annual performance assessmentso f all LGAs, the LGCDG system makes a linkbetween LGA performance, access to non-earmarked development funds, and capacity building.Under Component 1, LGAsthat meet minimumcriteria relatedto functional areas, notably financial management and planning, will access capital development funding LGAsthat do not meet the minimumconditions retain access to funds for capacitybuilding meant to assist them inmeeting the standards required for grant qualification. Qualifying LGAs also have access to the capacity buildinggrant to further improve their performance, whereby outstanding performance attracts a bonus to the grant amount. To ensure sustainability o f local investments, and operationalize GOT'Sfiscal decentralization policy, LGAsmustgeneratemore o f their own revenues andthey must spend adequately and appropriately on O&M. PO- W G ' s existing Local Government ReformProgram, which receives support from abroadrange o f development partners, will support all o f Tanzania's LGAsinthis effort, while Sub-component 2(b) o f LGSP focuses on Dar es Salaam, to provide a test, and hopefully a demonstration, o f what i s possible through frank analysis o f political and operational barriers to collection o f local taxes, and a systemic approach to overcomingthose barriers. It i s intended that the focused LGSP effort on revenue enhancement (RE) inDar will inform and cross-fertilize with the LGW efforts on REnationally. Withrespect to urban development, GOThas recently preparedaNationalHuman Settlements Policy (January, 2000). This Policy aims to address rapid urbanizationby providing a comprehensive framework for upgrading under-served areas which currently house the majority o f the urban population. Given the extent o f unplanned settlements, accounting for as much as 70% o f the populationinurban centers such as Dar es Salaam, the policy outlines a number o f objectives that build on upgrading activities begun inthe 1970s: e making servicedland available for shelter and human settlements; e improving the level o f provision o f infrastructure and services; e creating employment opportunities and eradicating poverty; e ensuring that legislation, regulations, standards and other controls are consistent with local conditions. Sub-component 2(a) o f LGSP helps implementthis policy, focusing on the provision o f infrastructure and services. This sub-component will demonstrate anupgrading approachbasedon (1) incremental upgrading -affordable capital and O&M investments, (2) interventions which 10% o f the city's population while respecting existing settlement patterns, and (3) neighborhood choice o f investments. 3. Benefitsandtarget population: The benefits o f the LGSP are related to two key dimensions: (i) increased access to local infrastructure, particularlyby the poor, and (ii) more effective governance. The Project will benefit three principal groups: 1. Local service consumers (households), who will benefit directly fromincreasedinvestment ininfrastructure and services by LGAs. This investment -particularly inComponent 2 -will be targeted at low income households. Anticipatedbenefits include improved infrastructure and services such as sanitation, upgraded roads and associated storm drainage facilities, and easier access to safe drinkingwater; 12  2. LGAs,which are mandatedto provide services to their communities inpriority povertyreduction sectors. The anticipatedbenefits include better and more sustainable investment choices, greater transparency and accountability inexpenditure o f public funds, and strengthened governance through genuine interaction between LGAsand communities interms o f decisions which affect people's quality o f life; and 3. PO-RALG, which oversees LGAs and has responsibility for monitoring and supporting them. Anticipated benefits include effective policy guidance, meaningful systems for monitoring and evaluating expenditure, assessingimprovements inservice delivery and capacity to manage a decentralized capital grant system. 4. Institutionalandimplementationarrangements: Institutional context. The responsibilities o f LGAsand national government are specified inlegislation, particularlythe Local Govemment Acts. In the context o f decentralization, LGAshave core functional responsibility for the delivery o f local services such as primary education, health, water, roads, and urban services such as refuse removal. PO-RALG i s responsible for overseeing the local government system and the decentralization process, while line ministries (Ministryo f Education, Ministryo f Health etc.) have regulatory and sectoral policy responsibility. The Ministry o f Finance (MoF) has responsibility for actually distributingfiscal transfers. PO-RALG and M o F both have roles informulation o f fiscal decentralization policy. Auditing o fLGA accounts i s performed annually by the National Audit Office. The overall project implementation periodi s 3 ?hyears. The institutionaland implementation arrangements for the project will be as follows: (i) The PO-RALG Permanent Secretary and Dar Es Salaam City Director will be the "Accounting Officers" for the project, assuming the overall responsibility for accounting for the project funds. (ii) MinistryofFinance (MoF) is responsiblefor disbursements to LGAsunder Component 1,based on determination by PO-RALG as to which LGAshave met the accessrequirements for receiving the Capital Development Grant (CDG) and the capacity buildinggrant (CBG). (iii) PO-RALG will be responsible for implementation o f Components 1and 3. PO-RALG will coordinate activities across the various components and evaluate LGAs' performance with respect to implementation. The primaryrole o f PO-RALG i s inspection, monitoring and support o f LGAs. Inaddition, PO-RALG will be responsible for publishingand publicizing the transfers to ensure transparency and accountability. PO-RALGwill beresponsible for annual Performance Assessments, which will affect participationand incentives infuture years. These assessmentsare described inthe project designreport indetail, and will: Verify LGA compliance with applicable legislation Determine whether each LGA has the capacity to manage discretionary development funds, and therefore be eligible for the CDG Provide the basis for rewarding good performance and sanctioning poor performance through incentives and penalties Include financial management and procurement assessments,reviewing compliance and outcomes with regard to prior years' funding Assist LGAs to identify capacity gaps and needs, which will inform their capacity buildingplans Improve downward accountability by providing a "scorecard" for citizens to gauge the performance o ftheir LGA These institutional arrangements are also detailed inthe final draft letter o f agreement between the Govemment and the Donors dated September 17, 2004. (iv) For overseeing the operations o f the LGCDG system, financed by IDA, GOTand bilateral donors, two committees will be established - a LGCDG Technical Committee, chaired by PS PO- RALG, with the task to discuss all issues pertaining to the functioning o fthe LGCDG system, and a inter-ministerial Steering Committee at PS-level to approve grant allocations and any changes to the system. Inaddition, PO-RALGwill establish a LG Capacity BuildingConsultative Group with the function to review management and coordination o f capacity buildingactivities. 13  (v) PO-RALGwill develop systems for mentoring LGAsto improve their performance "on thejob." PO- RALGwill monitor and evaluate the performance of LGAsto ensure compliance with national policies, regulations, standards, procedures and adherence to guidelines. LGAs which fail to perform adequately will be subject to sanctions. (vi) Two Project Support Teams (PSTs) will be established. At the central level, PST-PORALG will support the Director o f Local Government Coordination in PO-RALG inthe implementation o f Components 1 and 3, and will coordinate the overall LGSP. At the local level, PST-Dar will support the Dar es Salaam City Director and the Dar es Salaam LGAs inthe implementation o f Component 2. PST-PORALG will consist o f a project coordinatodmanager, a financial management specialist/accountant, a procurement specialist/engineer, a human resource and institutional development specialist, and support staff. Other PO-RALG staffmay be recruited by this PST, butwill be seconded to relevant departments o f PO-RALG, and will be responsible to their Heads o f Department. PST-Dar will consist o f a project coordinatodmanager, a financial management specialist/accountant, a procurement specialistlengineer, an overall RE/O&M program coordinator, an overall Community Infrastructure UpgradingProgram (CIUP) coordinator, and support staff. While the Dar LGAswill be accountable for implementation, PST-Dar will support contracting for over-arching activities, including recruitment o f consultants for sub-components 2(a) and 2(b). PST-Dar will be overseenby a steering committee composed o f five members, i.e. the 4 Dar es Salaam LGA Directors andthe Regional Administrative Secretary (vii) Interms of Component 1, actual works will be undertakenbyLGAswhich meetthe CDG access criteria. PO-RALG will monitor and evaluate expenditures and outcomes, but will not be involved inthe procurement or management o f construction contracts. (viii) For subcomponent 2(a), implementation o f the Community UpgradingPlans (CUPS) inthe communities will be carried out by each o fthe three municipalities. For component 2(b), each o f the four LGAswill implement their respective activities D. Project Rationale 1. Project alternatives considered andreasonsfor rejection: Component 1. As noted above, there i s little discretionary capital investment financing available to LGAs inTanzania. This is an importantgap inthe overall service delivery system andinthe decentralization process. The main altemative for financing local infrastructure would be a centrally implemented traditional investment operation, such as the previous Urban Sector Rehabilitation Project. This was considered to be undesirable primarily for the following reasons. First, it would be inconsistent with GOT'SLocal Government Reform Policy. Second, IDA'Soperational experience indicates that investment programs for local infrastructure and services should usually be implemented by LGAsinthe interest o f (i) buildingcapacity to plan and implementprojects and (ii) thesustainabilityoftheinvestments.Third,traditionalinvestmentoperationsarecumbersomewhen ensuring extended over multiple LGAs because itrequires extensive ex ante planning and review processes. The Bankhas established successful precedents inAfrica for designing and implementing capital transfer programs for local govemments based on eligibility and performance principles (e.g. Uganda, Senegal). This approachbuildsand deepens LGA capacity, and it i s inherently "mainstreamed" within the intergovemmental system. Sub-component 2(u). This sub-component has elements o f a more conventional investment approach. This i s a deliberate choice made after careful weighing o f tradeoffs. The key question, which has been discussed extensively betweenthe Bank, the GOTand other stakeholders, was whether to maintain a separate sub-component or to omit it, with the assumption that some upgrading activities inDar es Salaam LGAswould probably be funded from CDGs The latter approachmighthave been simpler and more elegant. However, it was ultimately agreed to retainthis sub-component for three reasons. First,targeting assistance to the urban poor, particularly inDar es 14  Salaam (where 30% o f the urbanpopulationi s located) i s considered an important objective inits own right. Second, the size o f the investmentsneeded to make a substantial impact could not fit into the initial scope o f CDGs. Third, the Bank's extensive experience with urbanupgradingmakes it clear that such activities require more intensive interaction and community participationto ensure that their objectives are achieved. The intention i s to use the experience o f this sub-component to design a replicable and "mainstreamed" approach to upgrading inthe future. Dar es Salaamhas appliedto the Cities Alliance for assistance indesigning aroll-out which would target the upgrading o f all under-served areas inDar by 2015, This initiative i s designed to complement the investment programto be implemented through LGSP. Sub-component 2@). This sub-component is aimed at improvinglocal own-source revenueperformance to ensure that Dar es Salaam LGAs are able to sustaininvestments made under Subcomponent2(a) as well other infrastructure. Duringthe preparation o f the project, two o f the most important local revenue sources were eliminated by central government. Although these were not sound taxes, their elimination in favor o f compensatory transfers dilutes fiscal decentralization. Recent efforts with regard to property taxes have shown promisingresults. There remains doubt as to LGAs' willingness and capacity to collect the revenues which a decentralizedfiscal systempresumes they must collect. Serious considerationhasbeen given to eliminatingthis component altogether. There i s a substantial riskthat it will not be effective. However, unless LGAs,particularly inurban areas, do improve their local revenue performance, they simply will not have the resources to maintain the extensive infrastructure investments they have made and continue to make. Consequently, the decision has been made to move forward, though with a reorientation to identifyingthe political and enforcement barriers that would make an exercise based on merely expanding the tax base unproductive. Inaddition, consultation with the MoFand PO- RALGhaveresultedina commitmentby central government to develop a holistic and coherent intergovernmental fiscal policy framework that clearly specifies local revenue sources, and the responsibilities and authority o f LGAs inregardto collecting revenues. Consideration was also given to expanding the revenueenhancement program nationally. However, since PO-RALG's Local Government Reform Programteam i s already making efforts inthis regard, it was decided to focus on Dar es Salaam. 15  2. Major related projectsfinancedby the Bank and/or other developmentagencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects /) Bank-financed lmplementa Develop- -tion ment Progress Objective (DO) Infrastructure and service provision to Urban Sector Rehabilitation S the poor Project (USRP) Support to local projects Tanzania Social Action Fund S S (TASAF)/ TASAF2 now in I Provision o f water supply and RuralWater Supply and S S sanitation services Primary education deliveryby LGAs S Development Program (PEDP) Provision o f water and sanitation Dar es Salaam Water Supply S services to the poor Essentialhealth services delivery by S LGAsand to improve the quality o f Development Project health services by implementinga quality assuranceprogram and integrating specified HIVIAIDS activities into service delivery at all levels. Support to the ongoing S decentralization process through Development and financing for subprojects for Empowerment Project community investments and capacity (PADEP) buildingat the district level Other development agencies Support to Local Government Reform GoTBasket FundDonors: Program Netherlands, Ireland, Denmark, Finland, Norway, Sweden, DFID,EUand UNDPAJNCDF 16  Support to local governance UNCDF: Local Development Fund(6 Districts o fMwanza) (closing December 2004) Support to local projects Belgium o possible projects under discussion with GOT; intending to support LGCDG Canada preparedto shift to LGCDG Denmark ongoing E U possible projects under discussion with GOT; willing to support LGCDG Finland to end in2005; considering future support for LGCDG Ireland; preparedto shift to LGCDG Netherlands closed June 2004 prepared to support LGCDG Sweden 0 to end in2007 IP/DO Ratings: HS (HighlySatisfactory), S (Satisfactory), U(Unsatisfactory), HU(HighlyUnsatisfactory) 3. Lessons learned and reflectedinthe project design: Overallproject and Component 1. The proposed operation will incorporate the mainlessons o fthe Bank's experience inurbandevelopment from the region and worldwide. The main lessons on decentralization and urban management are drawn from (i) the Afi-ica Urban Sector Strategy (November 2001); (ii) Operation Evaluation the Department's EvaluationSummaries; and (iii) the report"Fiscal Decentralizationand Sub-national Finance in Africa" (DANIDA and World Bank, 2000). Specific strategic and operational lessons also have been taken from four projects inthe region designed to channel funds to local governments for investments through grant systems: the Zimbabwe Rural District Council Pilot Capital Development Project (closed inJune 2000); the Zimbabwe Local Government Capital Development Project (negotiated but "on hold"); the Uganda Local Government Development Project (active); and the Senegal Urban Development and Decentralization Project (active). The Bankhas also financed numerous municipal grant mechanisms inother regions; two examples are the Paranh Municipal Development Project inBrazil and the Municipal Development Projects Iand I1inthe Philippines. Among the key lessons that have been incorporated inthe design o f the proposedProject are: Long-term approach. Development objectives inthe local government area are inherently long-term and mustbepursuedwithinthe framework o fanextendedprogram. Component 1supports anew fiscal transfer that will change the way local investment decisions are made; 17  Systemic reform. To effectively provide infrastructure and services, LGSP fits into a three-part framework which experience has shown to be necessary: (i) intergovemmental fiscal reform, (ii) institutional and local financial reform, and (iii)resources for capital investment; Local government implementation. The project incorporates the lessonthat local investments should be implemented by the local govemments to (i) buildcapacitythrough "learning by doing" and (ii) secure ongoing operation and maintenance; Demandand performance-based approaches. Prior experience has shown that strengthening sub-national govemments should be demand-driven. The LGCDG will fund local investment priorities and the CBG will fundlocal capacity-building plans. LGAswhichperformadequately will have LGCDG access, those that are outstanding will receive increased funding, and those that perform poorly will receive reduced funding. Considering lessons regarding need for institutional integration, Component 3, meant to support the implementation o fthe grant system under Component 1, has been designed to buildthe capacity o f PO-RALG interms o f its core functions and the tasks required for the operations o f LGSP. Component 2. The Bank's most recent involvement inupgradingprograms inTanzania dates back to the mid- 1970s. Since then the Govemment has undertaken several upgradingprograms which have providedvaluable lessons for the designo f this component. Inaddition, over the past few years the Bank has been analyzing the lessons o f experience o f urban upgrading world-wide (Urban Poor Thematic Group, TUDUR). The proposed CIUP for Dar es Salaam would incorporate the following principles: Selection o f specific settlements (sub-wards) to be upgradedi s based on a systematic and rational city-wide prioritization process and clearly defined criteria. Throughthis process all 154unplanned settlements (inDar es Salaam for example) are rankedand upgraded inphases. m Community involvementinselecting the package o f infrastructure improvements to be deliveredby the LGA in their settlement (sub-ward), and supervising construction and subsequent operation and maintenance. The community PlanningTeam has participated inplanning and design through an iterative community prioritizationprocess. Demonstration o f community demand and commitment to sustained operation and maintenance o f infrastructure. Households will contribute 5% toward capital cost. Municipalities and the DLAswill also contribute an additional 5% each for community and trunk infrastructure respectively. Selection o f packages i s subject to a per hectare cost cap (inthis case USD 18,000 equivalent to about USD 50 per capita) to ensure the widest possible coverage given limited availability o fpublic financing and capacity for operation and maintenance. Minimize andpreferably avoid displacing households by usingappropriate planning standards and layouts. Efforts are made to avoidresettlementby conforming to settlement pattems. O&M responsibilities, plans and financingcommitments are agreed upfront for each community and communities are responsible for monitoring and liaising with LGAsto ensure that O&M i s carried out as agreed. To ensure that financing for O&M is available, LGAshave committed to implementinga revenue enhancement initiative and budgeting adequately for O&M. Harmonizingwith sector policies and initiatives. Inthis case, Citiwater Services will be responsible for providing community water supplies inparallelwith LGSP. Broader linkages to the national settlement policy will bemade through the Cities Alliance initiative -aparallelprogramdesignedto complement the CIUP. And linkages will also be made to an E O initiative that will buildcapacity o fprivate solid waste collection agencies. 4. Indicationsof borrower commitmentandownership: GOThasrepeatedly stated its commitment to decentralization and to increasingcapital fundingto LGAs. A core component o f GoT's Local Govemment ReformProgram(LGRP), described above, focuses on fiscal decentralization. LGRPi s funded by a Common Basket Fund, the Steering Committee o f which i s chaired by PS:PO-RALG. Recently, GOTand several bilateral donors have agreed, inprinciple, that the LGRP Basket Fund will also be the vehicle through which donors will provide parallelfinancing for the LGCDG and CBG. Assuming this intention is realized, thesetransfers canbe made available country-wide. 18  The formulation o f the concept for the LGSP follows a comprehensive assessmento f the decentralization process inTanzania which was conducted as Bank ESW over calendar 2000-01. Since thenit has beenthe subject o f detailed discussion between the Bank and GOT.The current design, and recent decision to broaden the LGCDG and CBG country-wide, represent the evolution o f those discussions. Dar LGAshave playedan active role inthe design o f the project. CUPSoutlining the program o f interventions to be financed under LGSPhave beenpreparedfor each o f the 16 communities under the guidance o f municipal technical support teams, and with participation o f community planning teams; approvedby municipal departments and their respective committees; and signedby municipal councils and respective sub-wards Technical work for the preparation o f LGSP i s beingfunded from three main sources, all o f which have requiredGOTapproval: a PHRDgrant; the LGRP Common Basket Fund; and a component o f the USRP credit devoted to future project preparation. 5. Value added of Banksupport inthis project: Interms o fComponent 1,the Bank's support has catalyzeddevelopmentpartners inTanzania, who have committedto provide significant parallel resources to fund LGCDG and CBG. Interms o f Component 2, the Bank i s the only agency currently positioned to providethe resources to fund this high-impact upgrading program. The last large scale investments ininfrastructure were funded by the Bank inthe 1970s. The Cities Alliance initiative will map out a future funding strategy for upgrading all o fDar's unplanned areas, but this initiative mustbe tiedto actual investment, such as that supported by Component 2. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic(see Annex 4): Other (specify) NPV=US$ million; ERR = % (see Annex 4) The economic evaluation covers Component 1and Subcomponent 2(a), which account for most o f the LGSP costs. Withrespect to the LGCDG, the economic justification rests on demonstrating (analysis shows) that the transfer mechanism; which supports unified LGA planningandreporting, with discretionary fundingunder hardbudget constraints, and with incentives both for meeting access conditions and performance indicators, reinforces cost- effective and efficient resource allocation. The estimated overall economic rate o freturn for Subcomponent 2(a) i s 20%; the net present value based on 12 % discount rate i s Tsh.3.95 billion (US3.6 million equivalent). For Subcomponent 2(b), the Revenue Enhancement Program, it i s difficult to undertake an economic analysis, since the programcan be seen as a transfer o fresources from the household or the firmto LGAs. 2. ,Financial(see Annex 4 and Annex 5): NPV=US$ million; FRR= % (see Annex 4) The financial analysis relates solely to component 2(b). Based on pay back period i s between 2 and 3 years for Option I11o f the Revenue Enhancement (RE) Program. The resource envelope defined for the REProgram appears to be realistic interms o f the absorptive capacity and revenue generation. The RE component o f LGSP investment represents US$1262 million or 1.7% o f total project costs. It was determined that o f ten potential municipal revenues, only the property tax represents a realistic way forward, inthe present legal framework. Three options for implementingthe property tax more efficiently -discrete evaluation, value bandingand flat rate - were considered. The options can be re-evaluated inlight o fdata collected under the project, but based on projected investment, operation and maintenance costs, the flat rate i s the one with the lowest payback period. For the flat rate option, the payback period was found to be only two years. FiscalImpact: LGSP funds will be fully integrated within the local government budgetingand financial cycle. An inevitable challenge will be to decentralize budgeting and investment decisions while ensuring accountability and transparency. Generally, Tanzania has a sound financial management system and many rules have recentlybeen updated and strengthened. The speed o f implementation o f IntegratedFinancial Management Systems (IFMS) and 19  legislative changes has, however, left a number o f gaps which, ifnot filled, couldnegate the achievements o fthe recent past. LGSP will identify these gaps and address them to improve financial management and accountability (e.g. incentivising the use of IFMS). 3. Technical: For component 2, technical choices were determinedbased on a participatory approachthat involved communities determining the scope o f investments based on a fixed budget envelope, the ability o fbeneficiaries to contribute 5% o f the capital costs, and municipal commitment to meet operation and maintenance costs once the initial investment has beenmade. The detailed design o f investment packages was carried out with inputs from technical specialists to ensure an integrated approach to planninginfiastructure improvements, and to mitigate against potentialnegative impacts on downstream communities 4. Institutional: Institutional arrangements for project implementation will follow GOTstructure. At the central level, PO- RALG,MoF, andthe NationalAudit Office will beresponsible for the execution of the project, ensuringthat the project resources are budgeted for and disbursed within the national MTEF, and the project accounts audited as per the Development Credit Agreement (DCA) and GOTrequirements. At the local govemment level, the LGAswill be responsible for meeting the LGCDG accessrequirements and utilizing the grants as per their annual work plans and budgets. Dar es Salaam LGAswill be directly responsible for implementing the community infrastructure upgrading program. Management o f the completed facilities, including operations and maintenance, will be the responsibilityo f the LGAs. O&M responsibilities are detailed inthe Operational Manuals for Components 1and 2 (Annexes 1and 2 to the Project Implementation Plan) 4.1 Executingagencies: The President's Office - RegionalAdministration and Local Government (PO-RALG) will be the executing ministryfor LGSP andwill also be directlyresponsible for implementingComponents 1and 3. The Dar es Salaam Local Authorities (DLAs)will be responsible for implementingComponent 2. 4.2 Project management: PO-RALG will be responsible for coordinating the activities o f the project. The project will be implemented through two project support teams (PSTs) to be established, one withinPO-RALG and one by the Dar es Salaam Local Authorities (DLAs). The PSTs will provide back-up support to PO-RALG and the DLAsinthe following areas, inter alia, as detailed inthe Project ImplementationPlan: (a) preparation o f work plans, budgets, semi-annual progress reports; (b) ensure accountability for LGSP funding; (c) organize and oversee annual assessments and quarterly technical review meetings (inthe case o f component 1); (d) monitor and evaluate the impact o fLGSP activities on KPIs; (e) procurement, including purchases o f goods, works and consulting services; (f) supervision ofconsultancy assignments andpreparation ofreports detailing consultancy findings; (g) management o f contractual relationships; (h) financial management andrecord-keeping; managementand audit ofLGSP accounts; and (i)disbursements(inthecaseofComponents2and3). 4.3 Procurement issues: The overall procurement risk for the project has been rated as high, as i s the case for most IDA-financed projects inTanzania. The implementingagencies have limited experience with highvalue contracts and construction supervision contracts. Procurement filing and recordkeepingsystems are inadequate insome cases. In order to mitigate this risk, it i s proposedto (i) out orientation workshops onprocurement process usingthe carry 20  Public Procurement Act (PPA) o f 2001, LGA procurement regulations, LGA procurement manual, World Bank Guidelines for procurement o f goods and works and selection o f consultants to heads o f departments, supplies officers/ procurement staff, and members o f tender boards; (ii)conduct short courses for supplies officers/ procurement staff on World Bank procurement procedures for selection o f consultants and procurement o f goods and works; and (iii) require each PST to recruit a procurement specialist with qualifications and experience acceptable to IDA to work for a period o f at least 18 months. The riskwill be monitoredduringsupervision missions and post review missions and validated accordingly. 4.4 Financialmanagement issues: The overall conclusions o fthe financial management assessmentare: . The project's financial management arrangements satisfy the World Bank's minimumrequirements under OPh3P10.02. However, some improvements remain to be effected for the system inorder to establish an acceptable control environment and to mitigate financial management risks. The various measures/improvements should be implementedby the due dates as indicated inthe table below. The project financial management risk i s assessedas beingmedium provided that the financial management arrangements are properly implemented and the following financial management action plan (annex 6B) i s satisfactorily addressed inpractice: Standard financial covenants include the submissionto IDA o f .. Audited financial statements within six months after the year-end; Other related information as required by IDA; Financial Monitoring Reports (FMRs) within45 days after each calendar quarter The disbursement o f the IDA Credit to the Special Accounts will be done quarterly basedon Financial Monitoring Reports (FMRs). Fundsfor component 1will be disbursedquarterly and depositedto the Special Account. Fromthere, funds will be released quarterly into the GOTConsolidated Fund. Fromthere, funds will be disbursedto the LGAsfor investments subprojects. PO-RALG will carry out a FinancialPerformanceAssessment (FPA) inSeptember/October eachyear inthe context o fthe Annual Performance Assessment. This will determine accessby LGAs to LGCDGs. Consolidated quarterly financial reports will be preparedby each district level LGA. The submission o f these reports to PO-RALG will be a prerequisite for the release o f quarterly disbursements to the LGAs. The accounting systems, policiesandprocedures employed inaccounting andmanaging for LGSP funds are documents inthe Financial Management Manual (FMM). The FMMwill be updatedto include detailed descriptions o f the accounting systems and procedures. The Government will ensure that appropriate staffing arrangements are maintainedthroughout the life o f the project. Audit arrangements: Two financialreports will beproduced and auditedannually for PO-RALG & DCC respectively. These shouldbe submitted to IDA within six months after the end o f the financial year. As provided inPublicFinanceAct 2001, the NationalAuditOffice (NAO) will undertakethe audit (or a firmappointedbythe Controller and Auditor General (CAG). The auditor will be required to express an opinion on the audited project financial statements only, incompliance with International Standards on Auditing. Inaddition, detailed management letters containing the auditor's assessment o fthe internal controls and accounting systemand suggestions for improvement will be prepared and submitted to management for follow-up. 21  5.0 Environmental 5.1 Summarize the steps undertakenfor environmentalassessmentand EMP The environmental work for this project has beentailored to the objectives o f components 1and2 (a). Component 1: This component will include support for investments (sub-projects) that respond to local needs, for example, the construction o f schools, health centers and local roads, the provision o f water supply and sanitation, and drainage. Potential environmental impacts due to construction activities are likely to include soil erosion, loss o f vegetation, and soil and water pollution.Potential social impacts are likely to include some losses o f livelihoods due to land acquisition; there may also be traffic safety concerns, a potential increase in water-related diseases as more water supply systems are provided, air and noise pollution. Similar impacts may occur at the locations where borrow pits are either planned or are currently being exploited as sources o f construction materials for sub-projects. Since the exact infrastructure investments (sub-projects) are not known at this time, an Environmental and Social Management Framework (ESMF) has beenprepared. It will be usedby implementers at the level o f local governments (Village governments and Urban Sub-ward ("Mtaa") governments) duringthe sub-project planning stage. The ESMF outlines an environmental and social screening process which will enable the implementers o f future sub-projects to identify and mitigatepotential impacts at the planning stage. This screening process consists of (i)an environmental and social screening form; (ii) environmental and social checklist; (iii) an guidance for environmental impact assessment; (iv) a summary o f the Bank's safeguard policies and their applicability to the future sub-projects; (v) a medicalwaste management plan; and (vi) an Environmental Mitigation Plan (EMP) for the Local Government Support Project (costs ofUS$2,224,000 will be includedinthe project costs). Includedin the costs o f the EMPare estimates for capacity buildingactivities (EMtraining; training needs assessment for three ecologically distinct regions: Dar, Kilimanjaro, Iringa, and update o f the existingTraining Manual for the Bagamoyo and Meatu regions). These activities are designed to strengthen environmental management capacity at the local government level. The ESMF further proposes that the National EnvironmentManagement Council (NEMC) perform an enforcement monitoringrole supported by the PO-RALG and the local governments. NEMC will ensure that the monitoringplan for the overall monitoringo f the entire LGSP requirements i s implemented with particular focus on monitoring cumulative impacts o f the sub-projects on a nationallevel and to ensure that individual sub-project mitigationmeasures are effective at the cumulative andnational level. NEMC would primarily achieve this objective through periodic field visits, coordinating and implementingthe training program, and through technical assistance and back-up services to the local governments. To addresspotential negative social impacts due to land acquisition, the projecthas prepareda Resettlement Policy Framework (RPF)which outlines the principles andprocedures to be applied inthe event o f land acquisition or the loss o f livelihoods due to the construction activities o f future sub-projects. The ESMF and RPFhavebeenpreparedinconsultationwith the relevant government officials at the local andnational levels. (CIUP) a community-driven infrastructure upgrading program targeted at unplanned areas inthe Dar es Salaam -Component 2 (a) :This component includes support for the Community InfrastructureUpgradingProgram municipalities o f Ilala, Temeke, and Kinondoni. Since the specific areasto be upgraded have been identified, a Community EnvironmentalManagement Plan (CEMP) has beenprepared. The CEMP outlines the potential environmental and social impacts o f the planned investments (sub-projects) and proposes a number o f mitigation measures as well as institutionalarrangements at various levels for the implementation o f the CEMP and capacity buildingfor environmental management. As proposedinthe CEMP, the municipal council will be responsible for, among other things, implementation o f the environmental management plan; environmental monitoring and reporting; implementation o f an environmental awareness campaign and education program on public hygiene. Incases where medical waste i s becoming an issue, the authority will make arrangements with the Ministryo f Health to implement the National Medical Waste Management Plan. 22  NEMC will be one o fthe institutionsresponsible for monitoring the applicationo fthe environmental and social screeningprocess, the provisiono f environmental management advisory services, medical waste management under sub-projects, and the provisiono f training (train the trainers). The environmental mitigationplan includesprovisions for capacity buildinginthe following areas: preparation o f environmental household surveys, environmental management support, environmental monitoring and reportingby communities, train the trainers program, and environmental awareness creation and public hygiene campaign. The costs for this plan amount to US$310,500 and have been included inthe CIUP institutional development program (Vol. I1- Institutional and Management Arrangements). Similarly, the social impacts o f this component were identifiableat the time o fproject preparation. Therefore, a ResettlementAction Plan (RAP) has beenpreparedto ensure that all affected persons are compensated appropriately. 5.2 What are the mainfeatures of theEMP and are they adequate? Component 1:The main features o f the EMP for this sub-component are (i) institutional arrangements the for implementingthe mitigation measures, monitoring their implementation, cost estimates for these measures and their time horizons; and (ii) theproposedcapacitybuildingwith a focus on "train the trainers", anda training needs assessment for three ecologically distinct regions (Dar es Salaam, Kilimanjaro, Iringa). Component 2(a): The main features o f the draft EMP for this component include environmental awareness training, public hygiene campaigns, train the trainer, environmental household surveys, and environmental management support.; a summary EMP i s under preparation and will be includedinthe final CEMP. 5.3 Timeline and status of EA: The ESMF, RPF; CEMP; and the RAPhave been approved by the Government o f Tanzania and the World Bank and have been disclosed in-country on August 25,2004, and at the Bank's Infoshopon August 31,2004. 5.4 How have stakeholdersbeen consulted? Component1: The ESMF andRPFhavebeenpreparedinconsultationwiththe relevant government officials. Inthe case ofthe ESMF, the consultant carriedout consultations at thenational levelinDar es Salaam, i.e. the National EnvironmentManagement Council (NEMC), and with urban andrural LGAs, i.e. Municipal Councils, and District Councils. When asked about the usefulness and availability o f guidelines for carrying out EIAs and qualifications to carry out EIAs,the following responses were given: 0 Guidelines for project implementers on how to carry out EL4were providedby the Government inabout 50% o f the cases; inthe remaining cases, they were providedby donors and NGOs; 0 Difficulties encountered inimplementingthese guidelines were primarily due to a lack o fresources (no facilities, no transport, highreproduction costs); environmental ignorance, and compliance problems; 0 Mechanisms usedto ensure that guidelines are followed include reliance onby-laws, local committees and councils, and environmental education (including training provided by donors and mass mobilizations); 0 More than half (60% o fproject implementers had carried out EIA on their projects; and 0 About 50% o f the councilmembers interviewedhadreceivedEL4training. The outcome o f these consultations suggests a need for improving the usefulness and implementation o f EL4 guidelines, addressing compliance problems, and further enhancing the EIA capacity o f local governments. Component2(a): The CEMP was prepared inclose consultations withthe affected communities and within the full context o f local, national and international environmental andnatural resources management policies and regulations. The strong inclusion o f the communities inthe environmental management scheme as well as the country's institutional and legal support are assumed to provide a conducive environment to minimize and/or offset 23  the environmental and social impacts and ensure the workability o f investments made under this program. Community participation inthe ClUP was designed as an iterative process. The Dar es Salaam local authorities determined the stages o f the programwhere communityparticipation was most critical, and the level o f participationrequired. This includes involvement inthe planning and decision-making and responsibility for (environmental) monitoring o f construction and operation and maintenance. The RAP was prepared inclose cooperation with the affectedpopulation livinginthe municipalities o f Temeke, Ilala, and Kinondoni. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Component 1:Step 6 ofthe ESMF outlines the responsibilities for monitoring and evaluation ofthe mitigation measures adopted under the sub-projects. Thus, sub-project implementers at the various local government levels will beresponsible for day-to-day monitoring and reportingo f feedback throughout the life o f the sub-project; whereas Environmental committees at the different localgovernment levels will undertake compliance monitoring; the National Environment Management Council (NEMC) will perform an enforcement monitoringrole supported by the PO-RALG and the local governments, based on submissions and recommendations from the Environment Committees at the different local government levels, the District Environmental Officer, andby the District Management Teams. Component2(a): The CEMP outlines a specific monitoring and mitigationplanto be implementedby the municipal council with the training/technical assistanceprovidedby an EnvironmentalManagement Advisor (for environmental management support and train the trainers program), and provisions have beenmade for fundingo f environmental household surveys, environmental monitoring andreporting, and for an environmental awareness creation and public hygiene campaign. 6. Social: 6.1 Summarize key social issuesrelevant to the project objectives, and specify the project's social development outcomes. The social impact o f the project will be positive as a consequence o f improved social services. Infrastructure investments carried out under Component 2 (a) will buildthe capacity o f LGAs and local community organizations to engage inthe planning and design, monitoring and management of relevant aspects o f the upgrading program. Although efforts have been taken to reduce resettlement and social disruption, component 2(a) will result insome minimal relocation or resettlement and specific measures to reduce negative social impact have been determined through a process o f community consultation and negotiation that also involved project affected families. Mitigationmeasures will be part o f a Resettlement Policy Framework (RPF) prepared for the project. The RPFestablishes the resettlement and compensationprinciples, organizational arrangements and design criteria to be applied to meet the needs o f the people who may be affected by the project activities requiring land acquisition and /or denial, restrictionor loss o f access to economic resources. Based on the principles set out inthe RPF, a Resettlement Action Planfor sub-component 2(a) has beenpreparedanddisclosed to the public on August 25,2004. 6.2 Participatory Approach: How are key stakeholders participating inthe project? LGAsand communities will be the main stakeholders inthe project. Selection o fthe sub-projects will be participatory and demand-driven. For Component 1, Development Plans preparedthrough a participatory process will define priorities for investment. For Component 2, community participation is part o fthe component design and communities have been involved indecision-making through the entire process o fpreparing Community Upgrading Plans, including decisions relatedto capital cost contribution, direct participationduringproject implementation, and arrangements for subsequent operation and maintenance. The modalities o f the participatory approach were defined ina report preparedby a specialized consultant duringproject preparation. 24  6.3 H o w does the project involve consultations or collaboration with NGOs or other civil society organizations? Non Government Organizations (NGOs), CommunityBased Organizations (CBOs) and Civil Society Organizations (CSOs) will be stakeholders inthe consultations over investment identification. NGOs andor CBOs will also participate infacilitating the preparation and implementation of Component 2. NGOs will be specifically involved indeveloping a household sanitation improvement strategy and managing the implementation o f a household sanitation marketingand constructionprogram ineach o f the three municipalities. 6.4 What institutionalarrangements havebeenprovided to ensure the project achieves its social development outcomes? The projectwill be basedon a demand-driven approach involving LGAsand communities at all stages. In particular, under Component 2, Community Environmental Management Plans will ensure that the decision making process and monitoring mechanisms are participatory. 6.5 How will the projectmonitor performance interms o f social development outcomes? A Management InformationSystem (MIS) will bedeveloped for monitoringand evaluating the social development outcomes o f LGSP (EMSF and RPF) and also to provide the PO-RALG with a one-stop information center on LGAs. For Component 2, it i s intended that a baseline survey o f beneficiary communities will be carried out against which monitoringof social development outcomes can be undertaken. The baseline survey will form the basis for animpact assessmentto be carried out inyear three o fthe project. 7. Safeguard Policies: 7.1 Are any ofthe following safeguardpoliciestriggeredby the project? 25  7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. As discussed earlier, the Borrower has prepared the required safeguard documents for Component 1 and Component 2(a). Their implementationwill be monitored through NEMC at the level o f the PO-RALG. F. Sustainability and Risks 1. Sustainability: The sustainability of LGSP's intendedbenefits must be considered at two levels: (i) interms ofactual investments funded by Component 1and Component 2, and (ii) terms o f the LGCDG system as a durable, in ongoing element o f the intergovernmental fiscal systeminTanzania. Inrespect oflevel(i), . sustainability rests critically on: Withrespect to Component 1, the strength ofthe incentives providedbythe LGCDGto assure ownership by the LGAsof the investments financed and to motivate their corresponding efforts to mobilize additional revenues for operation and maintenance; . The effectiveness o f the implementation o f the LGRPreforms directed at strengthening financial management and enhancing local revenues; Withrespect to Component 2, the effectiveness of the community participation process for planning, design and implementation o f the CIUP, to assure community support for maintenance o f the upgrading investments. Specific measures for ensuring sustainability are contained inthe CUPSprepared for each sub-ward. These include training o f community planning teams to monitor O&M plans to be implemented by municipal authorities. Efforts to improve revenue collectionthrough Sub-component 2(b) ,inorder to improve the municipalities' position to assume O&M burdenimposedby these additional investments . Inrespect oflevel(ii), sustainability will require that: = The LGCDG systemi s continued as a fundamental feature o f the intergovemmental fiscal system in .. Tanzania, providing a key source o f capital fundingto LGAswhile maintainingand expanding incentives for LGAs for improvements intheir fiscal and institutionalperformance; The commitment o f GOTto continue with the steady implementation o f the intergovernmental fiscal, structural and systemic reforms which will reinforce the impact o f the LGCDG. The project concept reflects a number o f elements which are designed to ensure sustainability taking these factors into account. 2. Critical Risks (reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): Risk Risk Risk Mitigation Measure Rating From Outputs to Objective Failure o f GOTto put inplace adequate S Sustained support o f LGRPby donor legal, policy, fiscal framework for LGAs community; ongoing interaction by Bankwith GOT,including MoF; Lack o fbroad GOTconsensus on overall S Ongoing dialogue with MoF, policyresearchon intergovemmental fiscal framework intergovernmental fiscal framework supportive o f decentralization 26  ~~ ~ `olitical and policy environment for local H Attention to be placedon local revenue policy by :venues will deteriorate LGRP/ component 2(b) is a riskmitigation measure specifically targeted at Dar es Salaam LGAs I :ontimed ABP and other support for local 1 M Bilateral donors, includingNetherlands, Ireland, ?vestments, outside LGCDGsystem Finland, EU, CIDA, Belgium, will also fund LGCDG system, ensuring a critical mass; TASAF 2 to be harmonized and a strategy developed for convergence :ouncils unable to retaincapacitated staff ~ LGW support for humanresource reforms to be implemented / Public Service Act to be reconciled with local government reform efforts leform and implementation o f financial Donor support o f IFMS roll-out and LGSP nanagement systems and capacities (IFMS) incentives for LGAs to introduce and use the lo not progress satisfactorily system 3fforts to improve community participation S Donor support o f LGRP and LGSP incentives for md "downwards accountability" through community involvement inplanning >GWnot effective &ants not large enough to provide M Annual monitoring o f councils' performance and ncentives for improvedperformance by adjustments o f LGCDGas needed :ouncils lperation and maintenance measures by . M Inclusion o f O&M as performance criterion for :ouncils are inadequate LGCDG; proper planingo f O&M inCIUP `rom Componentsto Outputs 4"maynotbeusedinanefficientand M Annual External audit will be performed conomical way and exclusively for purposes Accountability for grants will be done in ntended and such funds may not be properly accordance with LGA statutory regulations and ccounted for. guidelines issued and widely circulated by the PO-RALG. Strong internal control procedures will be developed. LGAsadequate accounting capacity will be a prerequisite for the disbursement o f grants, as assessed throughAnnual Financial Performance Assessment. Each assessment will include the review o f relevant accounts, documents and reports, and interviews with key informants inthc LGA and inthe affected communities. Communities will be involved inmonitoring o f expenditures and review o fperiodic reports Fundswill be made available for monitoring and evaluating the implementation o f project activities. ;GAS capacity maynot be sufficientto S Po-RALG -PST to provide for highquality mplement all the control procedures as technical support to LGAswith the provision o f ntended (accounting, internal audit and closer backstopping and follow-up. nspection) Capacity Buildinggrants to be provided under Component 3. Capacity o f LGAswill have to be assessed as satisfactory before they receive grants. PO-RALG to ensure the recommendations o f the FPAs are carried out. LGAs receive transfers late due to M Project funds will be disbursedusing ielays inreleasing funds from the M o F prioritization mechanisms and inaccordance with 27  greed schedules to which GOTwill be :ommitted. :ounterpart funds may not be sufficient given H ,oca1 revenue enhancement measures through he declininglevels o f locally generated ,GRP and subcomponent 2(b) inthe case o f Dar evenues :s Salaam. nadequacy o f mechanisms used to identify S rJew planning guidelines and participatory :ommunity needs may leave communities out Aanning approaches will support the LGAs in )fmany decision-makingprocesses, with )laming andbudgetingo f investment funds and listrict Development Plans not fully iddress indusion o f community plans in ,eflecting community aspirations. :onsolidated District Development Plans. qA0 may lack capacity to audit expenditures S $upportto be given through the project for private ncurred by LGAs. i r m s to audit financial statements 4udit approachdocument to developedbyNAO ntemal audit functions may not be M '0-R4LG & DLAsto provide appropriate staff ;ufficiently carried out due to capacity 'esources ;hortfalls htemal audit function will be strengthened h o u g h the capacity buildinggrant. Inaddition, inintemal auditor willbepartofthe teamthat will be conducting annual Performance 4ssessment o f the LGAsduringthe Project Implementation. Councils fail to manage their grants M Capacity-buildinggrants to be provided to all adequately councils to help them qualify for LGCDG participation Lack o f effective support and coordination M Careful attention to design o f coordination for project at central and local levels mechanisms with involvement from all key stakeholders Political interference inproject operatiodin M2 LGCDG and CIUP implementation manuals revenue enhancement efforts well-disseminated; annual monitoring o fproject byLGRPFiscalDecentralizationTask Force, with representation from a wide range of stakeholders, specific effort to confront political issues interms o f local revenue enhancement Municipal councils' capacity to implement M Training and capacity buildingprogram for component 2 through line agencies may be municipal staff to ensure that they have the more limitedthan currently expected necessary skills; Joint supervision o f PST-Dar by all four Dar es Salaam LGAs. Overall Risk Rating S RiskRating - H(HighRisk), S (Substantial Risk),M(Modest Risk),N(Neg1igible or Lowhsk) 3. PossibleControversialAspects: INone I * Riskis modest for all components except subcomponent 2(b), revenue enhancement, where the risk i s judged to be high. 28  G. Main Loan Conditions 1. Effectiveness Condition (i) The Borrower has opened the Project Accounts, PO-RALG and DARLGAs, with initial deposits o f Tanzanian Shillings equivalent o f $350,000 and $100,000 respectively. (ii) TheBorrowerhasappointedthefollowingkeystaffinthePST-PORALG 0 Project Coordinatorhlanager 0 FinancialManagement Specialist/Accountant 0 Human Resource Development / InstitutionalDevelopment Specialist 0 Engineer with procurement experience (iii) TheDLAshaveappointedthefollowingkeystaffinthePST-DAR 0 Project Coordinatorhlanager 0 FinancialManagement Specialist/Accountant 0 RE/O&M Program Coordinator 0 CIUP Coordinator 0 Engineer with procurement experience (14 The DLAshave appointedthe,Revenue Enhancement Coordinator/O&M Coordinator withinthe finance ~~ department o f each DLA (v) The Borrower shall have entered into the Dar Agreement with the DLAs, ina form and substance that i s acceptable to the Association. (vi) The Borrower has submitteda planning guide regarding the roles o f lower local governments (LLGs) ina form and content satisfactory to the Association. (vii) The Borrower has established the LGCDG Steering Committee, LGCDGTechnical Committee, the Local Government Capacity BuildingConsultative Group and the Dar Steering Committee (viii) The Borrower has submittedthe revised Project Implementation Plan. 2. Other (i) Transfers(Component1):IDAfundswillbedisbursedfromtheSpecialAccounttothe Fiscal GOT Consolidated FundAccount inTanzanian Shillings on a quarterly basis based on the satisfaction o f certain criteria, an annual Performance Assessment (which includes a financial assessment) carried out under the responsibility o f PO-RALG and submission o f acceptable documentation for previous releases. Fundsintended for the Capital Development Grants (CDGs) will be disbursedby the Bank against LGA- approved District Development Plans. Triggers for the Association's quarterly releases are as follows: (a) For thefirst year release, the receipt o f 0 Participation Agreements, inform and substance satisfactory to the Association, between the Borrower and all participating LGAs; 0 an audit strategy preparedby the Auditor General for participating LGAs; and 0 Cash flow forecasts for the second halfo f FY 2004/2005 for the LGCDGbased on the District Development plans o f the qualified LGAs. 29  (b) For the secondyear release,the receipt of: 0 Participation Agreements, inform and substance satisfactory to the Association, between the Borrower and any additional participating LGAs; 0 Cash flow forecasts for FY2005/2006 for: i)theLGCDGbasedontheDistrictDevelopmentplansofthequalifiedLGAs;and ii)theCapacityBuildingGrantsforallEligibleLGAs. (c) For the third year release, the receipt of: 0 An annualPerformanceAssessment report (which includes a financial assessment) with respect to expenditures for Local Government Capital Development Grants and Capacity BuildingGrants financed under the first year release, inform and substance satisfactory to the Association, carriedout under the responsibility o f PO-RALG inSeptember 2005 which shall include: i)ForQualifyingLGAs: (1) a determination o fwhether there is continuing sufficient accounting capacity; (2) verification o f expenditures usingrelevant supporting documentation; (3) randomphysicalinspection o f sub-projects; (4) a review o f the status o f audits o f all eligible LGAs; (5) a review o f cash-flow forecasts for FY 2006/2007 o f all eligible LGAs; (6) a review o f reports o f transfers o f CDG and CBG funds from the Borrower's Consolidated Fundto the GeneralAccounts ofthe LGAs; and; (7) compliance by LGAswith the provisions o f their respective Participation Agreements; and ii)ForotherLGAs: (1) a determination o fwhether there is continuing sufficient accounting capacity; (2) a review o f the status o f audits o f all eligible Local Governments; (3) a review o f cash-flow forecasts for FY 2006/2007 o f all eligible LGAs; (4) a review o freports o ftransfers o f funds from the Borrower's ConsolidatedFundto the General Accounts o fthe eligible LGAs; and (5) compliance by eligible LGAs with the provisions o f their respective Participation Agreements 0 a schedule indicatingthe amount o f CDGs that has beenreleased to the eligible LGAs duringthe preceding FiscalYear and the amounts to be released, on a quarterly basis, to eligible LGAs for the nextFiscalYear; 0 Cash flow forecasts for FY 2006/2007 for: i)theCDGbasedontheDistrictDevelopmentplansofthequalifiedLGAs;and ii)theCapacityBuildingGrantsforallEligibleLGAs 0 a certification indicatingthat.there have beenno reallocations, deviations, suspension or partial suspension o f funds released under the previous release as compared against the Indicative PlanningFigures for the LGAs; 0 Participation Agreements betweenthe Government and the eligible LGAs 0 A progress report on the implementation o fthe audit strategy for LGAs Fundsintended for the Capacity BuildingGrants will be disbursedbythe Bank against fully appraised and approved subprojects drawn from the LGAsannual work plans. Triggers for the releases are as follows: 30  0 Participation Agreements between the Govemment and the eligible district-level LGAs; and 0 Accountability o f the previous funds released to the LGAs (ii) Counterpart Funding:the Borrower will open and maintaintwo accounts: (a) PO-RALGProject Account and (b)DARLGAsProject Account, inTanzanian Shillings ina commercial bankon terms and conditions satisfactory to the Association. The Borrower will (i) make an initial deposit into such the accounts, the amount o fTanzanian Shillings equivalent to US$350,000 and US$lOO,OOO respectively; and (ii) the Borrower will deposit, not later than April 1,2005, into the PO-RALGProject Account, the balanceo fTanzanian Shillings equivalent to US$350,000 to finance the Borrower's contributionto Components 1and 3 and the equivalent ofUS$100,000 into the DAR LGAsProject Account to finance the Borrower's contribution to Component 2. Thereafter, deposit intothe Project Accounts on a quarterly basis duringproject implementation, such amounts as shall be required to replenish the Project Accounts. MoF will include LGSP fund and Govemment counterpart contributions for the project inits annual budgets. (iii)Management Aspects o f the Project: PO-RALG and DLAs will maintain staffing and function, satisfactory to IDA, o fthe PSTs responsible for technical back-up support. (iv) Monitoringand Evaluation: PO-RALGwill submit the baseline data for all KPIs byApril 1. 2005. PO-RALG will submit semi-annual progress reports to IDA. (v) Mid-Tem Review: PO-RALG,through its PST, will prepare for a mid-termreview o fLGSPbyNovember30, 2006. (vi) Imdementation: The Govemment will carry out LGSPinaccordance with the PIP, ESMF, RPF, RAPand CEMP. H. Readinessfor Implementation 1.a) The engineering designdocuments for the first year's activities are complete andready for the start o fproject implementation.(This box has been checked inthe system) 1.b) Not applicable. 2. The procurement documents for the first year's activities are complete andready for the start o f project implementation. (This box has beenchecked inthe system) 3. The Project ImplementationPlanhas been appraised and found to be realistic and o f satisfactory quality. (Thisbox has been checked inthe system) 4. The following items are lacking and are discussed under loan conditions (Section G): I.Compliancewith Bank Policies 1. This project complies with all applicable Bank policies. (Thisbox has beenchecked inthe system) 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Matthew D.Glasser Team Leader Sector Manager Country Director 31  Annex 1: Project DesignSummary TANZANIA: LocalGovernmentSupportProject - " DataCollestlon Strategy Sector-relatedCAS Sector Indicators: SectorlCountry (fromGoal to Bank Goal: Reports: Mission) Improve quality of and Progresswith NationalBudget Stable political access to public services implementation of GOT'S environment and at the local level. Public SectorReformand CAG Report sustainablemacro- Local Government Reform economic policies. Program. PRSP ProgressReport Sustainedgovemment PER commitment to decentralization and the Annual LGRP Progress LGRP Report LGRP Reviewreports 1.1Number of 41targeted Projectreports: (fromObjective to Objective: LGAsreceivingLocalGov LGA financial statements Goal) Capital Development Grants (1) To strengthenfiscal (LGCDGs) increasedfrom 0 PlanRep Sustainedgovemment decentralization, improve to 30by2007/08 (22 already commitment to fiscal accountability inthe use qualify) Audit reportdComptroller decentralization of Local Government 1.2 Number of participating General report Authorities (LGAs) LGAswith"clean" audit Effective LGRP resources, and improve performance records. Public Expenditure implementation managementof 1.3 Proportionofresources Review intergovernmental transferredto LGAswhich Continued GOTand transfers system. are madewithinthe first 30 Annual Performance development partner days of eachquarter Assessment reports. funding for LGCDG increasedto 100%by 2007108 Adequate implementation capacity at local level (2) To increaseaccessto 2.1 Access to services in 1 6 Baseline andfollow up Demand for sanitation infrastructure and beneficiary sub-wards surveys; impact evaluation facilities increasesas a services inunplanned (approx. 10%ofDar study ofComponent 2.a result o finformation, areas o fDar es Salaam population) improved, as increasedsupply and and to improve revenue measuredby?': DLArevenuesandbudget demand incentives performance for a) Reduction intravel time sustainable operation and from home to worklschooll NGOs continue carrying maintenance. marketlclosest motor-able out sanitationprograms road b) Reduction inincidence of Waste collectors respond flooding ofhousehold to increasednumber of premises collection points The impact evaluation study will provide estimates for several socio-economic outcome indicators, including income and consumption, health status, education, etc. 32  c) Increaseinfrequency of Political will to waste collection adequatelyfund O&M , d) Reductioninproportion and transfer responsibility ofplots with no sanitation for capital investmentsto facilities local government citizens. 2.2 Dar es SalaamLocal Authorities (DLA) own Political will to collect sourceofrevenues increased localtaxes, especially by50% by2007/08 and property taxes adequate funds are disbursed for O&M Outputsfrom each Output Indicators: Project reports: (from Outputsto Component: Objective) Component1 (Local GovernmentGrants) 1.Established 1.1LGCDGandCBG Steering Committee Public Service Act made institutional mechanisms transfer mechanisms Minutes; Treasury consistentwithLocal for LGCDGs and operationalized by Jan 2005 Directive; Budget Government Reform Capacity BuildingGrants 1.2 Allocations approved in Suidelines Policy (CBGs), and allocations annualbudget Yational budget innationalbudget LGA own-revenue secured sources are not further diminished Component2 (Dar es Salaam Upgradingand Institution, Strengthening) Subcomponent2(a) 1.1Infrastructure builtand DLA reports idequate policy Community upgraded in 16 sub-wards, mvironment for planning, I nfrustructure as measuredby: Maintenancecontracts Ipgrading, and sustaining UpgradingProgram Kmofupgraded withprivate sector nfiastructure and services (CIUP) road nunplanned areas. 0 Kmofdrainagebuilt Physical progressreports (1) Infrastructure in 4ppropriate technical and 0 Numberof (FMR) project areasupgraded collection points space standardsestablished installed Supervisionreports 3y government. (2) Programfor Numberof householdsanitation sanitation facilities PlanRep (LGRPPO-PP) operational built 1.2 Information, education CPT O&M reports (3) Operationand and communication sessions maintenanceof (IEC) heldinthe 16 sub- Municipal O&M plans community infrastructure wards: established hygiene education Trainingrecords environmental (4) Impact evaluation management Contracts studyto measure 1.3 Number o f stafftrained component 2(a) at municipal, ward and sub- Project progressreports effectiveness in ward levels improvingliving Trainingrecords standards ofproject 2.1 Contract(s) withNGOs beneficiaries signed by June 2005 33  4lerarchyof Key Performance lata Collection CriticalAssumptions Objectives IndIcatsm itrategy 2.2 No. ofmicro-enterprises 'ST-Dar training rainedby June 2006 ,ecords 2.3 Target subsidies delivery 10 the very poor households 3y 2006/07 3.1 No. of community O&M planimplemented as defined inthe CUP 3.2 No. oftechnical support teams and community planningteams established andtrained 3.3 Municipal O&M plans, budgets and scheduleof maintenance 4.1 Baseline survey carried out byJune 2005 anddata available by December 2005 4.2 Follow-up survey carried out by June 2007 anddata available by December 2007 4.3 Impact evaluation analysis finalized and disseminatedby June 2008 Subcomponent20) 1.1 Council resolution Councilrecords I Political will at national Revenue enhancement approves localrevenue level to stabilize or increase (RE)program reformactionplanby GISreports localrevenue powers 2005 (1)Localrevenuereform 2.1 Property tax data base Consultant reports Politicalwill at council action plan installed level to enforce existing 2.2 Proportionofproperty Tax database data taxes, andperhaps increase (2) Improvedproperty tax on valuation roll rates database increasedfrom40,000 DLAfinancialreports to 160,000 by 2006/074 (3) Effective systems for 2.3 Council approves Independent audits of billing, payment, valuation methodology DLA finances collectionand for residential property enforcement. taxes by 2005/06 Project Supervision 3.1 Total propertytax Reports (4) Change management collection as aproportion of and awareness campaigns total propertytax liability increased Itis estimated that about a third ofproperties are of such low value that the return ofvaluating themrelating to the expected tax return is negative. These properties will not be includedinthe valuation effort. 34  Hierarchyof KeyPerformance 3ata Collection Critlcat Assumptions ObJeetlvsr Indleators Strategy (5) Assessment of RE 4.1 No. oflocalpoliticians program trained and involved incivic responsibility campaignsby (6) Changemanagement 2006107 programs andawareness campaigns. (7) Impact evaluation 5.1 Assessment study of RE study of REprogram program completedby carried out 2007l08 Component3 1.1 LGA annual Project supervision SustainedGovernment (Managementand Performance reports Zommitment to IFMIS, Institutional assessments completed 'lan RepandLGM&E Development) for the 41 LGA PO-RALG and 2.1 TwelveLGAsequipped consultantreports Zapacity of the Ministry of (1) LGA annual withIFMSbyJune 30, ?inance Performance 2005 Annual report from Assessments 2.2 No. of value-for-money LGRF' andprocurement audits (2) Development Grants carried out Trainingreports properly administered 3.1 Studies andbest andmonitoredbyLGAS practicesroll out plan Consultant contracts completedbyJune (3) O&M budgetingin 2005106 Auditreports LGAsinplace 3.2 Implementation ofroll- out standardby 2006107 Publications (4) Systems for guidance 4.1 Planning guidelines andmonitoringof service publishedand Workshop proceedings deliveryinplace disseminated 4.2 Standarddrawings and (5) Basic system for LG billsofquantity drivenhumanresource (SBoQs) disseminated development (HRD)and 4.3 Service delivery capacity buildinginplace indicators developed 4.4 Annual beneficiary (6) Strengthenedcapacity satisfaction studies of MISunit carried out 4.5 Planning expert (7) Strengthencapacity of deployed with PO- the IEC unit RALGthrough PST (2005) (8) Pre-qualification of 5.lFive preparatory training training providers courses for LGAsdeveloped and delivered by December (9) Evaluations of 2005 capacity buildingplans 5.2 Roster of qualified and activities trainingproviders available byOctober 2005 35  Hierarchyof KeyIndicators Performance DataCollection Critical Assumptions Strategy (10 Rollout of PlanRep 5.3 Tenstandardized and LGMDto all targeted rainingmanualsprepared LGAs; mdavailablebyOctober 2005 (11) Strengthened 5.4 Evaluation of capacity capacity of IECunit (PO- buildingplans andactivities zarriedout 5.1 M&EandITexperts kployedinPO-RALG throughPST (2005) (12) Impact evaluation study designed and implemented 7.1 Communication expert deployedinIECunit (2005) (13) Annual audit report 7.2 IEC material produced 7.3 Annual capital grant regional workshops carried Inputs: (budgetfor each Project reports: Component) e Quarterly financial e Localcontributions for 1.Support for Local US35.0 million managementreports capital investment Government Capital e Local taxedfees for Development Grant Annual O&M System US$18.8 million Perfomance e Operationand Assessments maintenancecontracts 2. Dar es Salaam e Community supervision Upgradingand e Management and and reportingon O&M Institutional US$7.0million financial reports, Strengthening procurement records, contract, 3. Support to PO-RALG audits andtechnical reports 36  Annex 2: Detailed Project Description TANZANIA: Local Government Support Project By Component: Project Component 1 - US$35.00 million 1. Supportfor LocalGovernmentCapitalDevelopmentGrants System The component supports an overall Local Government Capital Development Grant (LGCDG) system, which i s also beingsupported by GOTand bilateral development partners. The LGCDG system includes (a) a Capital Development Grant (CDG), and (b) a Capacity BuildingGrant (CBG). The LGCDGtransfers will be non- sectoral, distributed on a formula basis to LGAs, who will invest inaccordance withlocal needs as determined through local participatory planningand budgetary processes. The CBG will provideresources to LGAsto help thembuildtheir capacity to access andmanage the CDG. The LGCDG system will support GOT'Sstrategy for fiscal decentralization, a key element inGOT'SPoverty ReductionStrategy (PRS). The 2000 PRS identifies six priority sectors, with LGAsplayingthe primary service delivery role infive o f these: primary education, roads, water and sanitation, health, and agriculture. The sixthpriority sector, where LGAs are not inthe lead, i s the judicial sector. The LGCDG system will be mirroredby an equitable and transparent systemfor allocation o frecurrent transfers. Both the capital and the recurrent transfer systems will be phased inover several years. For bilateral donors, this systemi s intended to replace the former practice o f bilateralaid to "area-based programs" (ABPs) which ledto great variation incapital allocation, inplanning and management practices, and inmonitoring and evaluation. The CBG fundingwill extend over a two-year period from FY 2005/6 to 2006/07. CDG and CBG fundswill betransferred inaccordance with general GOTprocedures for transfers, accounting, andreporting. Designof the ComponentandActivities: 1.1 Size of the CDG/CBG: Basedon analysis o f LGA investment needs and costs and LGA absorption capacity, the average allocation for the initial CDG will be set at approximately U S $1.50per capita. This i s approximately 8% o f an average LGA's 2003 annualbudget, and about 56% o f an average LGA's 2003 development capital budget. The CDG transfers will be allocated interms o f a formula based on: population (70%), poverty (20%), and land area (10%). The initial size o fthe CBG is set at an average o f U S $35,000 per LGA. Eacheligible LGA that complies withthe minimumaccess conditions is guaranteedthe equivalent of at least U S $20,000, with the remaining funds to be distributed according to the same formula as used for the CDG. 1.2 Coverage andEligibility. 41 LGAswere initially selectedto be assessedfor qualificationfor the LGSP- funded capital transfers. However, with the GOTand donor fundingthat i s also anticipated for the LGCDGsystem, it is anticipatedthat the LGCDGsystemcanbe usedfor all LGAsinTanzania. The initial 41 LGAswere selected usingperformance-based criteria, excluding those LGAswith significant donor-supported ABPs. The LGAswere rank-ordered and given a score from 0-100. The initial 41 LGAs all received a score o f 66 or higher. 1.3 Releasesof CDG/CBG. The release offunds to LGAswill be made in,quarterlyinstallments against quarterly reporting on costs and outputs. Initially, funds will not be transferred below the districtlurban councils level, However, to stimulate public participation and resourceplanning within a known envelope, notional IndicativePlanningFigures (IPFs) will be usedwithin which village/mtaa LGAs can plan. 50% o f the CDG will be planned at the districtlurban council level, and 50% at the village/mtaa level. CBG transfers are expected to begin from July 2005, once the necessary materials have been developed. 37  1.4 InvestmentMenu. CDG: The CDG will cater for a broadrange o f capital investmentswithin the mandate o f LGAs. Because it i s generally limitedto capital expenditure and related one-time expenditures, the CDG i s somewhat different from the existingLocal Government Development Grant, which can include recurrent expenditure. The CDG fundedby LGSP will be a non-sectoral discretionary transfer to LGAs for new investments andrehabilitationo f existing capital property, plant and equipment. Upto 15% o f this CDG canbe used for "other" costs directly relatedto capital investment, such as planning, appraisal, monitoring, and supervision. This feature will help ensure strong planning andproject implementation capacity. A short negative list has been developed which excludes investments inareas outside the scope o f LGSP. The tentative negative list for which LGSP funds will not be used include the following: (i) recurrent or maintenance expenditures; (ii) micro-credits and other loan or grant schemes; and (iii) landpurchases. Wards (administrative unit at the sub-district level) will be providedwith indicative planning figures (PF), for the purpose o fprioritizing desired investments at ward and village levels. A consultative community planning process will identify community priorities. New participatory planning guidelines are being developed by PO- RALGto support this process. Unrestrictedbudget funds will notbe allocated directly to the sub-district levels, though funds may be transferred to them, with adequate safeguards, ifthe district council contracts with a sub- district unit (ward, village or community group) for implementation. CBG: The use o fthe CBG funds ina LGAwill be interms o f a locally-developed Capacity BuildingPlan. At least 50% o f the CBG i s to be used for skills development for councilors and staff, a maximum o f 15% can be used for professional career development, and a maximum o f 20% can be usedfor re-tooling. This i s the initial step ina long-term process o f developing a demand-driven systemo f LGA training and capacity building. As a general rule, 40% o fthe CBG would be usedto buildcapacity at the sub-district level (wards andvillages). Standardized training materials and courses will be developed and provided to potential trainingproviders. This will allow more providers to.enter the market with appropriately designed materials, and will help assure delivery o f a fairly uniform messageto all participating LGAs.The materials would target two different groups -i.e staff and councilors at the higher local government level (districts and municipalities) and those at the lower local government level (wards and villages).. Standardized materials would also include a manual for training providers -an"Instructor's Handbook." 1.5 Co-financingrequirements. The level o fLGA co-funding requirements for the LGCDis 5%. LGAswill fundtheir co-financing obligations from ownrevenue sources. 1.6 Access Conditions. Minimumaccess conditions have beenidentifiedand are includedinthe Assessment Manual. These include basic safeguards for handlingo f funds, financial management, capacity for planning and implementation o f projects, and basic good govemance and procedural functionality. The minimumaccess conditions are derived from existing GOTlaws, regulations, and guidelines. These conditions are mainly quantitative and are capable o fready and objective evaluation. For the CDG, a key access condition will include a 5% co-fundingrequirement. These minimumaccess conditions are supplemented by performance indicators, which measure LGA performance and are linked to a rewardsanction scheme which adjusts yearly transfer amounts. This performance feedback system i s intended to provide incentives for LGAs to improve performance inkeyfunctional areas and compliance withbroadpolicy guidelines on governance issues suchastransparency and accountability, participatory planning, and pro-poor budgeting. Access to the CBG i s contingent on the development by the LGA o f a Capacity BuildingPlancatering for district or municipalneeds, as well as those o f sub-wards and villages. 1.7 Annual PerformanceAssessment System. The PerformanceAssessment system comprises (i) the Assessment Process, and (ii) the Assessment Manual. Assessment ofparticipating LGAs,interms o fboth minimumconditions andperformance measures, will take place every year, ideally duringthe montho f September. 38  T h s would allow adequate time for the precedingfiscal year's data to be prepared, and will fit well withthe LGAs' and national govemment's planningandbudgeting cycles. Eachassessmentteam will have four members -two from the contracted consultants and two from a resource pool established by PO-RALG. Collectively, the team should have a broadrange o f expertise, covering local government finance, institutional performance, engineering (covering procurement andproject management issues), planning, and budgeting. EachPerformance Assessment will include the review o frelevant accounts, documents andreports, and interviews with key informants inthe LGAand inthe affected communities. As partofthe performanceevaluation system, incentives andpenalties would be applied whereby those LGAsthat perform adequately would be rewarded with access to 20% additional funds and those who do notperformwell would have their allocationreducedby 20%. Noncompliance withthe minimumconditions for either the LGCDGor CBGwillresult inno grants for the nextperiod. Results ofthe annual assessmentare expected to guide the capacity buildingplans as well as the use o f the capacity building grant. Project Component 2 US$18.80 million - This component will strengthen the capacity o f the Dar es Salaam Local Authorities (DLAs)to improve and sustain infrastructure and services by (i) supporting a phased infrastructure and upgrading program in unplanned and underserved areas inDar es Salaam; (ii) strengthening operation and maintenance planning and management systems at municipal and community level; and(iii) improving own-source revenue and improving operation andmaintenance o f existing infrastructure. Itconsists o f two sub-components: 0 Sub-component 2(a) - Community Infrastructure UpgradingProgram (CIUP) 0 Sub-component 2(b) - Local Revenue Enhancement / Operation and Maintenance (RE/O&M) Program 2.1 CommunityInfrastructureUpgradingProgram This componentwill improve access to infrastructure . and services for roughly 10%o fthe population o fDar es Salaam, who reside inunplanned areas. Resources will be providedto finance integratedinfrastructure upgrading packages in 16 communities (sub-wards) spread across the three municipalities inDar es Salaam -Temeke, Kinondoni and Ilala. These communities house an estimated 168,000 people and cover an area o f approximately 453 hectares. The CIUP will support upgrading o f community infrastructure in 16 sub-wards that are withinreach o f existing trunk infrastructure that may require minor, rehabilitation. Each community infrastructure upgrading package will comprise: Community infrastructure: Communities have selected from a fixedmenu o ftechnical options that includes roads, footpaths, drains, street lightingandpublic toilets. Eachsub-project package varies depending on community priorities identifiedwithina cost envelope o fUS$18,000 (an average cost o fUS$50per capita) per hectare including resettlement and partialdemolition costs (total base cost estimated at US$6.4 million). Trunkinfrastructure: Primarily roads, drainsandrelatedinfrastructure (bridges, culverts, etc). These costs are estimated at US$440,000 and will support limited rehabilitation o f existingtrunk infrastructure. The CIUP will also support information, education and communication activities, public awareness raising and capacity buildingfor municipalities, consultants, communityrepresentatives, andNGOs, inorder to build community commitment towards sustaining these investments. These efforts will focus on households, community members, civic leaders and the general public. Institutional strengthening and capacity buildingactivities will focus on strengthening and mainstreaming implementation functions withineach municipality. Although, the primaryfocus o f activities will be on the three municipal councils that will be responsible for implementation o f CIUP, this will also extend to Dar es Salaam City Council which i s responsible for coordinating activities city-wide. Dar es Salaam City Council will also coordinate 39  a complementary Cities Alliance initiative (not funded by LGSP) to improve the policy and implementation framework for infrastructure upgrading. A separatehouseholdsanitation improvementprogramwill alsobe undertakento complement the community infrastructure improvements outlined above. The householdsanitationprogrami s aimed at households (15%) that currently do nothave access to sanitationfacilities but will also allow for upgrading existing facilities (3%) that are o f low quality. Implementation o f the sanitationprogram will be supported byNGOswho will train local entrepreneurs to improve hygiene awareness; develop and construct improved sanitation facilities; andmarket their services to households. All 16sub-project communities will also benefit froma complementarybut separatewater supply improvement program funded by the IDA-financedDar es SalaamWater Supply Project that will providepublic water points andhouseholdconnections. A Memorandum o fUnderstanding (MOW has been signed betweenthe Dar es Salaam City Council (on behalf o fthe three municipalities) andthe Dar es Salaam Water and Sewerage Authority; andCity Water Services. To ensure coordinationwith CIUP, the MOUobliges Dar es Salaam Municipal Councils to assist inthe planning and training o f water supplyplanning and management agents to be established at sub-ward level. . As part o fthe M&Eprogram, abaseline survey will be carried out at the start o f the project and used as the basis for an impact assessmentto be carriedout towards the end o f the project. M&Einformationwill be stored in municipal databasesdevelopedjointly for Components 2(a) and (b) usingdigital maps and GIS systems developed withsupport ofLGSP. Sustainability o f infrastructure will be strengthened through an operation andmaintenance planning programincludedincomponent 2(b) which will support municipal levelplanningandimplementation o f arrangements (e.g. contracts for solid waste collection) for implementing the O&M plans that are includedinthe CUPS.Eachmunicipalitywill also receive support from the InternationalLabor Organization (KO) under a parallel program aimed at developing capacity among solid waster collection agents (community and private sector organizations). Finally, drawing on lessons from Phase 1, the design o f the second phase o f upgrading investments will be carried out inthe thrdyear o fthe project and implementedunder future operations. An operational manual outlining steps to betakenindesigning the second phase has beenpreparedand will be updated duringproject implementation to reflect lessons learned. 2.2 LocalRevenueEnhancement/OperationandMaintenance(RE/O&M)Program. The aimo f this sub- component is to significantly increase own-source revenues o f Dar-es-Salaam's City Council and Municipal Councils, through implementationo f a strategic revenue enhancement program and associated improvements in planning, institutional arrangements, systems, and capacity. Italso aims to significantly improve the councils' system for identifying and costing maintenance needs, budgeting adequately for O&M, andimplementing aroutine maintenance program. Activities will include: (a) the design o f arevenue enhancement programand provision o f support to implement the program, (b) carryingout tax base data collection and verification, (c) design and implementation o fproperty tax reforms and administration systems, (d) implementation o f an appropriate tax administration system for taxes other than property tax, (e) provision o ftraining to buildlocal capacity inrevenue enhancement mechanisms, (0 monitoring and evaluation, (g) disseminationo flessons learnt, (h)preparationo f the preliminary design o f a demand dnvenrevenue enhancement program for roll out to other urban LGAs, (i) provision o f supportto DLAsinupgradingtheir planningandbudgetingfunctions, andimplementingoperation and maintenance systems; and (j)provision o f operational support to the Dar Support Team inthe coordination, implementation, andmonitoring and evaluation o f its part o fthe Project, including contract management, monitoring o fperformance indicators, and carrying out o f impact assessments. 2.3 Support to ProjectManagement. Resources will beprovidedtowards office andadministrative expenses for PST-DAR to support the Dar es Salaam LGAs inoverall coordination, implementation, project audits, monitoring and evaluation. 40  ProjectComponent 3 US$7.0 million - This component will provide for management capacity (as much as possible mainstreamed into PO- RALG'sroutine functions, while buildingthe institutionalcapacity to performthese functions beyondthe life of LGSP) inoverall coordination, implementation, monitoringand evaluation and backstopping functions inrelation to the LGCDGsystem. The key areas for this component are as follows: . Annual Performance Assessment and LGinspectorate Administration andMonitoring o fLGCDGsand CBGs * O&M Budgetingincontext ofLocalRevenueGeneration Monitoringo f Service Delivery and Monitoringo fO&M for Infrastructure LGCapacity BuildingandManagement CapacityBuildingMarket . ReportingandMonitoring andEvaluation Informationand Communication Program Management Support Management of the annual LGApeflormance assessment and local government inspectorate. Resources will be provided to conduct the annualperformance assessments that will determine LGA grant access and guide LGA capacitybuildingactivities. Provisioni s made for evaluations and quality control o f the assessments that will allow refiningthe process andintegration into PO-RALG routines. Administration and monitoring of capital developmentgrants. Resources will be providedto rolling out o fthe IntegratedFinancial Management Systems (IFMS) to another 12LGAs, to ensure that all 41 LGAs under LGSP are equipped with IFMS. Inadditionto the normalmonitoringvarious audits (value-for-money, procurement, fit-for purpose) will be conductedas `lessons learning' exercises. Provision i s further made for fundingthe implementationo f a LGaudit strategy by the NationalAudit Office. Activities will support the institutional capacity o fthe (proposed) LGFinance section o fPO-RALG. O&M budgeting. Studies are anticipatedto include: (1) an analytical study on LGO&M budgeting and(2) a `best practices study' with a provision for roll-out o f such best practices to all LGAs. Monitoring of ServiceDelivery and O M . Resources will be providedto review the LLGprocurement guidelines inorder for LLGs to be able to become overtime increasingly involved inimplementation for service delivery, Activities will support the institutional capacity o f the (proposed) Service Delivery section o fPO-RALG., Facilitation and Monitoring of the Capacity Building market. Five courses will be prepared and disseminated duringthe first year of operations to prepare LGAsfor boththe CDGandthe CBG. Ten standardizedtraining manuals on generic capacity issues (each set witha manual for the HLG, a manual for LLGsand a trainer guide) as a menu for LGAs to for use the CBG. A pre-qualification exercise for service providers willbe undertaken. Provision i s made for evaluations o f the LGA capacity buildingplans andthe capacity buildingactivities funded bythe grant. Provision is available for additionalbackstopping to LGAsthat are unableto make effective use o f the CBG. Activities will support the institutional capacity o f the (proposed) Human Resource section o f PO-RALG as well as the Capacity BuildingConsultative Group that will be established. Reporting and M&E. Resources will be providedto support the establishment of the proposedDivision for Information Technology andPerformanceMeasurement. An M&Eexpert and an IT expert will be recruited under the PST andattached to this unit, which i s physically located inDodoma. The activity will assist PO-RALGin consolidating and harmonizing data collection and reporting procedures. Information and Communication. This activity will, incollaboration with LGRP, enhance the capacity within PO-RALGto produceInformation, Educational andCommunication (IEC) materials onthe LG-system ingeneral and the LGCDG system inparticular, and especially target for the public at large. It foresees a wide publicationo f 41  assessmentresults andreleases.Activities will support the institutional capacity o fthe (proposed) Information Education and Communication (IEC) unito f PO-RALG. 3.1 Support to ProjectManagement. Resources will be providedtowards office and administrative expenses for PST-PORALG. The project will provide technical assistance inthe areas o fpreparation for annual Performance Assessment, support incontract management, andworkshops and seminars. 32 Monitoring and Evaluation. LGSP will provideresources to support the Project Reporting andM&E including monitoringo fKPIs and impact assessment; consulting services for review o f documents for Mid-Term Review o f the project, andworkshop for final evaluation o fthe project. 3.3 Project Audit. LGSP will provide resources for annual audits for the LGAs and accounts o f the Project. 42  Annex 3: EstimatedProjectCosts TANZANIA LocalGovernmentSupport Project I Local I Foreian I Total *Identifiable taxes and duties are 0 (US$m) andthe total project cost, net o f taxes, is 60.8 (US$m). Therefore, the project cost sharingratio i s 86% o f total project cost net o f taxes. 43  Annex 4 EconomicJustification - TANZANIA: LocalGovernment Support Project Preface 1. This evaluation was done inJune 2004, at which time some o f the investmentswere anticipated to be larger than now planned. This does not affect the conclusions. The analysis covers two components: (a) Local Government Capital Development Grant Program(LGCDG) (US$35.Omillion) for 41 districts; and (b) CommunityInfrastructureUpgradingProgram(CIUP) covering 31settlement areas (sub-wards andwards) inKinondoni, Ilala, andTemeke MunicipalitiesofDares Salaam City. (US$9.3 million). The analysis for (a) does not follow a traditional cost-benefit approach since specific investments cannot be determined apriori. Rather, it i s based on validating the hypothesis that the LGCDG mechanismreinforces cost- effective outcomes, as supported by empirical evidence. The main inputs to, and assumptions for the evaluation are: (a) capital investments and maintenance costs, reflectingJanuary 2004 prices; (b) benefit streams, also inJanuary 2004prices, fromincrease inproperty value; savings inmedical expenses; savings inincome losses due to sick days; savings incleaning and repair costs after rain storm; savings in road asset due to improveddrainage; and increased business activities due to improvedenvironment; and (c) project life o f 20 years for the roads anddrainage facilities, capital investment period o f 2005-2006 for CIUP. PartI:Component 1 Support for LocalGovernmentCapitalDevelopmentGrant System - 2. The LGGProgram i s demand responsive. The relatively small size o f investmentsmakes it difficult to justify the time, effort, and expense o fcalculating conventional economic rates o fretum for each sub-project even ifinvestments couldbedeterminedapriori.The economicjustificationtherefore restsonvalidatingthehypothesis that the mechanism, which harmonizesresources under a single District Development Plan, will leadto more cost- effective solutions than with parallel programs, due to: (i) reducedtransaction cost; (ii) optimum allocation o f resources andrealistic development plan; and (iii) incentives for efficientresource allocation. A. ReductioninTransaction Costs. (1) TCi+. .+TCn+TCi....+TCm TCDDF>TCDDFt .. + Where, TCi-n represent transaction costs o f conditional grants o f ABPs; TCi-m represent transaction costs o f conditional grants o f SWAPSat local levels; TCDDFrepresents LGA's own discretionarybudgets transactioncosts; TCDDFtrepresents total transaction cost underLGSP mechanism 3. LGSP supports unifiedplanning andreporting, which reduces transactioncosts. Although data is scarce, it i s acknowledged that bothparallel channels have hightransaction costs. With harmonization under LGCDG, TCDDF willbe approximately equalTCDDFt,resulting innettotal saving o ftransactioncostsi.e. equal to (TCi+..+TCn+TCi..+TCm). The approach,has the strong support o fthe donor community. B.Planningunder a hardbudget constraint 4. Current practices are less cost-effective not only becauseo fhightransaction costs, but also becauseo f limited degree o f freedom over which LGAs can optimize satisfymg priority needs. The introduction o fthe LGCDG mechanism, which favors total discretionary fimding(i.e. below, DDPd=DDPt, assuming both ABPs and SWAPSare included inDDPd) i s likely to give more degree o f freedom to participatory planning. Further, hard 44  budget constraints will enhance the realism o f the plan. This i s more likely to providehigher satisfaction and ownership, and to be more cost-effective than under current practice. (2) Optimize (ABPl+ABPZ+ ..ABPi..+ABPn+ SWAPl+SWAP2+. ..SWAPj+..+SWAPm +DDPd) C DDPt where ABPi -n i s the participatingABPs inthe district inparallel; SWAPj-m i s the participating sector-wide approach programs at local level DDPdis the discretionary district development budget excluding the conditional ABPs and SWAPS DDPt is total resources available assuming ABPi, SWAPj and DDPd are all discretionary and operate under LGSP mechanism. C.BuiltinIncentiveSystems (3) (i)Select 01, D2 Di,Dj,..Dn) minimumaccessconditions ,... (ii)Reward (Dl,D2, Di,Dj,..Dn) >performanceindicators ... Where Di,Dj are districts inthe universe 5. This matrix shows that LGAs which meet both minimumaccess conditions andperformance indicators reinforce cost-effective outcomes. Minimumaccess conditions ensure basic functional capacities needed for effective use o fthe LGCDG. Performance indicators reinforce functional areas such as goodplanning, budgeting and govemance practices. D.Empirical Evidence of Cost-eflectiveness of LGSPMechanism 6. LGCDG-like mechanisms havebeen tested and provedvalid elsewhere inthe region. InUganda, post hoc evaluations ofthe Local Government DevelopmentProject confirms this. Inparticular, LGDP showedthat the approach (i) i s more cost effective than non-LGDP approaches; (ii) a higher economic rate o freturn, and (iii) has has highbenefit-cost ratios associated with social and economic benefits. To be specific: Average cost o f a standard desk was Ush. 46,714 under LGDPcomparedto Ush.58,410 under non-LGDP approach; e LGDPapproach appearedto prioritizeroads and footpaths which served more people per unito f investment ; e the healthbenefit o f investment arising from environmental improvement had a positivebenefit- cost ratio o f 4.6: 1; e a typical water supplyproject yielded 17% economic rate o freturn. Part11:Dares SalaamClUP 7. At the time ofthe analysis, the CIUPtargeted 31 settlement areas. Thebeneficiary populationrepresented 13 % o f the total Dar es Salaam City populationo f2,498,000 (2002 census) or 329,460 people, inareas equivalent to 19% o fthe unplanned area. Prioritizationo f community infrastructure was undertakenwith the help o fward level Community PlanningTeams, assistedby municipallevel Technical PlanningTeams. Lessons leamed from programs inTanzania andneighboring countries guided the preparations. A budget ceiling o fUS$18,000 per hectare was used. This assessmenti sbased onreview ofthe designreports andconsultations with the three municipalities, design consultants and community leaders inToroli sub-ward. The assessment also benefited from field visits andconsultation with community leaders inHannaNassifandTabata wards where recent similar upgradingprojects were completed. 8. Urban upgrading i s a priority based on: rapid urbanization and increasing urban poverty, growing importance o f the informal sector and recognition o fthese andrelated factors inTanzania's 2000 Poverty Reduction Strategy Paper. The informal sector contributes about 1/3 o fnominal GDP and ?4o fnonfarm employment. The major share o fthe informal sector activity i s inurban centers, primarily Dar es salaam. The majority o fthe urbanpopulation inDar es Salaam (68%) live inunplanned areas, characterized bypoor 45  environmental sanitation, poor access and inadequate social services. The urbanpoor also suffer disproportionately from mortality, illness, low productivity, and low capacity due to inadequate services. Moreover, Dar es Salaam accounts for 35% o fthe total urbanpopulation inTanzania. Results Eromthe updatedHouseholdBudget Survey' indicate that basic needspoverty has increasedroughly two-fold from 1991to 2000. Recent trends include arise in self- employment from 29% in 1991to 38% in2000. 9. The aiminselecting areas was to reach the most vulnerable population, usingthe least possible inputsin terms of capacityand budget. Three sets o f criteria were used. The first set was usedto identify sub-wards that would not be eligiblefor upgrading, the second set toprioritize sub-wards for inclusion, andthe thirdforphasing of theprograd. 10. Community-basedparticipation and demand responsive planningwere the maintools to select infrastructure. The key principles were: adequate community representation, community feedback, adequate exchange o f information, transparency, commitment and collaboration. Through iterative processes, communities identifiedproblems which need solution. These were then ranked inthe order o f their importance to the communities. 11. Translation o fneeds into demand depends on choices o f infrastructure standard. The budget ceilingo f US$18,000 per hectare i s the minimumexpenditurenecessaryto provide a basic level o f services. Basedon the HouseholdBudget Survey, it was estimated that +/- 30% o fhouseholds can pay the 5% contribution. These are largelyhome owners with average monthly income o f Tshs.80,000 per household. Sustainability i s predicatedon LGAsreformingtax collection. 12. Table 2 summarizes the potential benefits of CIUP interventions which are primarily environmental. The table lists socioeconomic, expected public health andnatural environmental impacts duringpre-construction, construction andpost-constructionphases. Iti s evident that the positive impactbenefitso f upgrading outweighs the negative. Table2: PreliminaryAssessment ofPotentialEnvironmentalImpactsof CIUP National Bureau of Statistics, Household Budget Survey 2001/01, Dar as Salaam, July 2002. The community selection criteria are providedinthe Annex 2 ofthe 111Economic evaluation report 46  Nuisance o frodents 10 10 I +l NATURALENVIRONMENT Keysfor evaluation categories:-3 = highly signifcant negative impact, -2 = signifcant negative impact, -1 =mild negative impact, 0 = no impact, +1 = mild benepcial impact, +2 = signifcant beneJicia1 impact, +3 = highly benejkial impact Source: Project Preparation Report, Volume 1:Findings and Recommendations,February 2004. Cost-benefitof CIUPinvestment 13. The main quantifiable benefits include: (i) reducedflood damage, (ii) income loss andmedical reduced expense; and (iii) economic growth. 14. Reducedflood damage. The analysis includes both direct and indirect damages to private houses, household goods and public infrastructure. Assessment o f flood damages was based on the actual number o f households identifiedinthe consultant's reports as affected during a stormrainbecause o f lack o f drainage or local depression. Basedon historical data, it i s assumedthat on an average a household inflooded areas have cleaning up expense andrepairs ofTsh.4,000 to TSh. 8000 per householdper year. The lower o f the two figures, TSh. 4000/household/per year i s usedinthe estimate. 15, The impact o f lack o f drainage i s more significant on roads. The municipality had estimated that up to 10% of the road asset is lostper year attributable to lack o f drainage. With drainage, current average maintenance cost estimate is 3.7 % ofplannedroad and footpath investment. Inthe cost-benefit analysis, itis conservatively estimated that only an additional 3.7% with goodplanning can restore the road asset lost ifthere is no drainage. 16. Benefits due to reduced income loss and medical expenses. Another major expected benefit o fthe CIUP i s the reduction inthe incidence o f sickness due to decreasesinprevalence o f diseases. Increasing incidence o f diarrhea, malaria, skin and eye diseases are associatedwith poor storm water drains, environmental air pollution due to uncollected waste and dust, water and sanitation services and lack ofhygiene. Reduction inthe prevalence o f these diseaseswould result inlosses o f fewer working and school days due to sickness, and may result inlower medical expenses. 17. In2003, thethreemunicipalitieshadatotalpopulationof2,498,000 peoplewhilethetotalpopulationinthe unplannedarea was 1,696,500 people. A total of 2,009,680 were treated either as inpatients or outpatients inthe three municipalities for the top ten diseases.The statistics do not include people who got treatment outside the official health system or other than for the ten top diseases or those who didnot visit at all the health centers for treatment. Between 14% and23% o fthe patients were treated for waterborne diseases excluding malaria. Including malaria, the figure rises between 49% to 80 % o fthe patients. Most o f the incidents o f disease were mainly among the poor. Fromthe statistics it can be assumedthat on average every person inthe unplanned area was sick and treated at least once ina year. 18. Anoutpatientwith diarrhea inamildcase loses 3 to 5 days andspendsUS$2to $3 dollars for medical expense, while an inpatient with a severe case lossesbetween 5 and 7 days and spends between US$20 and US$307. According to the 2000/01 Household Budget Survey, a household on the average spent 2.9% o f their income on medical expenses. And the share o fmedical expensesrelative to household income has beenrisingsince the 1991 Chief Healthofficer of Dar es SalaamCity. 47  survey. At current averagehouseholdincome o f TSh 65,000 per monthinthe unplanned areas, andassuming that only 20% o f the total medical expense i s related to waterborne diseases, the average annual expense per household would be Tsh.4,524. 19. Averaging 4 days losses per year, a householdwith an average members of 4 people would lose 16 days in a year. Assuming labor participation rate o f 50%, and lost days due to waterborne diseasesto be only 20% ofthe days lost, withhousehold income o f TSh. 65,00O/month/household, total income lost per householdper year will be TSh 4,727. 20.. Economic Growth. Value added basedonbusiness profit and wages are taken as measures o f CIUP's contribution to economic growth. The improvedamenities due to upgrading create a favorable business environment. Following upgrading, it i s assumedthat on the average two additional business enterprises will open per hectare. Basedon survey, current businessesoperating inunplanned under-serviced areas make from TSh. 2000 to Tsh.10,000 inprofits per day. The businessesare operated either by owners or employees paid from TSh. 15,000 per monthto TSh. 50,000 per month. The value added to economic growthi s taken as TSh. 5,000 per day operating 300 days a year. Given the competitive business environment under which these businessesoperate and the naturally highrate o f failure o f small business inthe initial years, growth is assumed to be constant inreal terms through the economic life of CIUP. 21. Based onthe foregoing, the economic rate of returnon the investment is 20% and the net present value i s Tsh.3.9 billion. Since 73% o f the contribution ofthe to NPV i s from business activities that respondto improved environmental condition, incentives to the entrepreneurs inthe upgradedareas are likely to enhance the net benefit o f CIUP. 48  Annex 5: FinancialSummary TANZANIA: LocalGovernmentSupport Project Years Ending IMPLEMENTATIONPERIOD FeeslBeneficiaries Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project 8.3 21.6 27.5 3.4 0.0 0.0 0.0 Financing 49  Annex 6(A): Procurement Arrangements TANZANIA: LocalGovernmentSupportProject Procurement A. General Procurement for the proposedProject would be carried out inaccordancewith the WorldBank's "Guidelines: ProcurementUnder IBRDLoans andIDA Credits" datedMay 2004; and "Guidelines: Selectionand Employment of Consultantsby WorldBank Borrowers" datedMay 2004, andthe provisions stipulatedinthe Legal Agreement. The general description ofvarious items under differentexpenditure categoryare described below. For each contract to be financed by the Credit, the differentprocurement methods or consultant selectionmethods, the needfor prequalification, estimatedcosts, priorreviewrequirements,andtime frame are agreedbetween the Borrower andthe Bankproject team inthe ProcurementPlan. The ProcurementPlanwill beupdatedat least annually or as required to reflect the actualproject implementationneeds andimprovements ininstitutional capacity. ProcurementofWorks: Works procuredunder this Project, would includeconstruction ofroads, footpaths, drains andpublic toilets inunplanned andunder-servedareas ofDar es Salaam. World Bank's StandardBidding Documents (SBD)and StandardBidEvaluationForms for Works andGoods will be usedfor all International Competitive Bidding(ICB). Sincethe GovernmenthaspreparedStandardBiddingDocuments for procurement of works, the Government may use these documentsfor procurement of works underNationalCompetitive Bidding (NCB). Civil works contractscosting more thanU S $500,000 equivalent per contract will beprocured through ICB. Domestic Preferencewillbe applicable to local contractorsbiddingfor contractsthrough ICB.Civil works contracts costing less thanUS $500,000 equivalent per contract will beprocured throughNCB. Smaller civil works contractscosting less thanU S $50,000 may be awardedonbasis of shopping obtained from at leastthree qualified local contractorsinresponseto awritten invitation stating description of the works, includingbasic specifications andthe required completion time. Eachcivil works contract estimatedto cost more thanUS $250,000 equivalent or more will be subjectto prior review inaccordance withthe proceduresof Appendix 1of the Guidelines. Procurementof Goods: Goodsprocured underthis Project would include office supportequipment, motor vehicles, etc. WorldBank's SBD and StandardBidEvaluation Forms for Works andGoods will beusedfor all ICB. Since the Government haspreparedSBD documentsfor procurement of goods, the Government may use these documentsfor procurement of goods underNCB. Goods contracts costing more than U S $200,000 equivalent per contract willbe procuredthrough ICB. Individual contractscosting less thanU S $200,000 equivalent will be procuredthrough NCB procedures.Other goodswith estimatedvalue of less than US $50,000 equivalent per contract will be procured through Shoppingor from UnitedNationsAgencies inaccordancewith paragraphs3.5 or 3.9 ofthe ProcurementGuidelines. Eachgoods contract estimatedto cost more than US $ 200,000 equivalent or more will be subject to prior review inaccordancewiththe proceduresof Appendix 1of the ProcurementGuidelines. Selection of Consultants :Consultantsselectedunderthis Project would include Technical Assistants to PO-RALG andPSTs; supervisorsfor execution of the civil works contracts, etc. WorldBank's StandardRequest for Proposals(RFP) and evaluation forms will beusedwhere applicable. All consulting service contractscosting more than U S $ 100,000 equivalent for firms will be awardedon the basis of Quality and Cost BasedSelection (QCBS) proceduresinaccordancewithPart 11of the Consultant Guidelines. Consulting service contractso f a standardor routine nature (audits, engineeringdesignofnoncomplex works, and so forth) where well-established practicesand standards exist will be awardedon the basis of Least-Cost Selection (LCS) inaccordancewith paragraph3.6 of the Consultant Guidelines. Other consulting services contractsbelow the threshold of US $ 100,000 equivalent for firms may be awardedonthe basis of ConsultantsQualification(CQS) inaccordancewith paragraph3.7 of the Consultant Guidelines. Short lists of consultantsfor services estimatedto cost less than U S $ 200,000 equivalent per contract for firms may be composedentirely ofnational consultantsinaccordancewith the 50  provisions of paragraph2.7 ofthe Consultant Guidelines. Individualconsultantswill be selectedinaccordancewith Part V ofthe Consultant Guidelines. SelectionofUNagencies andNonGovernmental Organizations will be carried out inaccordancewithprovisions ofparagraphs3.15 and3.16 of the Consultant Guidelines.Consultancy contractsestimatedto cost above U S $ 100,000 equivalent per contract for firms, 7JS $50,000 equivalentper contract for individuals andsingle source selectionwill be subject to prior review inaccordancewithproceduresin Appendix 1 of the Consultant Guidelines. Operational Costs: Operating costswhich would be financedby the Project would beprocured usingthe Borrower's procurementprocedureswhichwere reviewedandfound acceptableto the Bank Capital Development Grants (CDG) would providefor capital investment andcapacity buildingto the LGAs.These funds wouldbe allocatedona formula basisthrough GOT'Sbudgetas LocalGovernmentCapital Development Grants (LGCDGs) and Capacity BuildingGrants (CBGs). For contractsbelow the threshold set inthe DCA for ICB and QCBS, participating LGAsreceiving CDG and CBG funds shall procurethe goods, works, andservices financed from suchgrantsinaccordancewith the Public ProcurementAct (2001) andthe Local GovernmentRegulations on Selection andEmployment of ConsultantsandProcurementof Goods andWorks. 51  A summaryofproposedprocurement arrangements are presentedinTable A. Table A: Project Costs byProcurementArrangement (US$ millionequivalent) I Expenditure Category ProcurementMethod' SubprojectsUnderPart Operating Costs (1.70) (1.70) Total I 0.50 37.30 17.10 5.90 60.80 (0.50) I(36.20) I (15.30) 1 (0.00) 1 (52.00) * Figuresinparenthesisare the amountsto be financedbythe IDACredit. All costs include contingencies Includes goods to beprocuredthrough national shopping, consulting services, services of contracted staff ofthe PCU, training and technical assistance services. 52  Prior Review The prior review thresholds under the Project are stated inTable B below. Table B: Thresholds for Procurement Methods andPriorReview <200 NCB None (Post review) <50 ShoppingKJnitedNations None (Post review) Agencies 3. Services Firms >loo QCBS All 4 0 0 CQS None (Post Review) All values sss All Individual >50 I C All <50 I C None (Post Review) All values I sss All Total value o f contracts subject to prior review: US $12.0 million Overall Procurement RiskAssessment: High Frequencyofprocurement supervision missions proposed: Oneevery six months (includes special procurement supervision for post-review/audits) B. Assessment ofthe agency's capacityto implementprocurement Procurementactivities would be carried out at two levels. These are: (i) Government Authorities Local level-District level; and (ii) President's Office Regional Administration andLocal Government (PO -W G ) level -Central level. At the district level, procurementwould be carried out by: (i) Department within Finance council's establishment; and (ii)ProgramCoordination Unit (PST-Dar) to be established for the Dar es Salaam a Local Authorities (Dar-es-Salaam City Council; andIlala, Kinondoni, and Temeke Municipal Councils) to support implementation o f Sub-component 2(a). At the central level, procurement would be carried out by: (i) Division o f Personnel and Administrationo fthe PO-RALG; and (ii) a Program Coordination Unit (PST-PORALG) to be established withinPO-RALGto support implementation o f Components 1and 3. An assessmento fthe capacity o fthe ImplementingAgencies (Councils andPO-RALG)to implement procurement actions for the project has been carried out byDonaldMneney inMay 2004. The assessment reviewed the organizational structure for implementing the Project andthe interactionbetween the project's staff responsible for procurement andPO-RALG's Department of Administration and Personnel. The overall procurementrisk for the project has beenrated as high, as is the case for most IDA-financedprojects in Tanzania. The implementing agencies have limited experience with highvalue contracts and construction supervision contracts. Procurement filing andrecordkeepingsystems are inadequate insome cases. Inorder to mitigate this risk, it i s proposedto (i) carry out orientation workshops on procurementprocess usingthe Public Procurement Act (PPA) o f 2001, LGA procurementregulations, LGAprocurement manual, World Bank 53  Guidelines for procuremento f goods and works and selection o f consultants to heads of departments, supplies officers/ procurement staff, andmembers o f tender boards; (ii) conduct short courses for supplies officers/ procurement staff onWorldBank procurementprocedures for selection o f consultants andprocurement o f goods and works; and (iii) require each PST to recruit a procurement specialist with qualifications and experience acceptable to IDAto work for aperiod o f at least 18 months. The risk will be monitoredduringsupervision missions andpost review missions and validated accordingly. The corrective measureslaction plans which have been agreed to mitigate the procurementrisk are: Action Deadline Responsibility Conduct procurement courses/ workshops to DuringProject Borrower and IDA LGA staff involved inprocurementprocess implementation Conduct procurement courses/ workshops to DuringProject Borrower and IDA PO-RALGstaff involvedinprocurement implementation process Conduct workshops on the PPA, Local DuringProject Borrower and IDA Government Regulations, andProcurement implementation Manual to councils procurement staff and members o f LGAs' tender boards. Conduct workshops on the PPA, and DuringProject Borrower and IDA Regulations to PO-RALGprocurement staff implementation and members o f PO-RALG's MTB. Establishacceptable record-keeping and Within six monthsof Borrower procurement filling. Project implementation Recruit a Procurement Specialist to work inthe Bycredit Borrower PST established for the DLAsfor a period o f at effectiveness least first 18 months. Recruit a Procurement Specialist to work inthe Bycredit Borrower PST established withinPO-RALG for a period effectiveness o f at least first 18months. C.ProcurementPlan The Borrower developed a Procurement Plan for project implementationwhich provides the basis for the procurement methods. This planhas been agreed between the Borrower and the Project Team on September 27, 2004, and is available at PO-RALGoffices inDodoma. Itwill also be available inthe Project's databaseand inthe Bank's external website. The ProcurementPlanwill be updatedinagreement with the Project Team annually or as required to reflectthe actual project implementation needs and improvements ininstitutionalcapacity. The PIPhas beenprepared inwhich details o fprocurement procedures including standard forms to be used, are outlined. The PIPi s a livingdocument that will be updatedas new developments inthe procurementreforms will be incorporated subject to agreement between GOTand IDA. D. FrequencyofProcurementSupervision Inadditionto thepriorreview supervisiontobe carriedout fromBankoffices, the capacity assessmentofthe ImplementingAgency has recommended(includes special procurement supervision for post-review/audits) one supervision mission every six monthsto visit the field to carry out post review o fprocurement actions. Furthermore, an Independent ProcurementReview will be carried out after two (2) years o f implementation or before Mid-term Review. 54  E. ProcurementArrangementInvolvingInternationalCompetitionandOther Methods(first 18 Months) (See Annex 12) 55  Annex 6(B): FinancialManagementand DisbursementArrangements TANZANIA: Local GovernmentSupport Project 1. Summary ofthe FinancialManagementAssessment A FINANCIALMANAGEMENTARRANGEMENTS CountryRisks A CountryFinancialAccountability Assessment (CFAA), carried out in2001, concludedthat: "signijicant advances have been made in Tanzaniain the lastfew years,particularly in terms of accounting and expenditure control as well the introduction of theMedium TermExpenditure Framework (MTEF). Equally there are other areas, whichfor various reasons have not advancedas quickly, such as the standing and capacity of the national audit ofice or the ability of the anti cormption/ethics bodies tu undertake their duties egectively. Generally, Tanzaniahas a soundsystem of formal rulesforJinancia1 management and many of these rules have recently been updatedand strengthened ". GOThas clearly made great steps inimproving financial management andthrough the revisedPublic Financial Management ReformProgram(PFMRP) sets out a methodology to carry the process forward. These initiatives are significantly supported by the donor community at, for instance, the Accountant General and the Office o f the Controller andAuditor General as well as the AccountingDepartments o f a number o f line ministries. The speed o fprogress o f implementation andintegration o fthe IFMS and the legislative changeshas however left a number o f gaps, which unless filled, will negate the benefits o f the achievements o fthe recentpast. Inaddition, issues o fnon-compliance, limited execution, inadequate monitoring, insufficientcapacity andlack o f enforcement needto be resolved. Theses issues indicate that inadequate financial accounting andauditing systemsboth at central and local government level pose a highfiduciary risk. Priority issues identifiedinthe CFAA include strengthening o fplanningand budgeting, improvedgovernance and integrity, strengthening o f local government financial management and maintenance o fhighstandards o f financial reportingand auditing. The country's financial accountability framework, and therefore financial management, would be considerably more effective and the associated fiduciary risk mitigated, ifthese areas were strengthened. The PFMRP, which i s soon to be launched, i s designed to address these weaknesses. Although there i s noupdate o f the CFAA done since 2001, overall, over the last three years the government has continued to implement comprehensive reforms at both at central and local government level with some improvement inbudgeting, public financial management andaccountability. FullCFAA update will be carried out inyear 2005. ProjectRisks Key risksthat may face the project include: 0 Fundsmaynot be usedinan efficient and economical way and exclusively for purposes intended; 0 Staffing andLGAs capacity to implement the controlprocedures (accounting, internal audit and inspection), 0 Fundsflow delays; 0 Inadequate levels of counterpart funding; 0 Inadequacyo f mechanisms usedto identify community needs; and Lack o f audit capacity (both internal and external) Inmitigationofthese, thePO-RALGwillestablishastrongaccountingandinternalcontrolsystematLGAs and ensure that the two PSTs are always staffed with appropriately qualified staff, Internaland external verification o f expenditures will be carried out. A financial performance assessmentwill be carriedout annually to ensure compliance with all accountability rules andprocedures as a precondition for access to LGCDG and CBGby LGAs.Project funds will also be disbursed inaccordance with an agreed schedule to which the GOTwill be committed. 56  Main StrengthsandWeaknesses Main Strengths. The Accountant General's (ACGEN) Departmenthas beguntraining of fresh graduates on the IFMS,andinthe areasofinformationtechnology, accountingandmaterialsmanagementtobeableto provide support to the LGAs. . The LGAsaccounting systemis basedon Epicorcomputerized, double entry, accrual-basedsystem. Currently there i s on going local GovernmentReformProgram (LGRP) to improve accounting system . through the IntegratedFinancial ManagementSystem(IFMS) and training of CouncilDirectors and District Treasurers andAccountants on the system. LGAshave set ofFinancial RulesandRegulations,whichdescribethe internalcontrolsystem andset of accountingprocedures.These arebeingupdated. . The LAs assessed have experienceofmanagingWB projects under UrbanSector Rehabilitation (USRP) andParticipatory Agriculture Development andEmpowermentProject (PADEP). There arenew developmentswhich enhance LGAsplanning andbudget process (i) use of GFS codes the inthepreparationofLGAbudgetsandthe implementationofharmonizationoffiscal year oftheLGAs with that ofthe central governmentfrom July 2004, and(ii) newly approvedpopulation-basedformula the .. for allocation of grants to LGAs i s a matter of governmentpolicy, and shouldbe implemented inthe coming years. The govemment is now puttingquarterly allocations of the LGAsinthe public domain via local newspapers, national website andpublicnotice boardsto enhance transparency and accountability. There has beena steady improvement inauditing areainthe last three years. Basedonthe Report ofthe Controller andAuditor Generalon LocalGovernment Authority Accounts for the Year ended31st December2002, all LGAswere able to submit ontime their final accountsfor audit. Major weaknesses P Weak budgetdiscipline andcontrolsinLGAsas evidencedbylossesofcash, questionablepayments,stores losses, andunsatisfactory accounting andbankingofrevenues. P Lowcapacityinmost ofthe LGAsparticularlyinterms offinance ,accounting andinternal auditing skills to carry out appropriate accounting and financial management, > Most ofthe LGAs also lack effective internal audit units internal audit manual. P Poor follow-up onthe implementationofauditor's recommendationsbythe Accounting Officer. FinancialManagement SystemandReporting Financial/Accounting Policies h Procedures The accounting systems, policiesandproceduresto be employed by the PST inaccounting and managing for LGSP h d s will be documentedinthe Financial ManagementManualbeingdeveloped.The Financial ManagementManualwill includedetailed descriptions of the accounting system andprocedures. The Chart of Accounts will be developedto allow for project costs to be directly related to specific work activities and outputs of the project andformats of the various periodic financial reports LGAswill follow accounting systemgovernedby the Local GovernmentFinancesAct of 1982 and LocalAuthorities Financial Memorandum of 1997. LGAs accounting systemi s based on double entry, accrual-basedsystem. Informationsystems Currently 32 LGAs are computerized through the IntegratedFinancial Management System(IFMS)known as Epicor. This is the same systembeingusedby the central govemment. The system is user fnendly and can produce various financial reports. With regardto preparation for eventualroll-out o f IFMS to other LGAs, the Accountant General's (ACGEN) Department hasbeguntraining of fresh graduates on the IFMS,and inthe areas of informationtechnology, accounting andmaterials managementto be able to provide support to the LGAs. A 57  Systems Development Unitfor LGAs housed inACGENi s now inplace. 23 specialists are being trained inthe Epicor software andare to be deployed to the zones fi-om July 1,2004. Other support by ACGEN includes defining a chart o f accounts for LGAs andsupervision o f 5 LGAs support zones. Financial Monitoring Reports Project fmancial monitoringreports to be generated fi-om the financial management system will be developed. There will be clear linkages betweenthe informationinthese reports andthe Chart o f Accounts. The financial reports will be designed to provide quality and timely informationto project management and various stakeholders onproject performance. .. The contents o fthese reports should at a minimumconsist o fthe following: o Financial Reports: Sources andUses o fFundsbyFunding Source Uses o fFundsby Project Activity/Component o PhysicalProgress or output monitoringreports o Procurement Report The format will be defined andagreedby negotiations. The project will be required to submit to the Bankthe following informationinorder to support report-based disbursement: ... Financial Monitoring Report 0;MR) as indicated above. Special Account (SA) Activity Statement. SA Bank Statements. Summary Statement of SA Expenditures for Contracts subject to Prior Review. 9 Summary Statement o f SA Expendituresnot subject to Prior Review. Project Financial Statements Local Govemment FinanceAct 1982and Local Govemment Financial(Block Grants) Regulations,2000, govem the financial administration and management o fthe LGAsannual financial statements. The project financial statement shall be inaccordance with Generally Accepted Accounting Practice (which inter alia includes the application ofthe accrual basis o frecognition o f transactions). The Credit Agreement willrequire the submission o f audited financial statements to the Bankwithin six months after the year-end. These Financial Statements 'Owill comprise of: = A Balance Sheetreflectingthe assets, liabilitiesand fundingo fthe project basedonthe accrual bases. A Statement of Sources and Usesof Funds/ CashReceiptsandPayments, which recognizesall cash, . receipts, cashpayments andcash balances controlled by the entity for this project; and separately identifies paymentsby thirdparties on behalfo fthe entity. TheAccounting PoliciesAdopted and Explanatory Notes. The explanatory notes should be presented ina systematic manner with items on the Balance Sheet and Statement o f Cash Receipts and Payments being cross-referenced to any relatedinformationinthe notes. Examples o f this information include: . .. a summary o f fixed assetsby category o f assets; a summary o f SOE Withdrawal Schedule, listing individual withdrawal applications; A ManagementAssertion that Bank funds havebeenexpended inaccordance withthe intendedpurposes as specified inthe relevant World Bank legal agreement. lotshouldbenotedthattheprojectfinancialstatementsshouldbeall-inclusiveandcoverallsourcesandusesoffundsand I not only thoseprovided throughIDA funding. Itthus reflects all project activities, financing, andexpenditures, including funds from other donordparties and contributions inkindsuch as labor and accommodation, irrespective ofwhether the project implementing agency controls the funds for aparticular aspect o f the project. However, the IDA componentswouldhave to be identified separately. 58  Monitoring Project monitoringwill take the following forms: .. Management oversight o fthe IDNPSTs Annual extemal audit o fthe Project finances Annual Financial Performance Assessment. As specified inthe assessmentmanual, each assessment will include, inter alia, the review o frelevant accounts, documents and reports, and interviews with key informants inthe LGA and inthe affected communities. Stafing and Training Qualified Financial Management Specialist/Accountants will be recruited at PST levelto coordinate and handle over all project financial arrangements. Duringthe project implementationmore training will be provided on financial management andWorld Bankfinancial, disbursement, andauditing procedures and guidelines. PlanningandBudgetpreparation A project budgetand a disbursement schedule havebeendrawnupand is included inthe ProjectAppraisal Document and the Project ImplementationPlan (PIP). Iti s from this disbursement schedule (as may be subsequently revised) that annual budgets will be drawn. The annualbudget will be prepared based on the policy guidelines issuedby MoF on the fiscal policy o f the govemment. The annual estimates will reflect financial requirements o f the project. The ProgramCoordinators will be responsible for coordinating the PST staff in preparation o f annual budgets for the Project. The annual estimates will be finalized three months before the beginningo f the financial year. Audit Arrangements Internal Audit The Internal audit function i s not clearly established throughout the LGAs, and where it i s established there are clearly concerns about the effectiveness o f its operations. The role o f the intemal audit functioninassessing internal controls andrecommending improvements to systems and procedures i s not well defined. The scope i s limitedto financial verifications such as receipts and expenditures without sufficient emphasis on the efficiency and effective use o fpublic resources. This i s due to the inadequate capacity, resources, lack o fmanuals, and guidelines. Other reasons for this ineffectiveness i s lack o f enforcement o f punitive measures, inadequate technical and managerial capacity inthe finance function andlack o f accountability o f Accounting Officers. Duringproject implementation, strong internal control procedures will be developed. Inaddition, an intemal auditor will be member o f the team that will be conductingthe annualperformance assessments o f the LGAs duringthe Project implementation. Extemal Audit As per PublicFinanceAct 2001, the NationalAuditOffice (NAO) hasthe responsibility for the audit o fall govemment organizations includingLGAs and public corporations and donor funds. The Controller and Auditor General (CAG) has the power to authorize any person carrying on the profession o f accountant to conduct an audit on hisbehalf. The auditors will be required to express an opinion on the auditedproject financial statements only, incompliance withIntemational Standards onAuditing(IFAC pronouncements). Inaddition, providea detailed management letter containing the auditor's assessmento fthe intemal controls, accounting system and compliance with financialcovenants inthe Credit Agreement. A sample o fIDAterms ofreference for the external audit were providedto the project team andNAO. LGSP will provideresources for annual audits for the LGAsand accounts o f the Project. 59  ConclusionoftheAssessment The evaluation above indicates that the project's financial management arrangements satisfy the Bank's minimumrequirements under OPh3P10.02. However, some improvementsremainto be effectedfor the system in order to establish an acceptable control environment and to mitigate financial management risks. The various measureshmprovements should be implemented by the due dates as indicated inthe table below. The project financialmanagement risk is assessed as being medium providedthat the financial management arrangements are properly implemented. SupervisionPlan The Financial Management Specialist (FMS) will cany out financial management supervisionregularly at least once a year. Inaddition, the project may be submitted to regular SOEreviews as requiredby the World Bank. The FMS will also: 0 Review the financial component o fthe quarterly FMRsas soon as they are submitted to the World Bank, and, Review the annual Audit Reports andManagementLetters from the external auditors andfollow-up on material accountability issuesby engaging with the Task Teal Leader, Client, and/or Auditors. B DisbursementArrangements Table C shows the allocation o f the proceeds o f the credit. The proceeds o fthe IDA credit will be disbursed over three- and one-half years from FY2005 through FY2008. The annual estimated disbursements are indicated inthe table on the page one o fthis document. The expected Project Completion Date i s December 31,2007. The Closing Date would be June 30,2008. Allocation of creditproceeds(Table C) ExpenditureCategory Amount in US FinancingPercentage (1) CivilWorks (Component 2) 5.70 I 100%o f foreign expenditures and 85% o f local expenditures (2) Goods 100%o f foreign expenditures and 85% o f local expenditures B Disbursements to meet eligible expenditures under the project will be based on the submission o facceptable quarterly Financial Monitoring Reports (FMRs). The FMRs will be submitted within45 days o f the end o f each 60  reporting period andcashrequests will be the total cash forecasts for the ensuing six months periodless the closing balance inthe Special Account after necessaryadjustments. The F M R s will include informationunder three main disbursement categories: aproject financial statement which includes a summary o f sources anduses o f funds, an updatedsix-month forecast, Special Account activity and reconciliation statements, and eligible expenditures by disbursement category statement; a progress report which explains variances between actual physical and financial progress versus forecasts; anda procurementmanagement report w h c h shows procurement status and contract commitments. Disbursements to meet eligible expenditures under Categories 5 & 6 will be subject to the fulfillment o f the conditions set out inSection G. Bankaccounts The following bankaccounts will be maintained for the purposes o f implementing the project: (i)SpecialAccount:Inordertoensuretimelyreleaseoffundstofinanceeligible expenditures under the project, the Government will open and maintain two separate Special Accounts denominated inU S dollars ina commercial bank acceptable to the Association. Special Account A inthe amount o f US$2.0 millionwill finance activities under Categories 2(b), 3(b), 4(b) and 5,6 and 7(b). (ii) AccountBintheamountofUS$3.0millionwillfinanceactivitiesundercategories Special 1,2(a), 3(a), 4(a), and7(a). Duringnegotiations, agreements were reachedregarding the arrangements for establishing and operating the SpecialAccounts. (iii) Accounts: Inordertoensuretimelyprovisionofcounterpartfunds,theGovernmentwillestablish Proiect appropriate Project Accounts inTanzanian shillings ina commercial bank acceptable to the Association. Similarly, all LGAsunder the project shall also be requestedto establish project accounts at their levels. The central government andthe LGAs shall replenish the Project Accounts quarterly to meet the Government's share o f eligible expenditures under the project for the ensuing quarter. Duringnegotiations, agreement was reachedregarding the arrangements for establishing andoperating the Project Accounts and are reflected inthe D C A and PA. FundsFlow DisbursementofIDA Fundsto thePST IDAwill disburse the fundingfor Component 1and3 into a US$ denominatedSpecial Account (A) to be managedby PO-RALG For Component 1, releaseswill be made from the SA into the GOTConsolidatedFundon . a quarterly basis. Approval and releaseswill be based on the satisfaction o f certain criteria: the annualnational assessmentand the annualbudget processescarried out by PO-RALGand submission o f acceptable documentation for previous releases. LGAs will be requiredto submit quarterly financial statements andoutput reports inorder to properly document the use o fthe funds received inthe previous quarter. IDA fundingfor Component 2 willbe disbursed into aUS$ denominated Special Account (B) to be managedby the DARLGAs andwill be governed by the DARAgreement signedbetween MoFand the four DLAs. Sub-component 2(a) and(b)fundswillbetransferred fromthe SpecialAccount Binto aProjectAccount maintainedina commercial bank andmanagedby the three municipalities namely Ilala, Temeke and Kinondoni. DisbursementoffundsfromMoFto LGAs. The LGCDGand CBG funds will be allocatedto LGAswho meet minimumconditions o f access, on a formula basis. Activities to be financed usingthe LGCDGs andCBGs will be indicated inthe annual plans drawn upinaccordance withthe LGAFinancialandAccounting Regulations.The consolidatedwork plans for each district will indicate the plans for the districts within its area o fjurisdiction. These will be submitted to the PO- RALGfor approval. Once these workplans (and other relevant documentation e.g. accountability for grants previously disbursed) are reviewedandapproved by the PO-RALG, a request will be sent to the MoF for funds to 61  be released. The MoF will then mange a transfer o f funds by issuing a check or bank draft on the HoldingAccount infavor o fthe LGAs. Fundswillbetransferred fromthe LGADev. Fundto the DistrictFundAccount andfurther to the District LGSP Account. Two accounts will be established, one for LGCDGs and one for CBGs. The district will manage funds destined for the sub-ward andvillage councils. The district will provideIndicativePlanning Figures (IPFs) to the sub-ward andvillage councils. Fundswill be released on a quarterly basis. The MOF will make a quarterly commitment, andrelease the first month's funds at the beginning o f each quarter. The second release will cover the funds for the remaining two months andwill be made conditional uponthe receipt by the PO- U L Go fthe necessaryaccountability for thereleasesmade inthe previousquarter. Inaddition, LGAsshall establish a separatebankaccount for the project inwhich will be deposited funds from the Government's Consolidated Fundto be used exclusively for project activities inaccordance withLocal Govemment regulations. A validparticipating agreement will be arequirement for bothinitial andsubsequent disbursements to a district. 62  LGSPFUNDSFLOWMECHANISM LGSP FUND - Notes to the FundsFlow Mechanism 1. Bilateraldonors will not fund LGSPper se, butwill fund the CDGandCBGfor other LGAs on the same terms as LGSPdoes for the initial 41 LGAs. Donor fundingis not aconditionofLGSP, but is shown for contextualpurposes. 2. IDAwill disburse the fundingfor Components 1 and 3 into aUS$ denominatedSpecialAccount (A) managedbythe PO-RALG (PST). ForComponent 1, releases will bemadefromthe SA intothe GOT ConsolidatedFundon aquarterlybasis. Approvalandreleases will bebasedonthe satisfactionof certaincriteria. ForComponent 3, funds will bedisbursedby IDA on a report-baseddisbursement. 3. IDA fundingfor Component 2 will bedisbursedinto aUS$ denominatedSpecialAccount (B) managedby the Dar es Salaam LGAsandthe fundswill bedisbursedon areport-baseddisbursement andwill begovemed by the DAR AgreementsignedbetweenMoF and DAR LGAs. 4. GOTwill providecounterpartfundingfor Components 1,2 and3. For Component 1, the GOT'Scounterpartfunding will bepartof the releases to the eligibleLGAs. For Components2 & 3, the counterpartfundswill bedepositedinto a Project Account denominatedin TanzanianShillingsmaintainedinacommercialbankandmanagedby the PORALG-PSTfor Component3 and DARPSTfor Component 2. 5. ForComponent2(a), fundswill betransferredfromthe SpecialAccount B into asubproject Account maintainedinacommercial bankandmanagedbythe threemunicipalities. 6. Releases fromthe CF to the LocalGovernmentAuthorityDevelopmentFundAccount No. 2 (not through the LGA deposit account) will follow requestsfromPO-RALGto Ministry ofFinance(MoF) andwill bemadeon a quarterlybasis. Approvalandreleasesby PO-RALGwill bebasedon the satisfactionofcertaincriteria,financialperformanceassessmentcarriedbyPO-RALGandsubmissionof acceptable documentationfrompreviousreleases. Specialnew accountingcodes will be assignedto ensurethat the utilizationof funds in LGSPcapital grants andcapacitybuilding grants canbetracked. 7. Fundsare transferredfromthe LGA Development.Fundto the District FundAccount andfurther to the District LGSPAccount. Two accountswill beestablished, one for the LocalGovemmentCapital DevelopmentGrants andone for the CapacityBuilding Grants. The districtwillmanagefunds destinedfor the sub wards. The districtwill provideIndicativePlanningFigures(IPFs) to the sub-wards. 63  CounterpartFunds For Component 1, GOTwill release its counterpart funds inaccordance withthe timetable agreed. Normal procedures will be employed withinthe Government's Commitment Control System to release funds for the other components. Contributions from LGAs andcommunities will be determined and agreed. Assessment ofFinancialPerformance ofLGAs PO-RALGwillperforma Financial Performance Assessment (FPA) o fthe LGAsinSeptember/October each year. This will be part o f the annual NationalPerformanceAssessment o fthe performance o f LGAs. Satisfactoryperformance on the NationalPerformance Assessment, including the FPA for each year will be a prerequisite for qualification o fLGAs to receive grants inthe period following the one inwhich the FPA is carried out. The assessmentwill involve: (i) determination o f whether there i s continuing sufficient accountingcapacity in the local governments; (ii) verificationo fthe expenditures usingrelevant supporting documents; (iii) physical inspection o f investments; (iv) review o f the status o f audits of local governments inthe project; (v) a review of cash flow forecasts; (vi)a review ofreports o ftransfers o f funds from the GOT'SConsolidatedFundto the LGAs; and (vii)compliance o f local governments withproject objectives. The procedures undertaken during such assessmentare documented ina FPA Procedures Manual. Suspensionof disbursements IDAwillhave the right, asreflectedinthe DevelopmentCredit Agreement, to suspenddisbursements of funds ifreporting requirementsarenot complied with. 64  Annex 7: ProjectProcessing Schedule TANZANIA: LocalGovernment Support Project Preparedby: President'sOffice Regional Administration and Local Government (PO-RALG) - Preparationassistance: Project design, the Project ImplementationPlan and its annexes werejointly doneby consultants,bilateral donors andthe Bank-financed US". Bankstaffwho worked onthe project included: Name Specialty Matthew Glasser TeamLeader Solomon Alemu Engineer Rowena Martinez OperationsOfficer Sumila Gulyani UrbanPlanner Mukami Kariuki Water and Sanitation Specialist Barjor Mehta Senior UrbanSpecialist Arianna Legovini Senior Monitoring & Evaluation Specialist Mercy Sabai Senior FinancialManagementSpecialist PascalTegwa SeniorProcurement Specialist DonaldMneney ProcurementAnalyst Edeltraut Gilgan-Hunt Environmental Specialist Muthoni Kaniaru Lawyer -LEGAF Steve Gaginis Finance Officer, LOAG2 Susan Shilling ProgramAssistant Gordon Appleby ConsultantResettlement Specialist EphremAsebe Consultant/Economist ConsultantAnstitutional Specialist Quality assurance team: James Hicks, Dana Weist, Bruce Ferguson, andBillDillinger. 65  Annex 8: Documents inthe ProjectFile* TANZANIA:LocalGovernment SupportProject A. Project,ImplementationPlan Operational Manuals for Components 1and2(a) B. Bank Staff Assessments Report onthe Assessment of Financial ManagementArrangements Report onthe Assessment of ProcurementManagement Environmental and SocialManagementFramework (ESMF) Report ResettlementPolicy Framework Community Environmental ManagementPlans ResettlementAction Plan C. Other Letter of Sector Policy * Includingelectronicfiles 66  Annex 9: Statement of Loans and Credits TANZANIA: Local GovernmentSupport Project 19-Jul-2004 Differencebetween expected Original Amount in US$ Millions and actual disbursementsa Project ID Purpose IBRD IDA GEF Cancel. Undisb. Orig Frrn Rev'd FY PO57234 2004 TZ EastemArc Forests 0.00 0.00 7.00 0.00 7.00 1.oo 0.00 PO71014 2004 HIV/AIDS 0.00 0.00 0.00 0.00 72.15 3.53 0.00 PO74624 2004 TZ-Emergency Power Supply 0.00 43.60 0.00 0.00 44.64 0.00 0.00 PO78367 2004 TZ CentralTranspal CorridorProject 0.00 122.00 0.00 0.00 118.44 0.00 0.00 PO82335 2004 Second HealthS a o r Dev. 0.00 40.00 0.00 0.00 65.05 20.54 0.00 PO63080 2004 Secondary EducationDevelopmentProgram 0.00 123.64 0.00 0.00 147.66 0.00 0.00 PO59073 2003 DARWATER SUP & SANITATION 0.00 61.50 0.00 0.00 56.85 6.30 0.00 PO67103 2003 Partic.Agr. Dev.and EmpowenmotProj. 0.00 55.58 0.00 0.00 57.16 3.44 0.00 PO58706 2002 TZ ForestConservationand Management 0.00 31.10 0.00 0.00 33.69 9.56 0.00 PO71012 2002 Primary Educ. Dev. Program 0.00 150.00 0.00 0.00 55.65 44.04 0.00 PO73397 2002 Lower KihansiEnvironmentalManagement 0.00 6.30 0.00 0.00 4.65 1.87 0.00 PO47762 2002 RURALWATER SUPPLY 0.00 26.00 0.00 0.00 26.43 10.04 0.00 PO02797 2002 TZ SONGO SONGO GASDEV.& POWERGEN. 0.00 183.00 0.00 0.00 119.21 65.68 0.00 PO65372 2001 SocialAction Fund 0.00 60.00 0.00 0.00 5.67 -10.63 0.00 PO69962 2001 RegionalTrade Fac. Proj. ~Tanzania 0.00 15.00 0.00 0.00 8.84 3.60 0.00 PO50441 2000 RURAL8MICROFINSVC 0.00 2.00 0.00 0.00 0.96 0.66 0.40 PO49638 2000 PRIVATIZATION 0.00 45.90 0.00 0.00 30.73 28.79 0.00 PO60833 2000 PUBLICSERV REF PROG 0.00 41.20 0.00 0.00 26.61 -16.03 0.00 PO57187 2000 FlDP II 0.00 27.50 0.00 0.00 12.86 11.60 4.31 PO47761 1999 TAX ADMINISTRATION 0.00 40.00 0.00 0.00 20.65 16.30 11.26 PO02789 1996 HumanRes.Dev. I 0.00 20.90 0.00 0.00 0.91 0.24 0.00 PO46837 1997 TZ-LakeVictoria Environment (IDA) 0.00 10.10 0.00 0.00 1.04 -3.76 0.00 PO02756 1996 URBANSECTOR REHAB 0.00 105.00 0.00 0.00 5.43 12.15 0.00 PO02770 1994 TZ ROADSI1 0.00 170.20 0.00 63.53 19.29 07.53 35.27 Total: 0.00 1.361.66 7.00 63.53 942.20 314.67 51.24 67  TANZANIA STATEMENTOF IFC's HeldandDisbursedPortfolio Mar 2004 - InMillionsUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 AEF 2000 Indust 1.53 0.00 0.00 0.00 1.53 0.00 0.00 0.00 1997 AEF Aquva Ginner ' 0.68 0.00 0.00 0.00 0.68 0.00 0.00 0.00 1998 AEF BlueBay 1.24 0.00 0.00 0.00 1.24 0.00 0.00 0.00 2001 AEF BoundaryHi1 0.20 0.00 0.00 0.00 0.20 0.00 0.00 0.00 1996 AEF Contiflora 0.07 0.00 0.00 0.00 0.07 0.00 0.00 0.00 1998 AEF Maji Masafi 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 1994 AEF MoshiLthr 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 2000 AEF Zan Safari 0.52 0.00 0.00 0.00 0.52 0.00 0.00 0.00 2002 EximBank 2.50 0.00 1.oo 0.00 1S O 0.00 1.oo 0.00 1996 IHP 0.35 0.60 0.00 0.00 0.35 0.60 0.00 0.00 2000 IOH 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 2000 NBC 0.00 10.00 0.00 0.00 0.00 3.44 0.00 0.00 1993 TPS (Tanzania) 4.38 0.87 1.04 0.00 4.38 0.87 1.04 0.00 1991197 TPS Zanzibar 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1994 TanzaniaBrewery 0.00 6.00 0.00 0.00 0.00 6.00 0.00 0.00 Total Portfolio: 14.15 17.69 2.04 0.00 13.15 11.13 2.04 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic TotalPendingCommitment: 0.00 0.00 0.00 0.00 68  Annex 10: Countryat a Glance TANZANIA: LocalGovernmentSupport Project sub. POVERTYand SOCIAL I Saharan Low- Tanzanla Africa income Development diamond' 2003 Population,mid-year fm7lionsJ 35 9 703 2,310 Lifeexpectancy GNIper capita(dffesmethod, US$) 29Q 490 450 GNI{Atiasmethod, US$Mllons) i a4 347 1,038 Average annual growth, lW7-03 Population(%) 2.3 2 3 1 9 GNI Laborforce (%) 2 4 2 4 2 3 per Most recentestlmatetiatest year avallable, 199703) capita P Q Vf%~ofpopcllaftonbelownation&povertyrim) 36 Urbanpopulabon196oftotalwpulafion) 35 35 30 Lifeexpxtancy at birth(years) 43 46 58 1 Infantmortality (per 1,000live births) 104 103 62 Childmalnutrition(% ofcbildrenunder5) 29 44 Accessto imDrovedwater source Access to an improvedwater source I96 ofpopulation) 68 58 75 Illiteracy(% ofmulationage 75+1 23 I 35 39 Grossprimaryenrollment (% ofschod-agepopulation) 70 87 92 -Tanzania Male 71 94 99 Low-incomegroup Femak 69 80 85 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1 1 $983 1993 2002 2003 Economkratios' GDP (US$ billions) 4 3 9 4 9 9 Grossdomesticinwtment/GDP 2.51 167 17.8 Exwrtsof goodsandSetvidGDP 180 167 176 GrossdomesticsaviwdGDP -46 9 7 8 0 GrossnationalsavinMGDP 2 4 9 1 7 6 Currentm u n t balan&DP -28 2 -7 6 -10 2 InterestpapetWGBP 2 4 0 4 0 3 TotaldebtlGDP 1594 78 I 76 1 Totaldebt serviCe/expoFts 32.3 342 7 2 5 7 Presentvalue of debt/GDP 187 Presentvalueof dsWexpwh 1074 Indebtedness 198343 199303 2002 2003 200347 (averageannualgrowth) Tanzania GDP -. 3.0 4.5 6 3 5 0 6 6 .. GDBper mpita I I 5.2 1.9 4 1 3.5 4 5 Lowincomegroup L I STRUCTUREof the ECONOMY 1983 1993 2002 2003 (% of GDP) Agriculture .. 48.1 44.4 43.4 Industry .. 15.6 16.3 16.9 Manufacturing 7.5 7.6 7.7 Services .. 36.3 39.3 39.8 Privateconsumption ._ 85.2 77.4 77.2 Generalgovernmentconsumption .. 19.4 12.9 14.8 Importsof goodsandservices .. 47.7 23.7 27.4 1983-93 190343 2002 2003 (averageannualgrowth) Agriculture 3.7 5.0 3.5 Industry .. 6.5 9.3 9.7 Manufacturing .. 5.0 8.0 8.0 Services 4.4 6.2 6.3 Privateconsumption 4.5 4.2 1.9 Generalgovernmentconsumption 3.6 17.6 23.9 Grossdomesticinvestment .. 2.5 2.3 14.9 Importsof goods andservices 4.0 2.3 6.8 * The diamondsshow four keyindicates inthe country (in bold)comparedwith itsincomegroupaverage. If data are rrissing,the diamond will be incomplete. 69  Tanzania PRICES and GOVERNMENT FINANCE I 1983 1993 2002 2003 Domestic prices Inflation(%) I (% change) Consumer prices 27.1 25.3 4.6 5.0 u Implicit GDP deflator 24.5 4.1 7.2 Govemment finance (% of GDP, indudescurrentgrants) Currentrevenue 9.5 11.5 11.7 Current budgetbalance 4.4 -1.4 -2.3 Overall surpluddeficit -8.2 -5.7 -7.4 -GDP detiator '-0-CPI TRADE 1983 1993 2002 2003 (US$ millions) Exportand importlevels(US mill.) Total exports (fob) 377 411 737 814 II l2.m5 COffW 130 96 35 41 Cotton 62 78 29 36 Manufactures 44 52 66 73 Total imports (cif) 957 1,353 1,658 2,287 Food 91 58 147 Fueland energy 241 101 Capitalgoods 406 628 813 Export price index(1995=100) 82 73 156 175 0 7 8 8 8 9 0 0 1 0 2 Import priceindex(1095=100) 77 101 110 119 ! Expwts Elmports Terms of trade (1995=100) 107 72 141 148 BALANCE of PAYMENTS 1983 1993 2002 2003 li o (US$millions) Current account balance to GOP (%) Exportsof goods and services 509 603 1,568 1,722 Imports of goods and services 1,015 2,017 2,226 2,682 Resource balance -507 -1,414 -658 -960 5 Netincome -73 -164 -52 -54 Netcurrent transfers 22 463 -2 -10 Currentaccount balance -558 -1,115 -712 -1,002 -15 Financingitems(net) 572 992 1,083 1,452 Changes in netreserves -14 123 -371 450 Memo: Reservesincluding gold (US$millions) Conversionrate (DEC,/ocaWS$) 11.1 405.3 966.6 1,038.4 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$millions) :ompositionof 2003 debt (US$ mlll.) Total debt outstanding and disbursed 6,864 6.786 7,324 7,515 IBRD 223 140 6 3 A: 3 IDA 475 1,759 2,869 3,474 G: 831 Total debt service 164 211 118 102 IBRD 27 45 3 3 IDA 4 23 22 29 Composition of net resourceflows Official grants 256 786 804 Official creditors 302 108 142 504 Privatecreditors 31 34 -22 15 Foreigndirect investment 2 21 240 Portfolio equity 0 0 0 c:437 World Bank program Commitments 81 345 63 219 - Disbursements \ IBRD E Bilateral 90 146 148 397 F Private Principalrepayments D Othermitilateral ~ 14 42 8 12 G Short-ten -- Netflows 76 104 140 385 Interest payments 17 26 17 20 Nettransfers 59 78 123 364 mote Inis~ D was proaucea trom me ueveiopmenttmnomics central aataDase D 70  AdditionalAnnex 11:Letterof Sector Policy TANZANIA: LocalGovernmentSupport Project THE UNITEDREPUBLICOF TANZANIA THE MINISTERFOR FINANCE Telephone: 2112854 TRWURY, Fax: 2117790 W EP.0,BOX9111, In reply pleasequote: DAR ES SALAAM, TANZANIA. Ref. No: TYC/B/40/115/24 15th October, 2004 Ms. Judy O'Conor CountryDirectorfor Tanzania and Uganda The World BankCountryOffice DAR ESSALAAM Dear Ms. O'Conor LE7TEROF SECTOR POLICYON FISCALDEVOLUTIONOFTHE BUDGETAND LOCALGOVERNMENTCAPACITY BUILDING 1. Iamwritingtorequest,onbehalfoftheGovernmentoftheUnitedRepublicof Tanzania, a credit of USD 52 million equivalent from the Intemational DevelopmentAssociation (IDA) to finance the following componentsof the Local GovernmentSupport Programme(LGSP): LocalGovemment DevelopmentGrant; Dar es Salaam Upgradingand InstitutionalStrengthening; and Managementand InstitutionalDevelopment. 2. BACKGROUND 2.1 The Government of Tanzania (GOT) promulgated the Tanzania Development Vision 2025 in 1999 and this document defined the national development objectives and the policy framework within which they would be achieved. High amongst those objectives was to be "free from abject poverty" and a critical policy within the implementation framework was to "decentralise the political administration and the fiscal structure, roles and responsibilities". This is in conformity with the 1998 Policy Paper on Local Government Reform which envisagedfour main policy areas for reform: PoliticalDecentralisation 0 FinancialDecentralisation 0 Administrative Decentralisation 71  ChangedCentral-LocalRelations 2.2 Tanzania's Poverty Reduction Strategy (PRS 2000) provides guidance for the achievement of freedom from abject poverty through the various GOT interventions for poverty reduction, including local government reform and strategies for fiscal decentralisation. Seven areas - Primary Education, Roads, Water and Sanitation, Judiciary, Health, Agriculture and HN/AIDS - are identifiedas key priority areas for poverty reduction. These key areas have been prioritisedthrough the annualbudgetsand the PER/MTEF process. The PRS emphasises investments that target the poor, specifically in social infrastructure that falls under the responsibility of the local government authorities (LGAs). The PRS therefore recognises the importance of local government reforms for successful implementationof improved service delivery levels. Increasing amounts of funds have been, and will further be, channelled through Local Government Authorities (LGAs) using the recurrent and developmenttransfer systems. 2.4 However, the vast majority of development expenditures are at present still expended at local level through various project modalities and sector funding rather than more unconditional intergovernmentalfiscal transfers to LGAs. It is also recognised that substantial capacity building is required for LGAs to fully playtheir roleas envisagedinthe strategy for the reductionof poverty. This letter expands on the Government of Tanzania's policy positions on decentralisationwith emphaseson fiscal decentralisationand approachesto LGA capacity building, and how the Local Government Support Programme (LGSP) will contribute to the implementation of those policies. The LGSP will include three components, which are: ComDonent 1: Local Govemment DevelopmentGrant; Comoonent2: Dar es Salaam Upgradingand Institutional Strengthening; and Comwnent3 Managementand InstitutionalDevelopment, 3. THE GOVERNMENT'SOVERALL DECENTRALISATIONPOLICY 3. The Government's vision and policyfor the future decentralised localgovernment system are summarized in the Policy Paper on the Local Government Reform, 1998. 3.2 The Government's intention is to devolve substantial political, administrative and financial powers to LGAs. The Government intends to create a system that will enable LGAs to provide their mandated services to the citizens in a transparent, 72  accountable, accessible, equitable and efficient manner. This requiresdevolution of powers to make policy and operational decisions, and elected and accountable political leaders. It also requires capable, decentralised, administrative staff, as well as effective mechanisms for the participation of stakeholders (particularly the poor and other marginalizedgroups) in decision-making. It is understood, moreover, that possession of sufficient and reliable resources to implement the plans and budgetsis critical to the success of the decentralisationpolicy. 3.3 The Government recognises, that unless there is substantial improvement in institutionaland fiscal capacity at the local level, effective and sustainableservice delivery will not materialise. Its basic strategy to bring about institutional and fiscal improvementsis decentralisation, coupled with extensivecapacity building, and institutional performance based incentive structures. This strategy is being implementedprimarilythrough the LocalGovernmentReform Programme(LGRP) in the Presidenrs Office, Regional Administration and Local Govemment (PO- MLG). 4. FISCALDECENTRALISATIONPOLICY 4.1 The Government is in the process of developing a strategy for fiscal decentraiisation in conformity with the 1998 Policy Paper on Local Government Reforms, which envisagesreformsof the presentfiscal system that will improve: a. Revenuegeneration; b. Efficientuseof resourcesfor service delivery at all levels of Government; c. Equity in access to services, through more equitable allocation of resources; d. Transparencyand fairness inallocation. 4.2 Based on the Policy and work to date, the long-termvision for intergovernmental fiscal transfersto LGAscan be summarized as follows: a. The vision is of a unified transfer system, which brings together programmes and grants, recurrent and developmentfunding, donor and government funding into one process. Parallel funding to LGAs shall, wherever practical, be merged into the Government grant system over the next five years, .in order to maximise equity, transparency and efficiencyin the use of resources. b. The transfer of resourcesto LGAs shall be based on transparent formula basedaIlocations . c. Transfers to LGAs shall be made ina mannerthat providesincentivesfor LGAs to improve their administrative performance. Thus increased 73  discretion at LGA level in the use of transfers shall be contingent upon LGAs meetingagreed performancecriteria. Efforts shall further be made to provide incentives to LGAs for improvements in their own source revenuecollection. d. It is Government's policy that, in line with the Tanzania Assistance Strategy, there shall be no earmarking of funding; however, some conditionalities within the grant system cannot be avoided in order to ensure that special needs are addressed, but the conditionalitieswill not overly constrain LGA discretion. Initially the Government will ensure greater discretion within sector allocations of the recurrent grant transfer, whereas discretion across sectors will be given immediate priorityfor developmentgrant transfers. Devolution of the development budget is an important element in #is strategy. Hitherto, only a very small part of the funds for development have been transferred from central governmentto LGAs and, in addition, the Governmentis aware that the presentallocationof developmentfunding is spatiallyskewedand the principlesfor the allocationnottransparent. In order to address this, the Government will initiate a gradual, but systematic, devolution of a significant share of the development budget over the next 2-4 years, providing non-sector specific development funding for LGA investments according to locally identified priorities. These funds will be distributed through a needs based, transparent and objectiveformula. 4.5 As a first step towards this process the Government has implemented the new formula based allocation of the GOTfunded developmentgrant with effect from PI2004/05. It is envisagedthat also in 2004/05 will start the expansionof the non-sectoral discretionary development transfers, both in nominal terms and in relation to the sector grants and the Area Based Programs (ABPs) currently funded by various donors, to provide sufficient autonomy and efficiency in the resource allocation. Area Based Programmes are for the purpose of this document defined as development partner supported programmes that provide discretionary developmentfunding to specific LGAs. The present LGA development funds come from several sources each using individual allocation, disbursement, and accountability procedures. The Government will over the next 4-5 years bring all these various development grants under one operational "window", using common modalities for planning, budgeting, accounting, reporting and auditing. LGSP (Components 1and 3) will, together with the development partners participating in a basket arrangement, commence the implementation of this strategy through the Local Govemment CapitalDevelopmentGrant (LGCDG) system. 74  4.7 The LGCDG system will be implementedfrom 2004/05 and will initially comprise the current Development Grant from GOTown sources and the Capital Grant (CG) and Capacity Building Grant (CBG). The same allocation formulae and access criteria will be used in what will be one unified system, managed by PO- RALG, thoughfinancing may comefrom various sources. Over four to five years, the LGCDG system will be established as the main modality through which funds for capital investmentare transferred from central government and donors to LGAs. Ultimately the LGCDG system procedures and modalitieswill be the vehicle for the transfer of all developmentfunds to LGAs, includingsectoral programmes. Under the current Tanzania Assistance Strategy VAS) the Government and its developmentpartners identifiedbudget support as the most appropriate method of co-operation. The use of Area Based Programmes and Basket Funds are recognisedas temporary arrangementsthat will in time be convertedinto budget support. The Government believes that the LGCDG system now being implemented, which LGSP and the development partners' basket fund support, providesthe appropriate modalityfor effecting this strategy, and over four to five years parallelmechanismswill be madeconsistent with the LGCDGsystem. As part of the process of converting ABP and basket funds into budget support, the Government will initially work with the development partners at present operating Area Based Programmesto fold their support into the LGCDG system. The development partners have generally demonstrated their support for the LGCDG system and a basket funding arrangement is being prepared to channel their funds intothe system. The Government will also work to bring nationally applicable sectoral and discretionary developmentgrant programmes into the LGCDG system over four to five years. 4.12 The Government's intention is that a significant proportion of the LGCDG funds will flow to the Village/Mtaa level though initially this will only be in the form of indicative planning figures. These will be allocated to the wards through a formula based on population and other objective and transparent factors, then passed on to the Villages/Mitaa through an objective allocation process. It is expected that from 2005/06 onwards however that recurrent and capital funds will be passedto the VillageslMitaa, but only where they are ableto demonstrate adequatecapacityto managethe funds by meetingminimumaccess criteria. 4.13 The large size of the Districts in Tanzania makes the role of the Ward Development Committee critical as the facilitator of the plans and budgets 75  prepared by the Villages/Mitaa, ensuring their compliance with guidelines, reconciling intra ward issues and processing plans and budgets to the DistrictfTown/Municipal/CityCouncil. While the Ward DevelopmentCommittee is recognised under the Local Government Laws as an Administrative Unit of the Local GovernmentAuthority, it is democratically accountable as its members are the electedVillage and Mtaa Council Chairs and it is chaired by the Councillorfor the Ward. The work completed and in process for development grants is mirrored in the area of recurrent grants where a formula based allocation system has been designed and has been implemented in respect of the conditional grants for Education and Health from 2004/05. This will be extended to the remaining conditional grants in respect of Roads, Water, Agriculture and Administration in 2005/06. While there were some problems in the implementation of the formulae for Healthand Educationthe Government's commitmentto the formula based allocation system remains strong and this has been confirmed at the highest level. Whereas the previous systems transferred funds to LGAs rather routinely and automatically, the future strategy is to providedevelopmentfunds and autonomy against the performance of LGAs within key functional areas, especlally performanceIn planning, financial management and good governanceto provide stronger incentives to comply with legal requirement and ensure an efficient administration. LGAs will be assisted to improve their performance through capacity building support. Work is at present underway to define the appropriate institutional structures through which the Government's fiscal transfer system will operate. These will be derived from the fiscal decentralization strategy being developed and will embrace all the transfer processes including recurrent and development grants as well as sectoral and other programmes. 4.17 The Government recognises that fiscal decentralisation not only requires an appropriate fiscal transfer system but also buoyant and adequate local revenue sourcesthat will encouragelocalaccountability and provide for the operationand maintenance of investments in infrastructure. The abolition of regressive and nuisance taxes, and the reforms to the business licence system, were aimed at the removal of bad taxes and the rationalisationof the tax burden and not the reductionof LGAfiscal autonomy. The Government has commissioned a study which will examine the financing of Local Government and make recommendations as to local revenue sources that .will replacethose that have been abolished, and will be equitable and consistent with the promotion of economic activity. This work will include the development 76  of an EqualisationGrant system that will support those councils with inadequate revenuebasesto fund operation and maintenancecosts. Notwithstanding this, the LGAs have not maximised their collection of existing revenue sources and the Government is supporting LGAs in the improvementof their performance through the efforts made in the municipalities resulting in a steady increase in the collection of property tax, and the recently commenced revenue enhancementtraining in all LGAs through the LGRP. The Government has moreover recently intervened to provide legal assistance to the Dar es Salaam Municipalitiesto recover long outstandingdebts through the courts, and LGAs will be,encouraged and assistedto make use of all the recourses available to them underthe law. In concluding this section it is important to note that Government has made substantial steps in meeting its objectives of fiscal decentralisation includingthe development and implementation of formulae for recurrent and development grants, the rationalisation and harmonisation of local revenue sources, the provision of unconditional grants as compensation for lost revenues, the commissioning of studies for the identification of financing strategies for LGAs and the development of a holistic institutionalframework for transfers to local govemment. The introduction of the LGCDG system will mark a further considerable step on that road. 5. LGA PLANNING FOR POVERTY REDUCTION To achievethe goal of poverty reduction, the PRSemphasizesinvestmentsthat target the poor. A key challengefor LGAs is to improveinfrastructureaccess by, and servicedelivery to, the poor, This problemis particularlyacute in urban LGAswhere a significantproportionof the populationresides in unplannedand underserved areas-in the case of Dar es Salaam, for example, an estimated 70% of the dwellingsare in unplannedareas. Inthis context, the Government clearly recognizesthe importance of upgradinglow incomeunplanned settlementsin urbanLGAsas stated in the NationalHumanSettlementsPolicyof 2000 and the LandAct of 1999. 5.2 Recognisingthat previousinfrastructureupgrading initiativeshave been modest inscale and havetherefore benefitedonly a small segment of the population, the Govemmentis promotingeffortsto scale up and supportsthe following principles for infrastructureupgrading: a. Selectionof specific settlements(sub-wards) to be upgradedis based on a systematic and rationalprioritisationprocessusing clearly defined 77  criteria. Throughthis processall unplannedsettlementsare ranked and upgradedin phases. b. Communityinvolvement inselectingthe packageof infrastructure improvementsto be delivered by the LGA intheir settlement (sub- ward), and supervisingconstructionand subsequent operationand maintenance. c. Householdcontributionsto capitalcost to demonstratecommunity demandand to enhancecommitmentto sustainedoperation and maintenanceof the infrastructure. d. Selectionof packagesis subjectto a per hectarecostcap set by the LGA to ensure the widest possiblecoveragegivenlimitedavailabilityof publicfinancingand capacityfor operation and maintenance. e, Minimizeand preferablyavoid displacinghouseholdsby using appropriate planningstandardsand layouts. f. Operationand maintenance(OM) responsibilities, plansand financing commitmentsare agreedupfrontfor each communityto ensurethat infrastructureis sustained. Further, communitiesare responsiblefor monitoringand liasingwith LGAsto ensurethat O&M is carriedout as agreed. g. Municipalitiesare responsiblefor ensuringthat their responsibilitiesfor O&M are funded and implemented. 5.3 Buildingon existing nationalpolicies, experience from previousupgradingefforts and lessons learnedfrom the LGSPsupportedupgradinginitiative, the Governmentis committedto: a. Reviewingand modifyingthe space standards specifiedunderthe Town and CountryPlanningOrdinance, (TCPO) 1956, SpaceStandards Regulations, and adaptingproceduresand levelsof approvalfor planningschemes inconformancewith the overall decentralization agenda. A draft of the new legislationis currently under consideration. b. Implementingthe LandAct No. 4, 1999, and more specifically,the regulationspertainingto regularizationof upgradedsettlements, by issuanceof land regularizationplansand, residentiallicensesand eventuallytitle deeds. These efforts will reducethe potentialfor encroachmentof upgradedpublicspace and rights of way, enhance security of tenure, and create a basisfor future propertytaxation. c. Establishingfinancing arrangementsfor rollingout a national program for systematic, phasedand sustainable upgradingof all unplanned settlements in Dar es Salaamand other urban LGAs. 6 CAPACITY BUILDING POLICY AND STRATEGY 6.1 From the beginning of the local government reform it was recognised that substantial capacity building of the LGAs was required for successful 78  implementationof the reforms and the Local Government Reform Policy outlines the vision where the operational responsibilityfor human resource utilisation at LGA level remains with the LGAs. Government nevertheless retains the responsibilityfor providing an enabling environment and, in the initial stages of reform, substantial involvement in developing and implementing capacity building programmes. The Government is currently addressing issues raised by the Joint Donor-GOT Review of the LGRP in 2001 regarding previous efforts of LGA capacity building as follows: *The formula based allocation system for recurrent grants will give LGAs greater flexibility in the use of funds as the formula defines the total envelope for each council which is then allocated between personal emoluments and other charges by the LGAs following individual agreement on personnel requirements with the central ministries. This together with the performance based systems being introduced in the recurrent and development grant systems will provide incentives to improveLGA performance, .The initiatives being undertaken in the development grant system, particularly the LGSP Component 1, will provide access of LGAs to discretionaryfunds for capacity building, The Government will prepare a policy framework for capacity building in LGAs, which will embrace policies for recruitment, retention and development of LGA staff for sustainable improved service delivery. The developmentof this policy framework will be informed by the experiences of the LGSP. The first phasesin the local government reform focused on the key areas of LGA performance and supported councils in the restructuring process, and improved administration (financial management, good governance etc.). The support by LGRP In areas of capacity building has been supplemented by various sector and donor specific initiatives. The current phase of support will focus more on a demand driven capacity building approach, assisting LGAs to take more responsibility for their own development of capacity within a clear guiding framework and incentive structure, which ensure more locally targeted interventions and strong incentives to improve the performance. The mechanisms proposed under LGSP component 1provide an opportunity to pilot sucha LGA driven, performanceincentive based, capacity building approach. The Government has recently passed a new Public Service Act. The Act lays down the framework for a unified public service and seeks to restore discipline, * 79  efficiency, integrity, dignity, capacity and effective performance in the public service by operationalisingthe PublicServiceManagementand EmploymentPolicy. This policy emphasises merit based recruitment, decentralisation of personnel management issues within all sections of the public service, introduction of performance appraisal systems, staff development programmes closely linked to work improvement, and the introduction of relevant incentive schemes to boost work morale. The Act applies to all sections of the public service on Mainland Tanzania, including LGA staff. It is recognised that certain sections of the Act are not compatible with the intentions of the Local Govemment Reform Policy regarding LGA control over staff management issues and the Government is reviewing the Act with the aim of revisingthe relevant sections in 2004. The revisionwill ensure that the Public Service Act is fully consistent with the Government`s decentralisationpolicy. 7 RELATEDPOLICIES AND STRATEGIES 7.1 In addition to the fiscal decentralisation policy implementation outlined above Govemment has recently taken a number of initiatives to improve on the overall system of LGA finance. Beloware listedsome of the key elements. The Government of Tanzania is committed to the good governance practices including the fight against corruption in all public institutions. Guidelines are being developed in line with the NationalAnti Corruption Strategy to assist LGAs to develop local anti corruption plans, which will be implementedfrom July 2004. Further to this the conditions for access to the Local Government Development Grantsystems are designedto strengthengood governance. Operation and maintenance is recognised as a key challenge, as increased resources will be allocated for capital investments in LGAs. Government will support LGAs in the maximisation of local revenue collection and ensure that such funds are applied to the operation and maintenance of council infrastructure, thus ensuring the sustainability of investments. Improved planning and elements of user contributions will partially contribute to sustainability, but reliable LGA funding for operation and maintenance is crucial as LGAs will assume the main responsibility for operation and maintenance of infrastrudures. Improvement in the locally'generated revenue sources is also crucial to ensure LGA accountability and a sustainablesystem of local government finance and the recent abolition and rationalisation of inefficient and cumbersome local taxes is an importantcomponentof this strategy. Infuture LGA taxation will be focussed 80  on the highyielding taxes, with due consideration to the avoidance of distortion in local development and poverty reduction, and property tax collection will in particular be pursued. Under LGSP (component 2) constraints on the optimisation of own LGA revenues will be addressed in Dar es Salaam, with a view to enhancing revenuecollection in the three municipalitiesand to informing the initiatives beingtaken in revenuecollectionin other councils. Govemment will compensate LGAs for the reforms in the tax assignment, but they will also be expected to utilise the existing taxes more efficiently. Thus training and capacity building in tax administration (assessment, collection and control) has been and will continue to be in the forefront of these initiatives, both at the politicaland administrativelevels. The present revenue sharing arrangements between higher and lower local governments have been studied under the LGRP and initiativeswill be launched to ensure that the present local tax sources are shared in accordance with the overall decentralisationpolicy, in an equitable manner. The Government is in the process of commissioning a study to develop a strategic framework for the financing of local governments, starting from the identificationof the roles and responsibilitiesof the various levels of govemment and how they should be financed, including the identification of new revenue sourcesfor local government. Timeliness, transparency and dissemination of information about intergovernmental fiscal transfers have +improvedsignificantly in recent years, and this process will be continued especially with the focusing on capacity buildingwithin the key units of PO-RALGand MoF. A number of initiatives have been launched to improve LGA financial management. The financial management specialists recruited under the Local Govemment Reform Programmeare providingsignificant support to the LGAs. A financial benchmarking system to track and compare progress has been developed and implemented for all LGAs, and a steady overall improvement in performance is being revealed. Formal training in financial management is being provided under the sponsorship of the Ministry of Finance, which has focused on the up gradingof accountingskills in LGAs. A computerised Integrated Financial Management System (IFMS) has been introducedand is now operating in 32 councils as a basis for improvingfiscal and financial managementand reporting. The system is being extended to cover the remaining LGAs, under the auspices of the LGRP. The IFMS will link with the Planning and Reporting Database, which will soon commence implementationin the LGAs, to form a comprehensive managementinformationsystem. 81  LGAs currently receive guidance for participatory planning in the form of various sector specific planning guidelines in addition to the annual budget guidelines. The Governmenthas approved a participatory planningapproach, which is being operationalisedinthe LGAs. PO-RALG is, in common with other Government Ministries, going through a processof restructuring, under the Public Service Reform Programme, as part of which a revised organisation structure has been developed. This structure recognises the role of PO-RALG as the manager of national programmes in respectof local govemmentsand providesfor the appropriate capacity to carry it out. It is therefore the Government's policy that the management of programmessuch as LGSP will be mainstreamed into the Govemment structures and parallel programme management structures will only be countenanced during the period of implementationof the new organisation structure and the buildingof its capacity, becoming redundantthereafter. 0. CONCLUDINGREMARKS 8.1 Government is committed to continue the decentralisation reform and sees the devolution of the development budget, the strengthening of LGA capacity building and efforts for LGA revenue enhancement as critical pillars in this process. It is expected that the LGSP as part of the Government's development grant facility for LGAs, in close cooperation with and complementing the LGRP, and other important initiatives, will contribute to the enhancement of LGAs' capacitiesfor provisionof needed local servicesand thereby be an importanttool inthe Government's poverty reductionstrategy. 8.2 On behalf of the Government of the United Republic of Tanzania, Iwish to thank IDA and the donors contributing to the Local Government Reform ProgrammeCommon Basket Fund for the assistance renderedin the preparation of the LGSP and hereby requestfor assistanceto implementthe LGSP according to the budgetedestimates in the programmedesign documents. Itrust that this request for assistance through the proposed LGSP will receive your favourable support. 82  w -33 8 " Q pc m 00  t lyi n t t + I  n s t (cl 0 .I c) a .I k Q 0  I nE CI 0 ..I ca .CI L R0  h s W 0 8 5 T, - iD 0 0 N 0m 4 Y Y Y Y e, 8 e, 8 e, 8 4 8 -- I_ 2 8 *m 8 3 2 9 3 5: 82  n W 5hI l - l - I n u , 3 3 0 0 " 3- 0- m m Y Y a n B B t t 8 3 t  i T m - 0 9 0 3 s hl 3 N N m- vi- w 2 4-$ 4- m - 0 39 10 8 - 3 3 3 N N 4 n- vi- 2 D % 4 e, cr, U 8 Y 8 & PI - 8 8 8 8 8 Q\ BB c) .I 3 (r 0 .I u 8 .B h n 8    MAP SECTION