Tanzania - Local Government Support Program Project

Report No. PID11509 Project Name TANZANIA-Local Government Support Program Region Africa Regional Office Sector Sub-national government administration (90%); Central government administration (10%) Project ID P070736 Borrower(s) PRESIDENT'S OFFICE - RALG Implementing Agency Address PRESIDENT'S OFFICE - RALG Address: P.O. Box 1923, Dodoma, Tanzania Contact Person: Permanent Secretary D.M.S. Mmari Tel: 026-232-1607 Fax: 026-232-2116 Environment Category B Date PID Prepared November 15, 2002 Auth Appr/Negs Date December 15, 2003 Bank Approval Date July 16, 2004 1. Country and Sector Background The LGSP's objectives and structure are driven by two fundamental and interrelated elements of the Government of Tanzania's (GoT's) overall development approach: the Poverty Reduction Strategy (as outlined in the 2000 PRSP) and the Decentralisation Strategy (as encapsulated in the Local Government Reform Programme.) In the PRSP, GoT outlines a number of priority sectors in which improved and expanded service delivery is vital if the overall goal of poverty reduction is to be achieved. These include education, health, roads and water - all sectors in which local authorities have core functional and delivery responsibilities. The LGSP will provide funding to local authorities for much-needed investment in the expansion and rehabilitation of local infrastructure to promote the effective delivery of local services. Government has also recognized that unless there is substantial improvement in institutional and fiscal capacity at the local level, effective and sustainable service delivery will not materialize. Government's basic strategy to bring about such institutional and fiscal improvements is decentralisation, specifically the Local Government Reform Programme (LGRP.) The LGRP - which was effectively launched in 1999 - is focused on a medium to long term process of legal and institutional reform, intergovernmental fiscal reform, capacity building, deepening of local accountability and the promotion of community involvement in the planning and execution of infrastructure and service-delivery projects (community driven development, CDD.) It is housed in the President's Office - Regional Administration and Local Government (PO-RALG) and is strongly supported by a wide and closely co-ordinated group of nine major  donors who provide funding for its technical assistance and management needs through a Decentralisation Common Basket Fund. The LGSP - specifically the Capital Grant Programme - will form one of the main instruments through which the decentralisation process and CDD will be enhanced and progressed. It will articulate closely with other donor-funded and intergovernmental transfers to local authorities for investment in local services and will form an integral element of government's programme of intergovernmental fiscal reform. It is important to note that ESW conducted in 2000-01, which focused on decentralisation and local government reform in Tanzania, established solid grounds for a strategic orientation on the part of the Bank for support of the decentralisation process. Since then, the LGRP has been conceptualised in close and ongoing consultation with both the GoT (particularly PO-RALG) and the CBF donors. The PRSP also recognises that urban poverty is widespread and identifies it as an important challenge for Government. The combination of urban poverty and rapid urbanisation have contributed to the swift growth of informal and unplanned settlements in Dar es Salaam, characterised by a lack of access to basic infrastructure. In this context, the PRSP highlights the importance of community based approaches in addressing specific infrastructure and service deficiencies at local level. The Community Infrastructure Upgrading Component will enable local authorities in Dar es Salaam to extend infrastructure and services to about 300,000 residents in low income unplanned settlements in Dar es Salaam through a community based and demand driven approach that will be managed by the local authorities. Support will also be provided for a revenue enhancement programme that will strengthen the position of the Dar es Salaam local authorities to sustain ongoing investment in infrastructure and services. 2. Objectives The Development Objective of the Local Government Support Programme (LGSP) is to improve the performance and accountability of local authorities within the target group in the areas of planning, financial management and project implementation. The LGSP (Component 1) is conceived of as the pilot phase of a new central-local capital transfer system in Tanzania. As such, it will be directed at a substantial fraction of - but not all - local authorities in Tanzania. It is anticipated that by project close it will be possible to expand this transfer to a larger number of local governments. It is also expected that, over the life of the project, the LGSP will be established as an increasingly important modality through which funds are transferred from central government and donors to local authorities for investment in infrastructure projects. The LGSP thus aims both (i) to play an important role in improving the capability of local authorities to meet their statutory service-delivery obligations, and (ii) to become an integral and increasingly significant element of the ongoing process of intergovernmental fiscal reform in Tanzania. It also (through Component 3) aims to enhance the capabilities of the local government Ministry (PO-RALG) and the Regional Secretariats to perform their monitoring, oversight and management functions in respect of the local government -2 -  system as a whole. Simultaneously (through Component 2) the LGSP focuses on the upgrading of low income, unplanned settlements in Dar es Salaam. Although this Component is funded through a separate window from Component 1, the primary aim and structure of the project in the two Components is the same, viz. to improve the performance of the beneficiary local authorities through the provision of appropriately targeted and structured funds and incentives. 3. Rationale for Bank's Involvement The Bank is the only external assistance agency in a position to provide significant capital investment resources of the kind required to fund a mechanism such as the CDG and a high-impact program to upgrade poor urban communities. The Bank also is unique in possessing the experience and know-how for designing performance and incentives-based capital grants mechanisms and upgrading programs at scale. The Bank's 20 years of experience in urban and local development in Tanzania (most recently through the successful USRP and the FY01 Decentralization Study) give it credibility and a mature understanding of the issues. Through these activities, as well as other projects related to public sector reform and service delivery, the Bank has built up a relationship of confidence with the Local Government Reform Program in particular and the Government more broadly in these areas. 4. Description The project comprises three interrelated components: n Component 1: Capital grant facility to local councils for investment in infrastructure and capacity-building; n Component 2: Community upgrading and institutional strengthening in Dar es Salaam; n Component 3: Capacity building at regional and national level, and supporting programme management. Component 1: Capital grant facility to local councils will have two subcomponents, (a) the Capital Grant Programme (CGP), and (b) the Capacity Building Grant Programme (CBG.) The CGP will comprise a non-sectoral conditional grant, distributed on a formula basis between local authorities which fall into a pilot (or target) group, that will provide funds to local authorities to invest in local infrastructure in accordance with local needs as these are determined through local participatory planning and budgetary processes. Although all local authorities within the target group will be eligible to receive CGP funding, actual access to the grant will be determined by capacity and accountability conditions which will be be designed to incentivise improvements within the beneficiary local authorities in these areas. The CGP will thus be closely related to local capacity building activities, to be supported through sub-component (b) - the Capacity Building Grant - which will provide resources to local authorities for the capacity building activities which the CGP incentivises. The grants will be targeted on a limited number of local governments which will provide the pilot sample, the size and composition of which will be determined during project preparation. Other important design -3 -  issues - including the nature of the allocation formulae, the specific access conditions (criteria), the character of the annual assessment process, and so on - will also be addressed during project preparation. At this time it is anticipated that the credit will last for a period of four years. Depending on its success, the system piloted by the CGP will be expanded to additional local authorities in Tanzania after project close. The purposes, structure and conditionalities of the CBP and CGP will differ. Although both will be formula-driven, the CBP will be designed in such a way as to make it widely (but not automatically) available to all local authorities on which Component 1 will be targeted. The CGP, on the other hand, will provide capital to local authorities for investment in new and rehabilitated local infrastructure so as to incentivise capacity-building, strengthen the institutional and fiscal positions of local governments and deepen accountability at the local level. In this context, the following properties of the CGP should be noted: n Although the grant will be non-sectoral, local authorities will not have unlimited discretion regarding the type of infrastructure or capacity in which they invest. Broad expenditure parameters will be set in accordance with the PRSP i.e. CGP funds will only be available for expenditure on local services and infrastructure in priority sectors such as education, health, water and local roads and on basic urban services, such as refuse removal; n The grants will be focused on capital rather than recurrent expenditure. They will be designed both to ensure that the risks of contributing to unsustainable recurrent cost burdens at the local level are minimized and that local revenue enhancement efforts are maximized in order to ensure sustainability over time. Component 2: Community infrastructure upgrading and institutional strengthening in Dar es Salaam will have two subcomponents. Subcomponent (a) will comprise a community infrastructure and service delivery upgrading subcomponent targeted at low income unplanned and unserviced residential areas in Dar es Salaam. This will enable local authorities in Dar es Salaam to significantly and rapidly improve access to infrastructure and services in an estimated 2Ot of its "unplanned" areas (70- of Dar es Salaam's settlements by land area). In this subcomponent, the Dar es Salaam local governments will engage communities in a participative process to prioritise, design and implement Community Upgrading Plans (CUPs) which will be formulated by the affected communities in consultation with the local authorities. Participating communities and their required investments will be identified as part of project preparation using an agreed selection process which will involve an assessment of factors such as the level of deprivation, degree of physical difficulties for upgrading, and community mobilization or cohesiveness. The CUP process will entail a series of ongoing consultations, the use of secondary and selected primary data and the consideration of factors such as community priority and the overall budget envelope. Parameters of investment cost per capita, per hectare and other sector norms will also be established as an input to the CUPs. The component will be implemented in two phases, one of which will be designed in detail before appraisal. Each phase will comprise a maximum of 3 communities in each municipality. - 4-  As a recent World Bank evaluation shows, following a four year effort to improve governance in Dar es Salaam (under the City Commission), the four newly established local authorities responsible for the city (City Council and three Municipal Councils) are in a position of reasonable fiscal and institutional stability, but - as a result of resource, capacity and other constraints - have very limited ability to deliver services widely. This has negative consequences both for the residents of the city - particularly the poor, who are neglected most as a result of these constraints - and for the city's economic performance. The report identified substantial scope for the improvement in the performance of local revenues and indicated that this will be necessary if the scope and depth of service delivery in the city is to be improved. Funding the maintenance and operational requirements of the infrastructure developed under Components 1 and 2 (a) of the LGSP will also place an increased financial burden on the Dar es Salaam local authorities. Building on some initial improvements to the property tax system introduced under the USRP, LGSP subcomponent (b) will support improvements in local tax and non-tax revenue enhancement, focusing on strengthening data, administration and collection systems. Sources where the most significant gains stand to be made will be prioritized e.g. property tax where activities will include the improving and updating of valuation rolls, improving the efficiency of valuation systems and procedures, overhauling the collection system, and so on. Component 3: Capacity building at regional and national level, and supporting program management, monitoring, and evaluation will focus on capacity building in two areas: (a) strengthening of capacity within PO-RALG and the Regional Secretariats to administer, monitor and support the local government system; and (b) capacity to implement the LGSP itself. Subcomponent (a) will provide technical assistance, training and essential IT for PO-RALG and the RSs' to build their capacity to enable them to discharge their mandated role in monitoring and overseeing the local and intergovernmental system in Tanzania, and in supporting the decentralization process. The specific type and scope of the support will be determined in a manner that will enhance and complement any ongoing and planned activities in the area of capacity building, including those currently programmed or being prepared by the LGRP and Common Basket Fund donors. As regards subcomponent (b), the programme management demands the LGSP will place on PO-RALG and the Dar es Salaam councils will be substantial. For example, an annual evaluation of all local authorities will need to be undertaken in order to determine whether the qualifying local governments are entitled to receive their annual funding allocations as these are determined by formula. Subcomponent (b) will provide support for program management functions to PO-RALG and the Dar es Salaam local authorities. It will also provide resources to develop and implement monitoring and evaluation system for Components 1 and 2. A further aspect of Component 3 (b) will be the support of technical assistance for refining and establishing the CDG and CBG as progressively more important features of the intergovernmental fiscal system in Tanzania, thus using these instruments as primary initiatives in the decentralisation of the development budget in the country. Investment in local infrastructure and capacity building Dar es Salaam upgrading and intstitutional strengthening - 5-  Capacity building at regional and national level 5. Financing Total ( US$m) BORROWER $9.90 IBRD IDA $88.60 Total Project Cost $98.50 6. Implementation Institutional context. The respective responsibilities of local authorities and national government (Ministries and Regional Secretariats) are specified in various pieces of legislation, particularly the Local Government Acts, but are also subject to refinement and reform under the LGRP. In the context of decentralisation, local authorities have core functional responsibility for the delivery of the local services targeted by the LGSP (primary education; primary health; water; local roads; and urban services such as refuse removal.) The local government Ministry (PO-RALG) is responsible for oversight of the functioning of the local government system and the decentralisation process, and relevant line Ministries (Education, Health etc.) have regulatory and policy responsibility in their sectors. The Ministry of Finance also has key responsibilities in the area of intergovernmental fiscal relations, including oversight and administration of intergovernmental fiscal transfers and a role in policy development around fiscal decentralisation. Auditing of local authority accounts is performed annually by the Office of the Control and Auditor General. Institutional arrangements for implementation. In this context, PO-RALG will be the chief executing agency Ministry for the LGSP. The Ministry will be responsible for the day to day management of the management of project implementation activities including overall project planning, financial management, monitoring and reporting. In respect of Component 1, PO-RALG's responsibility will include ensuring that CDG funds are transferred to local authorities in accordance with their compliance with the conditions to access grant funds. This will be done by means of a comprehensive annual assessment. PO-RALG will co-ordinate closely with the Ministry of Finance to effect the transfers and with sector Ministries where co-ordination needs arise. In respect of Component 2, it will liase particularly closely with the Ministry of Lands and Human Settlements which has a number of legal and policy responsibilities in areas of relevance to the proposed upgrading programme. PO-RALG will also ensure that mechanisms are put in place for monitoring and evaluating the use of CDG funds. The capacity of PO-RALG to carry out these project management and implementation functions will be assessed - and proposals regarding the capacitation of the Ministry will be prepared - during project preparation. Local authorities themselves have the responsibility for using the funds for purposes for which they are intended through their ongoing planning budgetary and project implementation activities. Their capacity to do so will be enhanced by ongoing LGRP activities, on the one hand, and the Component 1 Capacity Building Grant, on the other. It will be important to ensure that sector innovations and reforms (such as the funding system - 6 -  established under the Primary Education Development Programme and the ongoing process of reform of local water Boards) are encouraged by the LGSP. Where such initiatives are in place the LGSP will be integrated with them. In the case of Component 2, where the Dar es Salaam local authorities will be in receipt of funds for intensive community upgrading activities and institutional/fiscal strengthening, Dar es Salaam City and Municipal Councils will establish specific implementation capacity to plan and execute these activities. Disbursement arrangements. Disbursements from IDA will initially be made on the basis of incurred eligible expenditures (transaction based disbursements). IDA will make advance disbursements from the proceeds of the Credit by depositing into two Borrower-operated Special Accounts to expedite Program implementation by PO-RALG and the Dar es Salaam City Council respectively. They will each also open a Project Account denominated in local currency. Thus each will operate two accounts for the components for which they have responsibility: a Special Account denominated in US dollars, and a Project Account denominated in local currency. Final accounting and reconciliation responsibility will reside with PO-RALG. Strengthening their accounting and financial management capacity will enable the above institutions to establish effective financial management and accounting systems, which should eventually facilitate the introduction of Financial Monitoring Report (FMR) based disbursements in periods subsequent to project effectiveness. The adoption of this approach will enable the project to move away from time-consuming transaction based disbursement (voucher-by-voucher) methods to quarterly report based disbursements to the Project's Special Account, based on the FMRs. Audit arrangements. Financial reports will be produced and audited annually. In addition, detailed management letters containing the auditor's assessment of the internal controls and accounting system and suggestions for improvement will be prepared and submitted to management for follow-up. As provided in law, this audit will be undertaken by the Control Auditor General (or a firm appointed by the CAG.) 7. Sustainability The sustainability of the benefits of the project needs to be considered at two levels: (i) sustainability of the specific infrastructure investments made by the Dar es Salaam local authorities under Component 2 and by other local authorities using CGP funding under Component 1; (ii) and sustainability of the CGP as a durable, ongoing element of the intergovernmental fiscal system in Tanzania. In respect of level (i), sustainability rests critically on: I The strength of the incentives provided by the CGP to assure ownership by the local councils of the investments financed and to motivate their corresponding efforts to mobilize additional revenues for operation and maintenance; I The effectiveness of the implementation of the LGRP reforms directed at -7 -  strengthening financial management and enhancing local revenues; I In Dar es Salaam, the effectiveness of the community participation process for planning and design of the CIUP, to assure community support for maintenance of the upgrading investments. In respect of level (ii), sustainability will require that: I The CGP is continued as a programme of the GoT beyond the lifespan of the proposed project as a fundamental feature of the intergovernmental fiscal system in Tanzania, providing a key source of capital funding to local authorities while maintaining and expanding incentives for local councils for improvements in their fiscal and institutional performance; I The commitment of the Government to continue with the steady implementation of the intergovernmental fiscal, structural and systemic reforms which will reinforce the impact of the CGP. The project concept reflects a number of elements which are designed to ensure sustainability taking these factors into account 8. Lessons learned from past operations in the country/sector Overall project and Component 1. The proposed operation will incorporate the main lessons of the World Bank's experience in urban development from the region and worldwide. The main lessons on decentralization and urban management are drawn from (i) the Africa Urban Sector Strategy (November 2001); (ii) the Operation Evaluation Department's Evaluation Summaries; and (iii) the report "Fiscal Decentralization and Sub-national Finance in Africa" (DANIDA and World Bank, 2000). Specific strategic and operational lessons also have been taken from four projects in the region designed to channel funds to local governments for investments through grant systems: the Zimbabwe Rural District Council Pilot Capital Development Project (closed in June 2000); the Zimbabwe Local Government Capital Development Project (negotiated but "on hold"); the Uganda Local Government Development Program (active); and the Senegal Urban Development and Decentralization Project (active). The Bank has also financed numerous municipal grant mechanisms in other regions; two examples are the Parand Municipal Development Project in Brazil and the Municipal Development Projects I and II in the Philippines. Among the key lessons that will be incorporated in the design of the proposed project are: I Long-term approach. Development objectives in the local government area are inherently long-term and must be pursued not on a project-by-project basis but in the framework of an extended program. The LGSP will pilot a longer term innovation in the Tanzania intergovernmental fiscal system; I Systemic reform. The project would be a good example of the region's new strategy of supporting the establishment of multi-faceted enabling environments for local governments to effectively provide infrastructure and services. The project fits into a three-part framework which experience has shown to be necessary for this to occur: (i) reform of intergovernmental legal, institutional, and fiscal relations, (ii) local-level institutional and financial reform, and (iii) financial support for physical investments; I Local government implementation. The project incorporates the lesson - 8-  that investment programs for local infrastructure and services should be implemented by the local governments themselves in the interest of (i) building capacity through "learning by doing" and (ii) promoting the operation and maintenance of the investments; I Demand and performance-based approaches. Prior experience has shown that strengthening sub-national governments should be a demand-driven process, to ensure that the interventions are truly effective and sustainable. The Capital Grants system would therefore operate on the basis of self-selection of local councils based on meeting criteria for participation. This may include such factors as making a council's eligibility for an annual grant dependent on its performance in using the previous year's grant and making the amount of the subsequent grant a function of the council's performance on, for example, improving its financial position. The Capital Grants mechanism would be designed with several features which, according to experience, should promote ownership and sustainability of investments by local councils. One would be a matching contribution from the council's revenues. Another would be a requirement for an operation and maintenance plan for each activity financed and the monitoring of the actual performance of O&M once investments once completed. Component 2. During the past two years the Bank has been analyzing the lessons of experience of urban upgrading world-wide (Urban Poor Thematic Group, TUDUR) and in the Africa region (NTFESSD Africa Upgrading Initiative). The proposed CIUP for Dar es Salaam would incorporate the following lessons: i Integrating external funding with local government financial management and institutional structures. This includes (i) ensuring that the appropriate municipal departments are engaged and supportive of the interventions and (ii) involving the municipal Treasury office in the project financial management, even if separate accounts are maintained; I Harmonizing with sector-specific policies on local infrastructure provision (e.g., urban water supply). In this case, DAWASA will be responsible for vetting all community water supply sub-components of the CIUP, and these will be co-financed through the Dar es Salaam Water Supply and Sanitation Project; I Making cost recovery provisions equitable and compatible with sector policies. Community water supply cost recovery will follow DAWASA policies and practices; I Paying careful attention to ensuring substantive community participation. The planning and design process for the CIUP includes an iterative community participation process starting with initial priority-setting and leading through the development of final Upgrading Plans and detailed designs. This process includes community choices being made against hard budget constraints. Conducting a prior assessment of property rights/tenure issues to determine whether and to what extent this issue needs to be addressed. 9. Environment Aspects (including any public consultation) Issues Infrastructure investments carried out under the project are likely to have some environmental impacts. Under Component 1, local authorities will access modest amounts of capital funding for expenditure on the development of local infrastructure and services in priority sectors such -9-  as education, health, water, local roads, and on basic urban services, such as refuse removal. Component 2 will focus mainly on the upgrading of infrastructure and services in low income unplanned areas of the city. Funds may be used to finance investments in the provision of services including water supply, sanitation, drainage improvements, access roads, solid waste management and other basic services. In general it is anticipated that the improvements to basic services to be supported by the project will have beneficial rather than detrimental impacts on the environment. However, for both Components the diverse nature of the investments means that the environmental impacts may vary. Given the limited amounts available to local authorities under Component 1, these sub-projects are not expected to have significant environmental impacts in aggregate. In the case of Component 2, construction activities may require environmental mitigation measures. In addition, there will be transport of substantial volumes of materials to and from the construction sites. These adverse impacts will be temporary in nature and largely limited to the length of the construction period. Longer term impacts will be dependent on the nature of the specific investments chosen and cannot be determined at this time. The primary stakeholders are local authorities targeted by the project, residents within these local authority areas, and those communities, in particular, that will directly benefit from investments in infrastructure and services made through the project. Secondary stakeholders include line Ministries, Regional Administration offices, private sector agencies and civil society. Selection of the sub-projects will be participatory and demand-driven 10. Contact Point: Task Manager Roland White The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending November 22, 2002. - 10 -