Mozambique - Decentralized Planning and Financing Project

Documentof TheWorld Bank ReportNo: 26365 - MOZ PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDGRANT FROMTHE INTERNATIONALDEVELOPMENTASSOCIATION INTHEAMOUNT OFSDR29.9MILLION(US$42.0MILLIONEQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR DECENTRALIZEDPLANNING AND FINANCINGPROJECT October 15,2003 Water and Urban 1 Africa RegionalOffice This document has a restricted distribution and may be usedby recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  CURRENCYEQUIVALENTS (Exchange Rate Effective September 30,2003) Currency Unit = Mozambican Meticais (MZM) 1MZM = US$0.00004 US$1 = 23250 FISCAL YEAR Government & Public Enterprises -- January 1to December 3I ABBREVIATIONSAND ACRONYMS APL Adaptable ProgramLoan MPF Ministry of Planning and Finance CAS Country Assistance Strategy MQA Management Quality Assurance CFAA Country Financial Accountability MTE Mid-Term Evaluation Assessment NCB NationalCompetitive Bidding DA District Administration O&M Operations andMaintenance DCC District Consultative Councils Framework O&M Operations andMaintenance DNPO National Directorate of Planning OLE LocalAdministration Reform andBudget PA Project Account DPPF ProvincialDirectorates of Planning PARPA Action Plan for the Reduction of Absolute andFinance Poverty DPT District Planning Teams PIM Project ImplementationManual EA Environmental Assessment PPS ProvincialPlanning Support EMP Environment ManagementPlan PPU ProvincialProjectsUnits ESSP Education Sector Strategic ProgramProject QCBS Quality and Cost BasedSelection FMS Financial ManagementSystem RFP Request For Proposal GOM Government of Mozambique RP ResettlementPlan IGF InspectorateGeneral of Finance RPF ResettlementPolicy Framework LGDP LocalGovernment Development Project RTTP RuralTravel and Transport LIG Local Investment Grants SA SpecialAccounts MADER Ministry ofAgriculture andRural SBD StandardBidding Documents Development SGSA SecondGeneration SpecialAccount MAE Ministryof StateAdministration SIFAP Public Administration Training Project MDP Municipal Development Project UCA Project Coordination Unit MICOA Ministry for the Coordination of UNCDF UnitedNations Capita Development Environmental Affairs Fund MOPH Ministry of Public Works andHousing UPP ProvincialProject Unit Vice President: Callisto Madavo Country Director: Darius Mans Sector Manager: Jaime Biderman Task Team Leader: Lance Morrell  FOROFFICIAL USEONLY MOZAMBIQUE DECENTRALIZEDPLANNINGAND FINANCINGPROJECT CONTENTS A. Project DevelopmentObjective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 4 3. Sector issues to be addressedby the project and strategic choices 6 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 9 3, Benefits and target population 10 4. Institutional and implementationarrangements 11 D.Project Rationale 1. Project alternatives considered and reasonsfor rejection 12 2. Major relatedprojects financed by the Bank and/or other development agencies 13 3. Lessons learned and reflected inthe project design 16 4. Indications of recipient commitment and ownership 18 5. Value added of Bank support inthis project 18 E.Summary ProjectAnalysis 1. Economic 19 2. Financial 20 3. Technical 20 4. Institutional 21 5. Environmental 23 6. Social , 25 7. Safeguard Policies 27 F. Sustainability andRisks 1. Sustainability 28 2. Critical risks 29 This document has a restricteddistribution andmay be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.  3. Possible controversialaspects 31 G. MainGrant Conditions 1. Effectiveness Condition 31 2. Other 32 H. Readinessfor Implementation 33 I.CompliancewithBankPolicies 33 Annexes Annex 1: ProjectDesignSummary 34 Annex 2: DetailedProjectDescription 39 Annex 3: EstimatedProject Costs 50 Annex 4: Cost BenefitAnalysis Summary, or Cost-Effectiveness Analysis Summary 51 Annex 5: Financial Summary for Revenue-Earning Project Entities,or Financial Summary 57 Annex 6: (A)Procurement Arrangements 58 (B)FinancialManagement andDisbursement Arrangements 65 Annex 7: Project Processing Schedule 80 Annex 8: Documents inthe Project File 81 Annex 9: Statement ofLoans and Credits 83 Annex 10: Country at a Glance 85 Annex 11: Summary 87 Annex 12: Monitoring and Evaluation 89 Annex 13: Letter of Sector Commitment 94  MOZAMBIQUE DecentralizedPlanning and Financing Project Project Appraisal Document Africa Regional Office AFTU1 Date: October 15,2003 Team Leader: Lance Morrell Sector ManagerDirector: Jaime M.Biderman Sector(s): Sub-national government administration (30%), Country ManagerlDirector: Darius Mans Central government administration (30%), Micro- and SME Project ID: PO01807 finance (20%), Roads and highways (20%) Lending Instrument: Specific Investment Loan (SIL) Theme(s): Rural Services and infrastructure (PI, Decentralization (P), Administrative and civil service reform (P), Ruralpolicies and institutions (P), Small and medium enterprise support (S) [ ]Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other: For LoanslCreditslOthers: BorrowerlRecipient: GOVERNMENT OF MOZAMBIQUE Government of Mozambique Responsible agency: MINISTRY OF PLANNING & FINANCE Contact Person: Mr.Custodio dos Mucudos, MPF Tel: 258 1416614 Fax: 258 1498930 Email: mpfppfd@teledata.mz Contact Person: Mr.Domingos Lambo, Deputy Budget Director, MPF Tel: 258 1490765 Fax: 258 1494653 Email: mpfppfd@teledata.mz Contact Person: Mr.Jose Guambe, Director, DNALIMAE Tel: 258 1307888 Fax: 258 1428565 Email: Project implementation period: 2004 2008 - Expected effectiveness date: 0211112004 Expected closing date: 06/30/2008  A. Project Development Objective 1. Project developmentobjective: (see Annex 1) To improve the institutional capacity o f District Administrations to plan and manage small infrastructure investments inresponse to community demand. 2. Key performance indicators: (see Annex 1) 0 80% o f districts inthe Provinces supported by the Project with District Development Plans and Annual InvestmentPlans approved 80% o f districts inthe Provinces supported by the Project with District Consultative Councils organized and approving district plans and implementation reports 0 60% o f districts participatings inthe Local Investment Grants inwhich participants in planningprocessesexpress satisfaction with responsivenessand accountability o f district administration. 50% of districts participating inLocal Investment Grants ratedgood or excellent on annual DistrictPerformance Evaluation assessments 60% o f districts at national level adopting MPF and MAE approvedmethodologies for participatory district planning and governance Key administrative and fiscal instruments adopted by GOM supportingtransparent district planningandmanagement, including: (a) Guidelines for Community Participation and ConsultationinDistrict Planning publishedand disseminated (b) Formalizationof District as a budgetunit (c) Operationalrules and procedures for district finance published (d) Provincial budget allocationto districts established for district infrastructure maintenance (e) 3% per annum increase in share of state investment budget programmed at provincial level with district input to plans B. Strategic Context 1.Sector-related Country AssistanceStrategy (CAS) goal supported by the project: (see Annex 1) Document number: 20521-Moz Date of latest CAS discussion: June 1, 2000 (IDA-R2000-76, IFC-R2000-80) The CAS for Mozambique was designedaround the Government's FiveYear Program and its poverty reduction strategy. It has three pillars: (i) increasing economic opportunities through private sector led growth, (ii) improving governance and empowerment; and (iii) improving human capabilities and social protection. The economic development pillar will involve maintaining an enablingmacroeconomic environment, investing in infrastructure, promoting agriculture and rural development, ensuring sound environmental management, and improving innovation and competitiveness to promote employment. Therefore, under this pillar, the DPFP will support investments inrural infrastructure, promote economic development and agricultural activities at the community level, and promote employment inthe n o n - f m rural sector, three areas central to the growth strategy to reduce poverty. The governance and empowerment pillar o f the CAS will support efforts to develop a public administration that i s responsive to its constituents and that effectively supports the country's poverty-reduction efforts. Underthis - 2 -  pillar, the DPFP's efforts will be aimed at strengthening the capacity of the public sector at local levels; reforming the institutional framework to strengthen an "integrated" model o f local administration, in support o f improving infrastructure and services through deconcentration and eventually decentralization, and simplifyingand increasing the transparency of administrative procedures and improving accountability. The social development pillar of the CAS focuses on primary health and primary education, activities currently supported through ongoing operations. The DPFP's role under this pillar will be to strengthen the local levels o f government to improve the planning and management of investments andmaintenance ofruralinfrastructureand to increasethe accountability of local public officials and service providers to rural communities. Therefore, considering that about 70% of Mozambique's total population live inrural areas and 81% o f the economically active population work inagriculture, forestry and fishing, any success at poverty reductioninMozambique will require sustainable and substantial economic growth with an emphasis on the rural sector, along with significant investmentinhumancapital andrural infrastructure. Rationalefor the use of the IDA grant: As an IDA-only country with a GNIper capita of lessthan $360 per annum, Mozambique has beenallocated IDA grants o f 29.9 million SDR for FY04. The full amount will be applied to the DecentralizedPlanning and Finance Project (DPFP). InFY03 grants were applied to the HIV/AIDS Response Project and the Public Sector ReformProject. The DPFP was selected for grant financing for the following reasons: 1. Strong capacity building impact. Central to the ability o f the GOM to implement the PARPA is the strengthening o f capacity at local levels to deliver services to the poor. Inthe words o f the Minister o f Planning and Finance "PARPA is the what, DPFP i s the how". The project's explicit objective i s capacity buildingthrough learning-by-doing and training, particularly inthe areas of local administration and district infrastructure investment planning, budgetingand implementation. I t does, however, also aim to strengthen the capacity o f provincial and national government to furtherelaborate and developthe policy andmethodologicaltools necessary for effective decentralization and district governance. 2. Strengtheninglocal governance Mozambique i s a relatively new democracy with a strong centrist tradition that i s recognized increasingly by the GOM as a hindrance to effective local development. The project emphasizes capacity buildingof local administrations as well as communities and civil society inorder to strengthenparticipation inplanningandpriority-setting at a district level (through Consultative Councils) and enhance accountability of local administrations both upwards, to higher levels ofgovernment andsector ministries,anddownwards to affected communities. This will further entrench and strengthen the foundations for democracy inMozambique. - 3 -  Centrality of improved local governance topoverty-reduction Through improved capacity of local administrations to effectively plan, budget, implement and monitor infrastructure investments on a demand-drivenbasis, the project will support the public sector's ability to deliver services ina cost-effective manner at the local level. The emphasis o f the project is inpoor rural areas inthe four centralprovinces. The investments have a "learning-by-doing" approach and will be inthe areas o f health, education, water, irrigation, markets, drainage and tertiary roads for the most part, thus addressing critical elements necessary for poverty reduction inMozambique. Better collaboration between IDA and other donors supporting budget policy reform, local government capacity building and community participation The project i s one o f a number of projects supporting the National DPFP under the leadership of the MPF. The project i s working closely with other donors ina collaborative effort to harmonize both operational guidelines, methodologiesand M&E systems and to work ina coordinated fashion with the GOM to implement a program of policy reform for decentralization. GovernmentPreference The G O Mhas strong ownership of the programand has requestedgrant financing for this project. It sees the DPFP as a critical approach to implementingthe PARPA through improved local governance and capacity. Monitoring results DPFP will provide financing for the development o f an M&E system to generate information necessary for operational monitoring as well as the evaluation o f operational systems and institutional change inlight of emergingpolicy objectives. Since the GOM has expressedits intention to move toward a national program of decentralized planning and finance, a national M&E framework will be neededto allow for coverage of all provinces. Inthis respect, this project will contribute to the development of a common M&E framework jointly with MPF and UNCDF. The M&E system will feed into the overall monitoring o f the PARPA. The establishment of a comprehensive M&E system for the project will be essential to ensure that the lessons from DPFP are captured and utilizedto improve existing project design over time. It will also be critical for the design o f a scaled up national program or for making alternative choices interms o f how decentralization should be implemented. 2. Main sector issues and Government strategy: Mozambique's institutionally weak and non-democratic local administration is a legacy o f Portuguese colonial administration (until 1975) and centralist socialism (from 1975 until 1990). As a result of liberalizationpolicies and constitutional reformaccelerated by the peace settlement ending civil war in 1992, economic, social andpolitical pluralism have increased significantly. However, public sector organizations remain centralized and only weakly accountable to civil - 4 -  society, especially inrural areas. Although the 1997 municipal legislation created a legal framework for elected local government, it i s constitutionally limitedto cities and towns. Under existing legislation, Mozambique's 128 rural districts, comprising over 70% of its population and 90% of its territory, remain subject to state administrationmediated by the 10provincial "governments" which are also entities legally and politically subordinated to the central government. Inspite of this constraint, the Government of Mozambique (GOM) has committed itself to increasingboth administrative decentralization (deconcentration) and grassroots citizen participationinpublic affairs inrural districts. The GOM's guidingpolicy framework, the Action Plan for the Reductiono fAbsolute Poverty (PARPA or PRSP) has identifieddecentralized planning and finance as a key element of its program inrural areas. The PARPA'Sdecentralization objective i s linkedto four strategic lines o f action: Rural Development Strategy: The Government's main development objective i s the reduction o f poverty through rural development. The PARPA focuses on continued investment on a priority basis to the social sectors andbasic infrastructure, especially water and roads, inrural areas. It also aims at establishing policy, institutional, and regulatory frameworks that improve access to services and resources while reducing their costs. To achieve these objectives, the GOM explicitly recognizes that an effective poverty-reducing rural development strategy requires substantial decentralization o f decision-making, affording local institutions the opportunity to participate and influence the allocation of resources. Shifts inEconomic Management: The Ministry of Planning and Finance (MPF) is overseeing a gradual shift inthe instruments o f the national development planning system. This transformation i s reflected in three concurrent and interrelated strategies. The first i s to open the development planning and budgeting process, which was essentially a bureaucratic and technocratic exercise, to the scrutiny of elected officials (greater transparency) andthe contributions oflocal communities and civil society at large (increased popular participation). The second i s to change the approach to development planning from a highly centralized to an increasingly decentralized approach, recognizingthe needto devolve/deconcentrate to sub-national levels bothresponsibilities and resources for development, and the needto buildthe requiredlocal capacity to plan and manage the use o f these resources. The third i s to refocus planning to promote medium-and long-term economic and social development by developing improvedprocedures for selection of public investments, mobilization of local contributions and promotion of private sector initiatives. Public Sector Reform: Broader concerns with public sector organization and management also underpinGovernment's promotion of decentralized planning and finance. LaunchedinJune, 2001 the GOM Global Strategy for Public Sector Reform identified decentralizationas a key area of action. Specific initiatives to transfer greater responsibilities to provincial, district and service delivery levels are to be undertaken inall sectors, complemented by increasingorganizational integration (see below) and more discretionary access to greater resources at local levels. The associatedpromotion o f greater responsiveness, transparency and accountability at all levels will permit a reorientationof relations between higher and lower level within the deconcentrated state administration from the present managerialregime to a more supervisory and facilitating one. - 5 -  Reform of Local Administration: The fundamental role and organization of district administration i s an important element in the reform of the Ministry of State Administration. In2000, the role of "community authorities" was legally recognized as interlocutorsbetweenrural communities and district administration, reversingdecades of official marginalization o f traditional institutions and leaders in local governance. Furthermore, greater community participation i s a stated objective of recently approved Local Administration Reform (OLE) legislation, although without clear specification o f how this participation shouldbe organized. Basedupon a model o f "integrated administration" which strengthens the territorial dimension o f public management vis-a-vis the currently predominant sectoral regime, the OLE reform gives greater authority to District Administration as well as provides the legal basis for the district as a budget entity. By complementing the OLE legislation's administrative focus with the promotion o f accountability mechanisms through local consultative fora and councils linkedto participatory planning and plan implementation, decentralized planning and finance will strengthen the governance dimension of local administrative reform. On these bases, GOM has identifieddecentralized participatory planning as a key element of its strategy for public sector reform and rural development promotion at district level. Based on a pilot project inNampula Province supported by UNCDF with Dutch co-financing, the GOM i s in the processof developing aNational Strategy for DecentralizedPlanning and Finance as apillar o f its decentralization reforms. Inorder to provide a common methodological framework for reform and capacity buildingin support o f district-based participatory planning and small-scale investment management, this Strategy provides the basis for a National Program which will continue the development and dissemination of district planning, finance and governance reforms through several projects, the largest of which i s the IDA Grant financed DPFP. Ledby the Ministryof PlanningandFinance and directly involvingthe Ministries of State Administration, Agriculture and Rural Development and Public Works and Housing, the National Steering Committee of the National DecentralizedPlanningand Finance Program will continue to guidepolicy reforms, the introduction of new institutional systems, andthe dissemination of improved working methods insuch areas as district organization and capacity building, district finances and budgeting, and district governance and accountability. 3. Sector issues to be addressed by the project and strategic choices: Key sector issues and strategic choices are based onthe recognition that the policy and institutional frameworks for decentralization inrural Mozambique will, inthe short-run, focus principally on administrative deconcentration, capacity buildingo f local administration, and support for the participation by communities in district development. First, although district administrators will continue to be appointedby state officials, the GOM has demonstrated its commitment to participatory governance inrural districts by adopting procedures which increase the involvement o f communities and their representatives in development planning, land andnatural resource management, and other matters of local public interest. - 6 -  Secondly, the G O M recently approved the OLE making the district a budget entity for the first time. MPF is working within existingbudget legislation to develop the instrumentsnecessaryfor district planning and finance. Efforts have begunto institutionalise district development plans and investment budgets. Furthermore, MPF i s seeking ways to deconcentrate sector investment budgets to the local level inorder to provide significant district influence over allocation decisions and resource management, thus moving toward a more decentralized regime within the states' unitary budget system. Thirdly, continuing efforts to strengthen local administrationthrough the OLE legislation, as well as the ongoing institutionalisation of community authorities by implementingDecree 15/2000, represent MAE'Seffort to increase both participation and accountability in district administration. Finally, the G O Mhas recognized that both institutional andhuman capacities at district level are inadequate to meet the demands of decentralized decision-making and resource management. As a result, it will dedicate significant resources, mobilized under the Public Sector Reform Strategy, to addressing this capacity gap through both training o f existing staff and the placement o f better qualified mid-levelpersonnel at district level. This analysis suggeststhat within the framework of deconcentrated state administration inrural areas, significant efforts are beingmade to meet the PARPA-defined objectives relating to reforms supporting the rural decentralization process. MPF and MAE continue to promote gradually increasingresponsibility, resources, participation, accountability and capacity at district level. As discussedpreviously, the GOM has consistently expressedits interest in greater decentralization of local administration, finance and governance even as it addresses the political and institutional challenges which such a strategy represents. Inaddition, extensive consultation duringthe project formulation process has documented strong demand among ruralcommunities, local administration officials, and key civil society actors for more comprehensive and more dynamic decentralization, participationand accountability reforms inrural Mozambique. Inorder to assurethat the DPFP continues to support a cumulative process that will leadbeyond deconcentration to more comprehensive legislated decentralization inMozambique, the project foresees that the GOM will prepare a Letter o f Sector Policy before its Mid-Term Review, in which clearer indications o f future government policy will be presented. On the basis o f this policy statement, project supported reform and capacity buildingefforts may be adjusted and deliberations regardingpotential follow-on investment operations financed by IDA Grant will be better informed. Inthis sense, the present operation should be seen as a preparatory phase o f a longer term investment program supportingmore comprehensive and more formally institutionalised decentralization inrural Mozambique. Inthe short-term, bycontinuing to advance institutional change onthe ground, bothinthe public sector itself and inits relation to communities and local civil society, the project will further institutionalise the practice o f local responsibility through participatory and downwardly accountable planningand management of small public investments. Inthis way, it will create both the objective preconditions for rural decentralizationthroughmore effective systems and - 7 -  capacities as well as strengtheningthe norms and expectations for responsiveness and accountability which favor improved local governance inthe field. Simultaneously, the project will support GOM efforts, led by MPF, to develop a policy and institutional framework more conducive to decentralizationand local government reform inrural areas through its assistanceto key central government agencies and decision-makers. Thus the key strategic choice reflected inthe project design is its support to the decentralization process inanticipation o f comprehensive legislation and reform. By improving the conditions necessaryfor decentralization, both inthe field and at the center, the DPFP will buildthe capacities and demand at various levels which will be necessaryfor subsequent implementation of a more complete program o f rural decentralization reforms inMozambique. C. Project Description Summary 1. Project components (see Annex 2 for adetaileddescriptionandAnnex 3 for adetailedcostbreakdown): % of Bank- financing 16.5 100.0 I Total Financing Required I 46.29 I 100.0 I 42.00 100.0 I The IDA Grant financed DPFP is premised on gradually strengtheningthe elements requiredfor decentralization inrural districts. The project will support further development and implementation of the policies, institutions, systems and capacities discussed above at district, provincial and central levels. Inthe four provinces of Mozambique's central region, training and technical assistancewill be providedto assist inthe development o f district plans, both strategic and operational. The plans will be developed by local administration staff with the participationof rural communities and their representatives, organized into fora of "local governance" called District Consultative Councils (DCC). Learning-by-doingwill buildpublic sector capacity for operationalising and implementing these plans through a system o f demand driven Local Investment Grants complemented by capacity buildinginfinancial management, civil works management, and downward accountability. Generalized deficiencies inthe knowledge and skill levels o f local administration staff will be addressedthrough a broadly based professionaltraining program. Support will be provided through local CSOs to strengthen the capacity o f communities to participate inthe DCCs. Finally, central government institutions will be supported to further the definition of decentralization reforms and improved local administration, planning and finance systems. The project has the following five components: Component 1. Participatory District Planning - The Participatory District Planning Component - 8 -  would develop a District-level participatory planning systembasedon civil society consultation andparticipation. It would deepenand expand the experience of a decentralized planning and finance pilot inNampula province financed by UNCDF, UNDP and the Netherlands. Component 2. Local InvestmentGrants (LIG) - Financing for small rural infrastructure included inthe annual planswould bemade available to eligible districts as localinvestment grants, upto a certain threshold and accordingto a set o f qualification criteria. There will be three grant types. Type 1Grants will finance investments indistrict administrative infrastructure and will be managed by the province (the district i s beneficiary but has no management role). Type 2 Grants will finance investments insmall-scale public social infrastructure prioritisedby communities through a process of participatory planning. The menu o f eligible subprojects would include, among others, primary schools, healthposts, rural water supply and sanitation, small-scale irrigation, feeder roads and bridges and rural markets. The provinces will take on co-management responsibility (with districts) for the financial and works management of LIG 2 as well as oversight and mentoring responsibility for districts. Type 3 Grants will provide very small discretionary funds (on the order of $20,000 per annum) to District Administrations for direct contracting for micro-projects. Component 3.Capacity Building- This component aims to strengthenthe training system to increase the capacity o f local administration officials to undertake key local government functions more effectively. Capacity buildingactivities for key provincial anddistrict officials would be providedbased on the identified roles and responsibilities of civil servants at each level, and are likely to include training inbasic public administration, planning and budgetingand selected technical subjects. The type of training purchased will include both supply-drivenand demand-driven content. Component 4. Policy Reform. This component would consist of technical assistanceto the GOM to improve decision-making through policy analysis and for the further development of the institutional and policy framework for decentralization. Component 5. Project Coordination. This component would consist o f a small core team of project coordination staff at central and provincial level who would fulfill some World Bank-specific fiduciary functions and provide technical assistanceto the government officials responsible for project implementation and GOM fiduciary functions. 2. Key policy and institutionalreforms supportedby the project: Duringproject preparation, an extended dialoguebetweenthe GOM andthe IDA has takenplace, linkedto broader discussions concerning reform o frural administration, fiscal and governance systems organized under the UNDP-convened "Informal Donor Working Group on Decentralization." As a result o f these discussions a medium-term reform agendahas beenagreedwith the relevant ministries,MPF and MAE, including the following elements: 0 Legal framework for district planning 0 Enabling legislation for district administration organization (OLE legislation and regulations) - 9 -  0 Formal legitimation of district consultative councils 0 Define and publishoperational rules and procedures for district finance (revenues and expenditures) 0 Budget allocation established for district infrastructure O&M 0 Define framework for increased district retained revenues 0 % Increase o fpublic investmentbudgetallocated for planning and management at provincial level The IDA Grant financed DPFP project, jointly with projects supported by UNCDF andUNDP as well as support from other donors, will assist MPF and MAE inpursuingthe National DPFP and this reform agenda duringthe period 2003-2007. 3. Benefitsandtarget population: The target group of the project i s the population of the forty-nine districts inMozambique's four central provinces, estimated to be over 7 million. Most of this population i s very poor; the region has the highest poverty incidence inMozambique ranging from 62.5 percent inManica to as high as 87.92 percent in Sofala Province. It i s anticipated that by inducing greater dynamism and capacity within district administrations, they will better collaborate with other actors to face the challenges of combating poverty and promoting economic growth at the local level. The project's principal impact will be inthe form o f institutional benefits at the central, provincial and district levels. Inthe short-term, improved resource management, performance and accountability by deconcentrated state administration at district level can be expected. Inthe medium-term, shouldthe GOM adopt a more comprehensive decentralization policy, the DPFP will provide further benefits by significantly improving the conditions for implementingfiscal reforms, participatory governance, and devolved service management by new rural local governments. The DPFP will support social development by strengthening the capacities o f rural communities to participate effectively inlocal governance and development management. The project will also provide material benefits to the rural poor inthe form o f improved access to public infrastructure and services inor near their communities. As a result of the project's intervention, members of rural households with a special emphasis on women and frequently marginalized segments o f the population will benefit from more effective, more responsive and more accountable district administration and thus to improvedperformanceby this administration as an institution o f governance and as a promoter of local social and economic development. The private sector will also benefit from implementation of small investment works planned under thisproject by increasing the capacity of civil construction contractors, private works inspectors and community based artisans. - 1 0 -  4. Institutionaland implementation arrangements: The IDA Grant financed DPFP project, whose overall project implementationperiod is four and one-half years, has been formulated as a contribution alongside that of the UNCDF to the development o f a National Decentralized Planning and Finance Programunder policies defined in the PRSP/PARPA and Public Sector Reform Strategy. At present, the emergingNational Program i s focused on the definition of a DPFP strategy and on elements of a common methodological framework which are beinggradually developed, field tested and approved as guidance to field implementation. This Program i s beingfinanced andmanagedthrough a series of projects, o f which the IDA financed project i s to be the largest. The project both contributes to the continuing development of the National Program incollaboration with UNCDF as well as to implementationo f its elements inthe provinces and districts o f the central region. As such, its organizational arrangements include elements linkedto each o f these levels of intervention. The institutional arrangements include: (i)AttheCentralGovernmentlevel,theMinistryofPlanningandFinancewillbethe implementingagency. Within the MPF, the NationalDirectorate for Planning and the Budget (DNPO/MPF) will have the line responsibility for the DPFP. Inter-ministerial coordination related to policy, strategic and operational questions will be assured by a DPFP National Steering Committee (Comitk de Supervisiio or CS)comprisedo f National Directors from MPF, the Ministryof StateAdministration (MAE),the Ministry ofAgriculture andRural development (MADER) and the Ministry of Public Works andHousing(MOPH). The CS will be supportedby a Technical Group whose members, drawn from the same four ministries, will provide substantive inputonpolicy andmethodologicalissues germane to their respective directorates. A Project ImplementationManual (PIM) will be developed by MPF and approved by IDA in order to provide clear guidance to provincial and district implementers regarding project objectives, norms, procedures and methodologies. The manual will also define lines of accountability and reporting, criteria for access to project provided resources, systems for supervision, procurement control management and the monitoring and evaluation of local level implementation. Inorder to ensure readiness for implementation, key elements to be included in the POM have been field tested through the UNCDF pilot project, through similar systems employed by the Municipal Development Project, and through pilot subprojects financed under a PPF. (ii)Ineachofthefourparticipatingprovinces,theProvincialDirectorsofPlanningandFinance will be responsible for project implementation and resource management relatedto field operations and will have fiduciary responsibility for the management of Local Investment Grant funds. The Provincial Government and Governor will guide and supervise implementationin light o f the government's program andthe provincial development strategy, and will assure adequate linkage and accountability betweenProvincial Directorates and DistrictAdministrations. A Provincial Steering Committee will ensure intersectoral coordinationand the mobilization of technical staff from relevant Provincial Directorates to undertake support and supervision functions at district level. (iii)DistrictAdministrationsunderthedirectionof DistrictAdministrators(DAs)willbethekey -11 -  operational implementersof DPFP supported activities. The administrators will be responsible for resource use and subproject management at the district level. District Technical (Planning) Teams including staff from various directorates will be created and trained ineach district to assist the DAs inthe preparationof strategic and operational investment plans. With project support, district staffing will be strengthenedby the placement and training of new personnel-District Accountants and District Works Technicians-to assume the increased responsibilitiesrequiredto co-manage with the DPPF and DPOPHprocurement, disbursement and supervisiono f LIG2 (socio-economic infrastructure) investments, and directly manage procurement, disbursement and supervision o f LIG3 (community infrastructure) micro-works. (iv) Finally District Consultative Councils andLocal fora will be organized and strengthened with project support to provide institutionalized venues for systematic participationby community and other civil society representatives inplanning and investment budgeting and in oversight/accountability regarding resource use and planimplementation. (v) Project Coordination. At central level, a Coordination and Support Unit (UCA) will be established inthe DNPO and staffed with contract personnel to provide operational support to central ministries and provinces; to undertake central level resource management, procurement, project procurement oversight and reporting functions; and to assure adequate liaison regarding both programmatic and administrative matters between the GOM and the IDA. At the Provincial level, a small Provincial Project Unit (UPP) staffed by a Provincial Coordinator, a Project Accountant and Accounting Supervisor (who will monitor and support government accountants at provincial and district level) a Provincial Works and Procurement Advisor, and a Monitoring Technician support will be provided by contracted technical assistance providers inthree areas: Support for Planning and Community Participation, Management Quality Assurance, and Support for Planning and Management of Training. (vi) Financial Management. The principal objective o fthe project's financial management system (FMS)will be to support management intheir deployment oflimitedresources with the purpose o f ensuring economy, efficiency and effectiveness inthe delivery of outputs requiredto achieve desired outcomes, that will serve the needs o f the people o f Mozambique. Specifically, the FMS must be capable of producing timely, understandable, relevant and reliable financial information that will enable management to plan, implement, monitor and appraise the project's overall progress towards the achievement of its objectives. Relevantly qualified, experienced and independent auditors will be appointed on approvedterms o f reference. The external audit will cover all World Bank and counterpart funds at all levels of project execution. The chart inAnnex 6 B illustrates the proposedbanking and funds flow arrangements. D. Project Rationale 1, Project alternatives considered and reasons for rejection: Four main alternative project designs were considered. The first was a social fund or rural investment fund: This was not adopted because it involves creating a separate, vertically -12-  integrated structure for selecting and implementing infrastructure sub-projects. Such an approach would have some short-term benefits, but it would not develop long-term institutional capacity in the public sector. Also, giventhe effort that has gone into the establishment o f sectoral policies and local implementingarrangements and the scarcity of technical personnel inMozambique, a new, separate structure would be duplicative and wasteful. The secondwas direct financial support to local authorities via the state budget (such as the DDGinZimbabwe): Such a mechanism would be appropriate ifMozambique had already devolved a certain degree o f authority and fiscal autonomy to Provinces and Districts and the government were committed to a substantive, clearly articulated governmental and fiscal decentralization program for these sub-national levels. The third was to continue supporting separate sectoral programs, abstain from supporting a multi-sectoral approach to decentralized development, and leave rural infrastructure to be provided by separate sectoral ministries. Sector programs can have economies o f scale and allow for the easy integration of capital investment with complementary institutional improvements. However, this approach lacks the element of local choice andprioritisation among various sectoral investments, which i s an essential part of demand-responsiveness. It misses the opportunity to beginbuildingthis multi-sectoral element of "allocative efficiency" at the local level. The fourth was an area development project. This approach would be inthe tradition o f the integratedrural development projects o f the 1970s. These types o f projects proved to be too complex to implement, necessitating high-level coordinationbeyondthe capacity o f central or evenregional level administrations. Inaddition, the investment priorities which they identified often didnot reflect the actual needs of communities, resulting ina sub-optimal use o f the facilities. It was stated at the start of Section C.1that this project would be considered the first stage o f a long-term program. The question o f whether to make this operation an APG (Adaptable Program Grant) was raised. It i s understoodthat APGs are recommended where a well-established strategy and implementation mechanismexist. Inthis case the strategy i s emerging, and the implementation mechanisms are new and untested. Thus, due to the level o f uncertainty, an APG was not considered advisable. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-finance projects only) Implementation Development Bank-financed Progress(IP) Objective(DO) Pilot experienceswith participatory <malRehabilitationProject S S planningand decentralizedsmall works closed) managementinSofala andZambezia Provinces Pilotmunicipal grant system for local dunicipal DevelopmentProject S S investmentplanning, financingand management 1 Capacity Buildingfor municipal - 13-  officials and staff Decentralization policy and regulatory development for municipalites Reengineering, restructuring and 'ublic Sector Reform Project decentralization to improve public services by movingthe point of delivery closer to the intended beneficiary Increasedtransparency and accountability inpublic management Decentralization o frural water supply Iozambique National Water provision through reform and capacity )evelopment IProject building Community participation and beneficiary responsibility through demand driven approach to water supply provision Decentralized management o f the .ducation Sector Strategic delivery process rogram Project (ESSP) Greater role for commutities indecision making process inthe schools Increased community roles inplanning and implementation of school construction with more sustainable construction technology Decentralized maintenance oftertiary lozambique - Roads and andnon-classified roads 'ridges Management and laintenance Program Project Increased district responsibility and 'hase I) andRural Travel and community participaticion in ransport Program (RTTP) non-classified roadmaintenance and spot improvements Adoption o f strategic spatial oastal and Marine development plans by national, iodiversity Management provincial and district authorities in roject pilot areas 3ther development agencies Decentralized PlanningandFinance N C D F Project inNampula and Cab0 Delgado - 1 4 -  Provinces and central level support for MPF and M O P H (see annex 7) Public Administration Training Project JNDP (SIFAP) to develop training system, curricula and trainers Support for Local Administration Reform Project to support implementation of OLE law, restructure MAEto better support decentralization, and monitor community authorities decree implementation Support for Decentralized Planning Project (closed, proposednext phase currently unfunded) PARPA Monitoring Project will develop capacity inprovincial government to monitor implementation and impacts o f PARPA inrural districts Co-financing o f UNCDF DPFP Project iovemment o f the Jetherlands (Nampula focus) FundingofNGOProjects for Civil Society Strengthening linked to DPFP inNampula(SNV andConcern) Co-financing of UNCDF DPFPProject iovemment o f Norway (Cab0 Delgado focus) Co-financing o fUNDP projects (see above) Support for Municipal Development lwiss Cooperation Project (PADEM) focusing on smaller municipalities innorthern region Program Support for Local Governance Improvement Co-financing of UNCDF DPFP Project District focused capacity building iTZ project inManica Province (PROCIPP) - 15-  District focused rural development project inSofala Province (PRODER) Decentralized Planning Project (DESOPOL) inInhambane Province (introducing district planningas of 2003 Decentralization and Democratisation Project (PDD) focusing on smaller municipalities in central and southern region 'rovincial Support Program for Niassa JIDA (Government of Sweden) %evince (PROANI) planning to ntroduce DPFP methodologies in2004 w l IrishAid) 'rovincial Support Program for Niassa IrishAid 'rovince to introduce DPFP nethodologies in2004 (w/ SIDA) 'rovincial Support Programfor nhambaneProvince supporting district Ilanningas o f 2003 (w/ GTZ project) 20-financing ofUNDP projects (see Ibove) '/DO Ratings: HS (Highly Satisfactory), S Satisfactory),U (Unsatisfactory), hu (Highly Unsatis 3. Lessonslearned and reflected in the project design: The key design features of the DPFP have been developed to reflect best practice inthree basic areas. The first area was to incorporate the findings o f the report on Participation, Transparency, and Downward Accountability in Mozambique prepared by an international expert in2002. The purpose o f that report was to provide diagnostic elements to assist inthe design o f the participationand downward accountability component o f the project. The report's findings as to what may be required for better delivery o f services from the perspective o f the poor communities were incorporated inthe participatory planning and the local investment grant components. This report provided the basis for defining the participatory approach to the project drawing on the best practices that were identified inMozambique and Uganda. To date, most government projects have tended to be "top-down". As a result, such projects have been regarded as "external", lacking beneficiary support, commitment, and ownership and, therefore, have not been sustainable. Inthis context, the lessons learned from these previous activities and from the referenced report include: - 16-  (i)Lackofcommunityconsultationresultinginadversepublicreaction; (ii) ofownershipduetoinadequateinvolvementoftheclientinthedecisionmakingprocess; Lack (iii)Unsustainable investments due to inadequate attention to operations and maintenance; and (iv) Inadequate capacity ofthe client to effectively manage investments contracts. The second key design feature of the DPFP was based on the experience of other Bank and donor supportedprojects designedto support decentralization and to strengthen the capacity of local governments to provide improved service delivery. Inthis regard, emphasis was given to reviewingthe results inMozambique from the MunicipalDevelopmentProject (MDP) and the UNCDF supported Decentralized Planning and Finance Project inNampula, inUganda from the Local Government Development Project (LGDP), and inKenya from the Local Government Reform Program. The basic lesson learned from these projects is that the integration o f the key components of these projects (support for the decentralizationprocess; local development grants; local capacity building; and support to project implementation) are effective and result inboth developingthe capacity of the local governments to manage and plan for the delivery o f sustainable services and providing demand driveninfrastructure which provides highvalue services to the communities. From these projects it i s also clear that progress toward decentralization i s greatly affected by the performance and capacity of the local governments. These projects also clearly demonstrate that the difficulties associatedwith the implementation of projects at the local level requires effective and experienced project management. These projects need clear and well definedProject Development Objectives with corresponding Key Performance Indicators and systems for monitoring and evaluation to effectively monitor and control the progress o f the project toward achieving its objectives. The management unit must be staffed with specialists with experience with World Bank procurement guidelines and budgeting and disbursement requirements to bothmeet the requirements of the Bankbut to also be able to provide the pro-active support neededto effectively implement the project at the local level. Finally, the key consultancies designedto support the Learning By Doing provided by the grant mechanism must be on the ground prior to the start o f the grant component otherwise the effective integration o f the components i s far more difficult. The third key design feature was that community-driven development may be supported through single-sector or multi-sector instruments.Both single-sector and multi-sector approaches to CDD have advantages, serving different objectives indifferent circumstances. Multi-sector programs have the potential to offer greater choice to communities and thus to enhance demand responsiveness and local ownership. A review o f the experience o f the Nicaragua Rural Municipalities Project among others indicates that developing institutions at boththe local and national levels are essential to the sustainability o f the whole system of intergovernmental relations, and that effective monitoring and evaluation i s more crucial and problematic in decentralized implementation than inother approaches. Local level participation i s necessary but not sufficient to guarantee sub-project sustainability. The central government needs to be pro-active inmonitoring and supervision, and must also provide technical assistance and support functions. The projects also benefit from the central government providinga differentiated system of incentives andpenalties to local governments. Technical capacity will also vary significantly betweenmunicipalities. Such differences cannot be addressedusingcarbon-copy mechanisms. - 17-  The central government needs to identify and differentiate mechanisms for local administrations with a wide range of capacities. 4. Indications of recipient commitmentand ownership As discussedabove (see" Government Strategy") the GOM inits PARPNPRSP has defined participatory district planningas the cornerstone o f its approach to improving rural governance and a key contribution to accelerating poverty alleviation inrural communities. The Cabinet level decision to adopt the Nampula pilot as the basis for a national approach to DecentralizedPlanning and Finance led directly to MPF's request that the IDA develop its next rural support project in line with this approach. The definition of the National DPFP Strategy and the gradual development of elements of an associatedmethodological framework as well as the increasing prominence o f the DPFP National SteeringCommittee further reflect this commitment. The recently approved Local Administration Reform (OLE) legislation as well as already implemented Community Authority decrees are broader indications of an increasing focus on the responsibility and nature o f district administration. Plans to provide guidelines for the organization and operation o f District Consultative Councils and Local Councils/Fora represent the next steps along these lines. Furthermore, decentralizatioddeconcentration of service delivery systems constitutes a key objective Public Sector Reform, as does capacity buildingand staff strengthening at local levels. Commitment inthe project context to staff District Accountant and District Works Technicians posts is a specific instance o fplans to put these intentions into practice. While fiscal policy remains constrained by large allocations of investment funds to centrally-organized sector investment programs, MPF has unambiguously expressed its desire to increase the share of resources which are programmed and managed at provincial, and eventually at district, levels irrespective of their attribution to territorial or sectoral budgets. Medium-term plans to operationalize the district as a budget unit and to beginto strengthen the district's revenue base also evidence commitment to move toward an institutional framework. 5. Value added of Bank support inthis project: The Bank bringsconsiderable experience inthe areas of fiscal and administrative decentralization as well as extensive experience and knowledge inworking with communities inparticipatory planning processes. Particularly relevant i s the experience inUganda, Zimbabwe, South Africa, Kenya and Mozambique litself. The Bank also has relevant experience from a variety of social funds inthe region, such as those inZambia and Malawi. The Bank has an advantage inbridging across sector ministriesand working in coordination with other donors, as well as the ability to mobilize sufficient funding to expandpilot programs and to undertake longer-term programs, The Bank is currently working inMozambique inthe areas o fpublic sector reform, rural development, municipal development, among others, providing opportunities for synergy in support of the Government's broader deconcentration efforts and decentralization agenda. - 18-  E. Summary Project Analysis (Detailedassessments are inthe project file, see Annex 8) 1. Economic (see Annex 4): 0 Costbenefit NPV=US$million;ERR= % (see Annex 4) 0 Costeffectiveness Other (specify) The Local Investment Grants form approximately 50% of the total grant and are expected to deliver short-term economic benefits under the DPFP. These are intendedas the primary instrument for increasing local administration capacity to accountably plan for and implement small infrastructure investments at the district level, through the development of annual plans that fit within the framework of a DDP. As aresult ofthe demand-basednature of LIG-financed plans and projects, the specific composition of the DPFP investments cannot be determined a priori. Thejustification of the DPFP rests on demonstrating the following two hypotheses: (i) the that DPFP processes that are put inplace are functional and sustainable and (ii) that the DPFP investments planned and implemented following the processes do achieve the desired output. Inrespect of (i), DPFP intends to use the existingGOM systemsandprocedures for provincial the and district management o f small infrastructure investments. However, it will provide the necessaryinstruments and training to ensure their effective and efficient implementation. Most sectors (including health, education, roads and water) have definedstandards and procedures and DPFP will ensure the least cost selection of bids that meet these standards, givenlocally available capacity andtechnology. This "mainstreaming" approach will reduce complexity andenhance sustainability. Hypothesis (ii) on the assumption that the decentralized planning and financing framework rests for local investmentsleads to the identification, selection and prioritization of economically and socially viable investments. However, this requires fiscal and administrative decentralization along with enhanced downward accountability. By ensuring that administrative reform and capacity buildingefforts are complemented by additional financial resources available through the LIGs, learning-by-doing should result inmore effective deconcentration o f planning and management. By strengthening downward accountability through the participatory planning and accountable implementation component, demand driven processes should ensure that project financed investments respond to local needs and priorities. Under these circumstances, evidence suggests that small-scale projects involvinglimited investments ininfrastructure generally have highrates o f return (see Annex 4). However, it must be emphasized that the objective o fthe DPFP at this stage is one o f capacity-building, with service delivery a secondary objective. GivenMozambique's scale and diversity, it i s critical that local administrations buildthe capacity to deliver services inan efficient and effective manner if PARPA goals are ever to be reached. As key officials have expressed, "PARPA i s the what, DPFP i s the how". Inmakingresourcesavailable, alongwith support for learning-by-doing and additionaltraining and policy reform, the DPFP will support districts to rigorously plan investments with their communities, develop skills to turnthese plans into contracts and to manage these investment - 19-  projects more effectively than before. These efforts will result inmore efficiently designed and managed sub-projects by the local administrations, in addition to a greater overall quantity and quality o f public infrastructure facilities available to improve basic services to the rural population. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million;FRR = % (see Annex 4) The resource envelope defined for the program appears to be realistic both when looking at the capacity to generate revenues and interms o f the absorption capacity Fiscal Impact: Overall, the fiscal impact o f DPFP i s very small relative to the government budget. Annually, DPFP disbursements represent about 0.02 % o f the central government current revenue and even a smaller part o f its total expenditure. According to the Public Expenditure Management Review 2001, at present there does not appear to be a risk o f budget deficits at either the district or municipal levels. However, further improvements inthe quality and quantity o f service delivery at the district and municipal level will be constrained by available own source revenues as well as central government transfers. The size o f the DPFP is, therefore, not expected to change this picture o f local budget deficit risks but it should support the improvement inservice delivery at a local level due to increased availability o f resources through the LIGs. Within the project's lifetime, it i s expected that significant policy decisions must be made regarding changes to the deconcentrated budget management system including the operationalization o f districts as a budget entity and increased discretionary transfers to both provincial and district capital budgets. The project will also seek to support nascent efforts to improve own-source revenue bases and collection efficiencies. However, given the weak fiscal base inmany rural districts, it i s not expected that significant proportions o f district budgets will be funded with own revenues for the foreseeable future. Emphasis will continue to be on expenditure management but revenue-raising incentives and programs will be includedunder the LIG, capacity-building and policy reform components. 3. Technical: The choice o f technology will be governed by the standard project designs being prepared under the DPFP, emphasizing simple construction technologies usingmaterials and equipment available inlocalmarkets and relying ontechniques commonly employedinruralareas. Some ofthese have already been tested under the MDP. These designs will be consistent with the level o f the available budget envelope and the ability of the provinces to meet the requirements for operation and maintenance (O&M) costs. The project will make use of, and inmany areas improve, the government's existing systems for works planning,procurement and management. Standardized guidelines and planning manuals will also ensure that DPFP financed investments conform to the policies and technical standards o f each sector. District level systems for "micro-project" planning and management will be developedbased on regional CDD models, emphasizing local accountability, community-based execution and the use - 20 -  of local artisans. There will also be District Works Technicians recruited and trained as new staff members of District Administrations with operational responsibility for assisting the District Planning Team andthe District Accountant inthe planning and implementing of LIG3 funded community infrastructure sub-projects and insupporting maintenance of local public infrastructure inthe districts Local contracting industry capacity is limitedinMozambique, but the project intends to build capacity inthe industry intwo ways. First,the establishment o f the LIGs and associatedfinancial and works management capacity buildingwill provide increased demand and greater certainty and transparency inthe tendering and contract management by local administrations, includingmore timely andreliable payments to contractors. Second, the DPFP will also provide modest capacity buildingassistanceto small private construction firms and private works inspectors basedinthe provinces and to community-basedartisans to ensure that they are able to fulfill their role in project execution. There is, therefore, a fairly sound base for the enhancement of technical capacities duringthe implementation of DPFP. 4. Institutional: The MPF has overall responsibility for the project through its Planning andBudget Department. Its Provincial Directorates of Planning and Finance (DPPF) would take primary responsibility for all project financial flows, procurement reporting from provincial level, as well as direct responsibility for the Planning and Investment Grants components. Technical support will be provided by the Provincial Directorates o f Public Works and Rural Development. The capacity buildingcomponent will involve the Ministryof StateAdministration's Provincial Directorates of Support and Supervisioninplanning and programming. At district level, the Administrator, while formally part o f the Ministry o f State Administration system, responds to the DPPF for planning, budgeting, disbursement, procurement of small works and accountingmatters. The relevant Directorates o f Public works and rural development play important technical roles but will not be resource managers or have executive responsibility. These responsibilitieslie with the MPF/DNPO, the DPPF and the District Administrations. 4.1 Executingagencies: The Ministryo fPlan and Finance (MPF) will be the executing ministry for DPFP. Eacho f the four Provincial Directorates of Planning and Finance will be responsible for the implementation of the DPFP within its respective province. 4.2 Projectmanagement: MPF will be responsible for managing and coordinating the activities for the project. A Project Coordination Unit (UCA) will support the MPF inthe management and coordination of the various program activities. The U C A will prepare project work plans, budgets, reports and other documents, will maintain liaison with all provincial governments and coordinators, will disburse funds from the special account andreview fund accountability, organize and oversee quarterly review meetings, procure equipment and services, monitor and evaluate the impact of the activities and the project KF'Is, contracting and supervision o f consultancy assignments and the preparation of reports detailing consultancy findings. The U C A will also have the overall - 21 -  responsibility for the procurement which will be largely done on a decentralized basis. 4.3 Procurementissues: Since most of the procurement inthis project will be conducted without prior review by theBank, and as much of it will also be done by the provinces andthe districts who have very limited exposure to such procurement, the procurement risk for the project i s ratedhigh. Further,while the UCA has some procurement experience, its capacity needs to be enhancedby employing senior procurement staff with the capability to organize the overall system of decentralized procurement, to monitor its operation, to guide the development of the procurement activities and to develop the capacities of the widely spread-out procurement staff inthe provinces and the districts. Plans and funds have also beenincludedinthe project for capacity buildingand for periodic procurement audits. The procurement activities at the three levels will be fulfilled as follows: (i) the central level, at the UCA will have full-time senior procurement specialists with responsibilities for processing transactions as well as developing the capacity of the procurement staff at the provincial and district levels; (ii) eachprovince will have a Provincial Works and Procurement Advisor postedto the Public BuildingsDepartment of the Provincial Directorate o f Public Works and Housing. The Public BuildingsDepartment staff, supported by the Advisor and overseen by the Project Procurement Specialists based inthe UCA, will undertake all procurement for LIG financed subprojects managed at provincial level; and (iii) each eligible district will have a District Accountant and a District Works Technician as part of local administration staff who will be responsible for procurement for small value procurement (below $5,000). These staff will be supported by the Public BuildingsDepartment and Advisor at provincial level to ensure compliance with procurement procedures. Training will be provided on a regular basis to district based procurement staff on the simplifiedprocedures which will be employed as mentioned earlier. Procurement under the project shall be guidedby the IDA procurement guidelines (at central level and for non-LIG goods and services) andby IDA approved G O M procedures for the Local InvestmentGrants at provincial and local level. 4.4 Financialmanagementissues: The assessment of the financial management arrangements o fthe project includeda review o fthe systems o f accounting, reporting, auditing, flow o f funds and internal controls. The implementing agents' arrangements are acceptable ifthey are considered capable o f recording correctly all transactions and balances, supportingthe preparation o f regular and reliable financial statements, safeguarding assets, and are subject to auditing arrangements acceptable to the Bank. For the project to fully deliver on its objectives, a FMS will be developed inaccordance with the Financial Management Assessment Report presented inAnnex 6B. Inspite of weaknesses in systems, the project will needto adopt systems that are not incompatible with those o f GOM. This i s inpart due to the capacity-building objectives o f the project, which envisages strengthening the capacity of local governments to plan, execute, report on, and maintain local investments, under government systems. Therefore, the accounting system will use government procedures as they exist on paper, while insistingon proper application o f those procedures. - 22 -  Inorder to achieve this, intensive training, inspection, andoversight ofthe system will berequired to ensure compliance. Project management will also carefully study what additional procedures will needto be adopted by the implementing agents to ensure complete and accurate recording and reporting. The overall conclusion of the financial management assessment is that inorder to establish an acceptable control environment and to mitigate financial management risk, measures, as outlined inthe FinancialManagement Action Plancontained inAnnex 6B, should betaken. DisbursementArrangements and Flow of funds World Bank grants in Mozambique are generally controlled through separatebank accounts [Special Accounts (SA)] managed by a Project Coordination Unit (UCA). Normally, inW B grant management inMozambique, the GOM agrees to open a separate Project Account (PA) where counterparty funds are deposited inagreed amounts and managed by the U C A to fulfill counterpart financing requirements. This project will adopt the SA and PA structure. Provincial implementingagents will manage provincial-level Second Generation Special Accounts (SGSAs), and Project Accounts for government funds. The DPPF will be a grantee and receive grant disbursements from the SA to a separate grants account. This account will receive only Grant funds, which are 100% grant financed, and will be managedby a government accountant, reporting to the DPFP, who will be supervised as well by the Project's Supervisory Accountant at the Provincial level. Second Generation Special Accounts will receive advances from the Special Account at the beginningof the year on submission of approved plans, and thereafter will receive replenishments of eligible expenditures to continue to finance approved activities. Districts will open accounts to receive grant disbursements. Each district will maintain two accounts, one for larger works contracts, which will be managed as a zero-balance account, only receiving transfers when invoices are presented for payment. The second will be managed on an imprestbasis, receiving an initial advance, andthen replenishment onpresentation of adequate justifications of eligible expenditures. The chart inAnnex 6B illustratesthe proposedbanking and funds flow arrangements. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues andtheir treatment emerging from this analysis. The GOM's Framework Environmental Law (Law No. 20/97 o f 7 October) and EIA Regulations (Decree No. 76/98 o f 29 December) and the Bank's Operational Policies 4.01 require the preparation of an Environmental Assessment (EA) report which assesses potential environmental and social impacts o f public investments. The EA Report prepared for the DPFP was publicly disclosed duringMay 15, 2003 by the Government o f Mozambique and the World Bank as part of preparationfor the appraisal o f the project. The EA establishes the screening process or mechanism for DPFP funded subprojects which enable local administrations to identify - 23 -  potential environmental and social impacts of subprojects and to address them by incorporating the relevant mitigationmeasuresinto their designs when necessary. The EA Report also assesses the capacity at the provincial and district level to implement the proposed screening process and mitigation measures, including the provision of support to communities incases of community managed subprojects, and makes recommendations as appropriate, including training needs and costs. The EA indicates the institutionalarrangements for the environmental and social management o f future subprojects, includingmonitoring indicators, activities and costs to be budgettedinto subprojects applications and approvals. The investments under the LIG component fall under various sectors such as water supply, drainage, sanitation, solid waste management, access roads, construction o f schools and health facilities. Due to the diversenature of the investments and districts themselves, the scope of the environmental analysis for each investment would also vary. Provisions for the environmental and social preparation, review, approval and implementation of subprojects prescribedinthe EA and RPF, including traning, will be included inthe Project ImplementationPlan. 5.2 What are the main features o f the EMP and are they adequate? The Environmental Management Plan (EMP) is prepared as part o f the Environmental Assessment and consists o f a set of mitigation, monitoring and institutional measures to be taken duringimplementation and operation ofthe subprojects to eliminate adverse environmentaland social impacts, offset or reduce them to acceptable levels. The main features of the EMP are: (i) mitigation plans which describe the technical details o f each mitigation measure, together with designs, equipment descriptions and operation procedures as appropriate; and (ii) monitoring objectives that would specify the type of monitoring activities that will be linkedto the mitigation measures. The EMP would also provide specific descriptions o f institutional arrangements. In addition, the EMP would include an estimate of the costs o f the measures and activities recommended so that the local administration can budget the necessary funds. The mitigation and monitoring measures recommended inthe EMP were developed inconsultation with all affected groups to include their concerns and views inthe design o f the EMP. See sections 7,8, and 9 of the EA for a more complete description of the framework EMP, the subproject EMPs, monitoring, andtraining and capacity buildingto implementthe EMPs. 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: This is a category Bproject. An EA has beenprepared and disclosed on May 15,2003. 5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted? An environmentalscreening form has beenprepared specifically for the DPFP and i s includedin the EnvironmentalAssessment Report. Environmental screening will take place duringthe subproject planning process, and issues and concerns relatedto potentially adverse subproject impacts will be captured inthe screening process. The EA Report has been reviewedby the Ministry for the Coordination o f EnvironmentalAffairs (MICOA) inMozambique and a public - 24 -  announcement has beenmade inorder for interested and affectedparties to consult the Report, which i s available for consultation at MICOA as well as MPF. Environmental screening o f subprojects would be conducted by the local administrations with the assistance o f their District Planning Teams (DPT) to ensure that they carry-out the appropriate EA for each subproject, Before approving a subproject, the DPT verifies that the subprojects meet the environmental and social requirements of the national and local governments and are consistent with the overall DPFP EA and other applicable environmental and social policies and safeguards of the World Bank. They must also ensure that any legally requiredEA report has beenprepared and approved by the District Administration and ConsultativeCouncil before the subproject i s approved for funding. Public consultations will be heldwith the local communities and all other interested/affected parties. These consultations will identify key issues and determine how the concerns of all parties will be addressed inthe terms o f reference of the EA. To facilitate meaningfulconsultations, the local administrations would provide all relevant material and information concerning the subprojects ina timely manner prior to the consultation, ina form and language that are understandable andaccessibleto the groups beingconsulted 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Modular sector specific environmental checklists have beenprepared for the project and these checklists will be usedto determine that the investments conform to environmentally appropriate guidelinesand that they incorporate the mitigation measuresdefinedtherein.Local administrations will be required to apply the environmental checklists for appraising their investments and comply with the mitigation measures contained therein. Inaddition to the RPF, an individual Resettlement Plan (RP) will be prepared duringproject implementation for cases where obligatory landacquisition turns out to be necessary. To determine the depth o f the EA required, potential impacts inthe following areas needto be considered: (i) issues; (ii) social health issues; (iii) protected areas; (iv) cultural heritage, archaeological sites; (v) existing natural resources such as forests, soils, wetlands, water resources; and (vi) wildlife or endangered species' habitats. Monitoringand evaluation guidelines will be developed to provide for clear and functional environmental and social monitoring and evaluationroles and responsibilities, and to provide monitoring indicators inorder to measure the success of the mitigation measures. Responsibilities for Monitoring and Evaluation of the Mitigation Measures would be assigned to the UCA inMPF. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The development objective of the project is improved district administration institutional performance to plan and manage small infrastructure investments inresponse to community demand. The key social issue i s to ensure that planning and planimplementation promote the institutionalisation of participation, especially o f frequently marginalized groups such as women and the absolutely poor, inlocal decision-making. The project's planned social development outcomes o f greater empowerment and social inclusion, will be furtheredinsofar as investments are identified,prioritised and funded by district administrations ina participatory, transparent and accountable manner. Performance assessment criteria for districts will include the quality of - 25 -  community participation inplan formulation and implementation. While not a direct objective of the DPFP, improved access to basic public services and infrastructure resulting from the use of project financed Local Investment Grants will also provide significant social and economic benefits to the rural and most poor population inparticipating districts. 6.2 Participatory Approach: How are key stakeholders participating inthe project? The DPFP will promote increasedparticipationand downward accountability inthe district planningprocess as well as inplan implementation. The planning approach piloted by UNCDF on which the project strategy i s based engages communities inthe district planning process both through participatory rural appraisal and through representation inlocal consultative councils. The DPFP will buildupon this experience inseveral critical respects: first, government guidelines beingdeveloped with project support will structure consultationand representation inDCCs to institutionalise dialogue and accountability between local officials and civil society inrural districts; second, local NGOs and civil society actors will participate as facilitators for community organizations and capacity buildingefforts for community leaders and grassroots institutions; finally, based on CDD best practices adapted to local conditions the project will promote district administration-community co-management of LIG3 financed community infrastructure improvement investments, thus movingbeyond planning to strengthen beneficiary participation in project execution. Both district eligibility for access to LIG funds and the annual district performance assessments, which will determine subsequentallocations of LIGs, will employ participation and accountability criteria. The DPFP will also develop partnerships at central, provincial and district levels with NGOs and other civil society actors engagedinparticipatory development and governance improvement initiatives. The DPFP's policy reform component also foresees engaging public sector, civil society and private sector actors inparticipatory diagnoses and consultations regarding furthering decentralization processes and increasingthe transparency and accountability of public sector planning and management at local levels. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Duringproject formulation, both governmental andnon-governmental stakeholders were consulted at central, provincial and district levels regarding both strategic and operational questions related to project design and operational aspects o f engaging communities and local civil society in district planningprocesses. At district level, rural communities and civil society will constitute the membership base for the local fora and District Consultative Councils through which district development plans will be developed, discussed and approved. NGOs working in the districts will participate as facilitators and technical resources for both the planningprocess and insupport of consultative councils. The district planningprocess has as one o f its objectives the development of effective partnerships betweendistrict administrations and development assistance NGOs inresponding to locally defined needs andpriorities. At the provincial level, the DPFP will support Provincial ParticipationNetworks inorder to promote complementary approaches between NGOs and civil society organizations engaged inlocal empowerment activities and the public sector institutions responsible for governance andthe provision o f services inrural areas. 6.4 What institutional arrangements have beenprovidedto ensure the project achieves its social development outcomes? - 26 -  The DPFP planning manuals and communication strategy will be developed with special attention paid to frequently marginalized groups suchas women, the absolute poor, and those not reading or speaking Portuguese. Technical assistanceinparticipatory planningmethods, district based community participation facilitators, and the Provincial ParticipationNetwork will emphasize the inclusion inplanning and consultative processesof these segments of the rural population. Official guidelines for Community Participationand Consultationin District Planning are being developedwith project support and will be approved as the authorizedGOM methodology for organizing dialogue between local administrationand rural communities. These guidelines will ensure both adequate representation and provide guidance for information flow and accountability regarding resources managed, and actions undertaken, by district administration through civil society fora and local consultative councils inthe districts. The District Performance Assessment System, which will link LIG allocation to prior year performance inthe areas of planning, management and participation, will assure that district administrations have bothunambiguous information and specific incentives related to the quantity and quality of participation by community representatives inplanning decisions as well as inholding local official accountable for resource uses and investment outcomes. 6.5 How will the project monitor performanceinterms of socialdevelopment outcomes? The DPFP Monitoring and Evaluation System will collect and present information related to social development outcomes not only to government official and project personnel but also to community and civil society representativesparticipating inconsultative councils. Simple and clear indicators regarding decision-making processes and outcomes will be available at all levels. Specific indicators regarding the quality of participation and accountability include: 0 % o f localities with consultative institutions (fora) functioning 0 % o f districts inwhich participants inplanning processesexpress satisfaction with responsiveness and accountability of district administration 0 % districts effectively implementing communication strategy linkingcommunities to local administration Training will be provided to community representatives, NGOs and civil society members of Provincial Participation Networks and district andprovincial level civil servants relatedto both participatory monitoring of district plan implementationand the monitoring of participatory processes supported by the DPFP. 7. Safeguard Policies: * Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0Yes 0No NaturalHabitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 NO Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) 0Yes 0 No Cultural Property (OPN 11.03) 0Yes 0 No IndigenousPeoples(OD 4.20) 0Yes 0No Involuntary Resettlement(OP/BP 4.12) 0 Yes 0No Safety of Dams (OP 4.37, BP 4.37) 0Yes 0No - 27 -  Projectsin DisputedAreas (OP 7.60, BP 7.60, GP 7.60)' 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguardpolicies. - A Resettlement Policy Framework (RPF) has been preparedunder the project and has been disclosed to the public inM a y 15,2003, both inMozambique and at the World Bank. The RPF establishes the resettlement and compensation principles, organization arrangements and design criteria to be applied to meet the needs o f the people who may be affectedby the project. The RPF i s prepared to the standards o f the Government's own policy on resettlement and compensation and the policy o f the World Bank, OP 4.12. Inaddition to the RPF, an individual Resettlement Plan (RP) will be prepared duringproject implementation for cases where land acquisition turns out to be necessary. The RPF will specify the format for reporting that the land given to the government as a "voluntary donation" by communities i s in fact not at the expense o f any villagers without the clout to decline to donate the land. - An Environment Assessment was prepared for the project and was disclosed on May 15, 2003, both in Mozambique and at the World Bank. F. Sustainability and Risks 1. Sustainability: Sustainability issues for DFPF arise at two levels: (i) sustainability o f the physical infrastructure investments made by local authorities with their receipts from the Local Investment Grants, particularly if local revenues remain extremely low; and (ii) the sustainability o f the DPFP capital and capacity-building transfers as an ongoing element o f the deconcentrated budget management system inMozambique. The former issue was clearly identified during the preparationo f the DPFP - where it was noted that the capacity o f provincial sector departments to plan and allocate revenues for operations and maintenance o f district infrastructure would be a critical element inthe approvals process for LIGs.Government budget review and approval procedures will be applied at provincial level, as they are with SWOP and own-source funded projects, to investment projects requiring recurrent budget coverage (specifically schools and health care units) to ensure that personnel and operating costs are available for their operation and maintenance. As part of the planning process, provincial sector departments are required to indicate the capacity to support these recurrent costs intheir budgets or districts will have to make alternative choices. At the same time it should be noted that a significant percentage o f investments in social service infrastructurewill finance upgrading o f existing sub-standard facilities which are already funded under the province's recurrent budget. Operations andmaintenance will also be promoted through the involvement o f district administrations and district consultative councils inplanning and implementation o f community based infrastructure improvements. Inaddition, districts may choose to raise their own revenues as well as to use LIG3 funds to support repairs to existing facilities, creating an incentive to leverage capital funds. Given the remote and poor nature o f most rural districts inMozambique, - 28 -  however, the potential for short-term significant increases inown revenues are very limited and dependence on transfers will remain high.The capacity buildingand policy reform components of the proposedproject will also support activities at policy, legal and operational levels to improve the regulatory and institutionalenvironment for own-source revenue mobilization by local administrations across the country. Inrespect ofthe level (ii) it is important that DPFPbe seenas contributing to fundamental issues, change processes in the system of deconcentrated state administration inMozambique beyond the life o f the project. Prospects for the sustainability o f institutional changes are good provided that GOM does not reverse its nascent trend towards decentralization. A cardinal feature o f the project i s the use o f government systems for transferring funds through to the districts, using standard government procedures and guidelines for district planning issuedby the GOM. Government staff are the primary implementingagents, and the district planning process at the heart o f the project follows the government's budget system and annual cycle. The introduction of a district budget will institutionalise investmentplanning at this level. Furthermore, the GOM will be financing the recruitment o f a District Works Technician and District Accountant as full-time civil servants for each district, as part of eligibility for participationinthe DPFP, thus providing a sustainable human resource base for local planning and management. Inaddition, the effective development o f proper DDPs and annual plans should provide the basis for leveraging often fragmented and duplicative donor and NGO funds to support gaps and promote synergy in sources and uses o f funds. The GOM has also agreed that by mid-term review, it will present a Letter o f Sector Policy specifying how the administrative, fiscal and governance dimensions of decentralization will proceed duringthe period 2006-2010. This policy i s expected to consolidate existing commitments to increasing deconcentration o f discretionary and sector budgets to provinces and districts and to establishing the district as a budget entity. The passing of the OLE (Local Administration Reform) law i s expected to prepare the ground for the appropriate regulations and operationalising o f broader institutional reforms as part of this process. While the existing policy and regulatory environment remains incomplete and unevenlydeveloped in its support of decentralization, within the MPF, MAE, MADER, MPOPH, as well as among prominent provincial governors and district administrators there i s considerable ownership and support for moving towards sustainable local service delivery with its associatedinstitutional and resource requirements. 2. Critical Risks (reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): Risk I Risk Rating Risk Mitigation Measure From Outputsto Objective The GOMunwilling to further formalize N Drafting of national planning legislation to be district planning system. supported by project and UNCDF partnership. Project provided TA will assist inthe development, piloting and dissemination o f planning manuals. MPF does not continue commitment or Joint reform agenda developed during efforts towards decentralized fiscal formulation based on dialogue between GOM - 29 -  planning and budgeting and multi-donor decentralization group. Project, UNDP/UNCDF and other donor support to development o f fiscal decentralizationpolicies. Links to public sector reform and macro finance andbudget reforms favoring decentralization. MAEand its provincial anddistrict S Support to dissemination o f norms and methods officials do not support and facilitate the approvedby MAE for community consultation District Consultative Councils and Local and participation. Engagement o f local civil CouncilsiFora. society actors inpromotion o f consultative councils and fora. GOM does not recruit and pay district M GOM approval o fpositions a Condition o f accountant or works technician positions Negations. MPF involvement inincreasing provincial budgets to fund staff positions. N o effective collaboration between M GOM approval of clear institutionalroles DPOPH with other sectors among MPF, MAE & MOPH. Project Manual provides guidance to implement these roles. DPPF staff do not manage LIGfunds M Clear manuals, computerized systems and accountably training provided. Full-timeaccounting supervisors ineach province and periodic Management Quality Assurance inspections o f disbursements, accounts and investments. MAE/DPAC coordination and SIFAP M TA to provinces for planningandcoordination training system not effective o f SIFAP training. Demand-based approach permit flexible contracting arrangements and alternative training providers. MPF and MAE do not collaborate on S Project provides support through a single reform mechanism to both ministries for reform. Role o f National Steering Committee inplanning and guidingreform across MPF/MAE ministerial lines. GOMdoes not increase resource S allocation to fiscal decentralization Broad GOM-donor dialogue supports fiscal decentralization. Links between DPFP and macro finance andbudget reforms. Assessment o f decentralization policy and reforms at Mid-Term Review. From Components to Outputs GOMdoes not disburse counterpart funds S DNPOMPF as DPFP lead implementing ina timely manner. agency improves access to budget allocations andtreasury disbursements. -30-  GOMdirectors do not respond effectively M Clear rules inProject Implementation Manual to Management Quality Assurance specify reduced or curtailed resources flows management reports and audits :ontingent on poor management. FMRs and innual reviews permit IDA oversight o f :ompliance. Inherent FinancialManagement Risks: H 4 "ring-fenced" financial management strategy, Corruption and a weakjudiciary combine with dedicated bankaccounts, and Project to create an extremely weak control and Financial Procedures Manuals, will be accountability environment. ieveloped for this project. Commitment to change, including the effective decentralization o f finances and financial management, could be blocked by either lack o f interest or lack o f management capacity to implement that Zhange effectively. Financial Management Control Risks: M The proposed financial management (FM) Illiquidityat all levels delaying project irrangements are properly implemented, the FM implementation through lack o f iction plan satisfactorily addressed inpractice Zounterpart finds. inda separateProject Coordination Unit is set Weak financial management capacity ~pat central andprovincial levels. delaying implementation through faulty mduntimely reporting, or misapplication 3 f resources. Delays inimplementation due to the time md capacity requiredto train staffto an 2dequatelevel to manage a ring-fenced, md decentralized Project structure. 3verall Risk Rating S tisk Rating H (High Risk), S (SubstantialRis , M (Modest Risk), - Negligible or Low Risk) 3. Possible Controversial Aspects: None G. Main Grant Conditions 1. Effectiveness Condition (i)Relevantlyqualifiedext m1audit rsappointedonapprovedtermsofreference; (ii)TheRecipienthasappointedProcurementSpecialistsfortheUCA; (iii) RecipienthasopenedtheProjectAccountsandaninitialdepositofcounterpart The funds equivalent of $100,000 has been made therein; and (iv) The Financial Management System (FMS) has been designed, installed andthe ability to prepare F M R s demonstrated at the central and provincial level: (A) the -31 -  FMShasbeendesignedand installed; (B) qualified and experienced Supervisory Accountants have been appointed to the PPUs/UPPs; and (C) qualified and experienced Project Accountants have been appointed to the PPUsLJPPs (v) Submission of the revisedProject Implementation Manual (vi) The Recipienthaspublishedinits OfficialGazette, inform and substance satisfactory to the Association, the notice of adoption of the Guidelines for Community Participationand ConsultationinDistrict Planning 2. Other [classify according to covenanttypes used in the LegalAgreements.] Conditions o f Board Presentation (i)SubmissionofthefinalLetterofSectorCommitmentdulysignedbytheMinisterof Planning and Finance Other: (i)ManaPementAspectsoftheProiect:GOMshallmaintainstaffingintheUCA, satisfactory to IDA, to ensure the effective implementation of the project. (ii) Monitoring and Evaluation: the UCA will submit quarterly progress reports to IDA. (iii) Mid-TermReview: MPF through its UCA will conduct a mid-termreview of the DPFP inearly 2006. (iv) Implementation: The Government would carry out DPFP inaccordance with the Project Implementation Manual (PIM) and guidelines for the community participation. (v) Counterpart Funding: The Recipient will open and maintain an account (a Project Account) in Mozambique Meticais ina commercial bank on terms and conditions satisfactory to the Association. MPF will include DPFP government counterpart contributions in its annual budget. (vi) Letter of Sector Policy before MidtermReview. Additional Conditions for the participation of Provinces and Districts (i)FMSdesignedandinstalledattheprovinciallevel (ii) Qualified and experienced supervisory accountants appointedto the Project Coordination Units of the provinces to supervise the management of the Grants account at the Provincial Directorates o f Planning andFinance and in the participating districts (iii)Qualified and experienced Project Accountants appointedto the UCA of the provinces to manage the flow o f funds at the provincial level, outside o f the Grants - 32 -  H. Readiness for Implementation 0 1,a) Theengineeringdesigndocumentsforthefirstyear'sactivitiesarecompleteandreadyforthestart of project implementation. IXI 1.b) Not applicable. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation, KI3. The ProjectImplementation Planhasbeenappraisedandfoundtoberealistic andofsatisfactory quality. 04. Thefollowingitemsarelackingandarediscussedunderloanconditions(Section G): 1. Compliance with Bank Policies ixI 1.Thisproject complies withallapplicable Bankpolicies. 0 2.ThefollowingexceptionstoBankpoliciesarerecommendedforapproval. Theprojectcomplieswith all other applicable Bank policies. 6 4d .:.- 44- Lance Morrell Jiime M.Biderman Darius Mans Team Leader Sector ManagerlDirector Country ManagerlDirector - 33 -  Annex 1: Project Design Summary MOZAMBIQUE: Decentralized Planning and Financing Project Data CollectionStrategy Critical Assumetions 3ector-related CAS Goal: 1 Sector Indicators: jectorl country reports: (from Goal to Bank Mission) ~ [mprovedgovernance and 0 Sustained pro-poor social 1.Political and nore responsive service spending macro-economic stability lelivery 0 Greater fiscal decentralization 2. Sustained political and e Improved structure for financial commitment to service delivery poverty reduction and economic growth Droject Development Outcome I Impact Jrojectreports: (from Objective to Goal) 3bjective: Indicators: :mprove the institutional 0 80% o f districts inthe 8 Project Implementation :apacity o f District Provinces supported by the md Monitoring Reports 1. Continued commitment 4dministrations to plan and Project with District 0 Annual District by Government to fiscal and nanage small infrastructure Development Plans and 'erformance Assessment administrative nvestments inresponse to Annual Investment Plans teports decentralization, :ommunity demand. approved Q Mid-Term Evaluation particularly from Ministries o f State Administration and 0 80% o f districts inthe C* Implementation Provinces supportedby the Zompletion Report Planning and Finance. Project with District 2. Continued Government Consultative Councils commitment to community organized and approving participationand district plans and empowerment. implementation reports 3. Sustained political and 0 60% o f districts budgetary commitment to participating inthe Local the provision ofbasic Investment Grants inwhich infrastructure and social participants inplanning services. processes satisfaction with 4. Sustained commitment responsiveness and to and progress o f the accountability o f district public sector reform administration program. 0 50% o f districts participatinginthe Local Investment Grants rated good or excellent on annual District Performance Evaluation assessments 0 60% o f districts at national level adopting MPF and MAEapproved methodologies for participatory district - 34  lanning and governance htput from each butput Indicators: Project reports: irom Outputs to Objective) :omponent: :omponent 1- "ticipatory District Vanning ,1District administrations 80 % districts with , GOMdistrict planning trengthened to formulate 'lamingteams inplace and 0 DistrictPlansand ystem formalized x a l development plans unctioning Reports iithcommunity 80% districts w l LIG 6 Provincial !. MFP continues articipation. h d e d projects based upon 1Implementation and :ommitment and efforts pproved District Plans MonitoringReports 1 *:* oward decentralized fiscal Planningand Particip. )laming and budgeting. TA Reports .2 Civil society 9 ProjectAnnualand 1. MAE and its Provincial mdDistrict officials 180% o f administrative kengthened to participate Mid-TermReports ffectively informulation ;upport and facilitate ndimplementation o flocal 3istrict Consultative evelopment plans. clouncils and Locality Clouncils/Fora. $, Effective articulation and dormationflows among localities, community mthorities consultative ;ouncils and District Administration :omponent 2 Local - nvestment Grants i.1LocalInvestment 80% o f LIG 1 & 2 1.DPPF staff manage LIG Srants disbursed and projects with funds *:* District LIG Plans and 1funds accountably iccounted for inaccordance disbursed and properly Reports with agreed procedures. accounted for based on *:* Provincial LIG 2. GOM staffs and pays approved plans Financial Reports District Accountant 0 LIGSubproject positions 070% districts with LIG 3 MISMonitoring Reports - 35 -  Fundsdisbursedand idequately accountedfor P MQAReports Timely disbursements 3asedonapprovedplans + ProjectAnnual and om central levelofLIG D % districts with District 4id-TermReports mds Accountantscontractedas dvil servantsandpaidby the State budget ..2LIGfinanced Effectivecollaboration D 80% ofLIG 1& 2 works , ubprojects correctly properly executedas :tween DPOPH/Public rocuredandexecutedto plannedandwithin uildings Dept with rural greedtechnical standards. specifications )ads, ruralwater and 75% ofLIG 3 works x i a l sectors completedas plannedand with community oversight .GOM staffs andpays 100%districtswith Iistrict Works Technicians Works Technicians ositions contractedas civil servants andpaidby the State budget htponent 3 - Local 1dministration Capacity 31dg I.1ProvincialandDistrict 80% of targetedprovincia: jtaff with adequate skills 0 3 ProvincialAnnual anddistrictfinancialstaff in .Commitmentof Provincia mdknowledgeto manage rrainingReports each of 4 provincestrained iov't and District JG funds andsubprojects f* Annual ProjectReport to manage andaccountfor idministratorsto training Q TrainingTA LIGfunds :ontractor Reports 1.Effectivenessof MAE/ 0 80% of targeted b Mid-TermReports DPOHDEdstaffineach of )PAC coordinationand 4 provincestrainedto ;IFAP training system procureandsuperviseLIGl & 2 fundedworks subprojects 0 80% ofdistrictsinthe projectarea with staff trained andable to adequatelymanage, superviseandreport onLIG 2 &3 funds and subprojects !.2 Provincialanddistrict 0 Number of provinces ;taffwith improvedskills with HumanResource mdknowledgeto fulfill DevelopmentPlansand annual trainingplans  eir general responsibilities 70% district lr local govemance and .dministrative personnel lministration. vho have participated in raining courses for rofessional development 'omponent4 Supportfor - lecentralizationPolicy , Policies adopted to 1 Official Guidelines for crease decentralization of Iistrict consultative council: :. DPFPSteering 1. Effective collaboration scal, administrative and ublishedand disseminated 3etweenMPF andMAEon :ommittee and GAT ovemance systems inrural :eform 1 Formalization o f Leports istricts. listrict as a budgetunit I+ Donor Decentralizatior Increased GOM resource P Operational rules and iroup Minutes irocedures for district locationto fiscal Mid-Term Reports 'iance published :*:* :centralization Letter o f Sector Policy 3% (per mum)o f state for MTR) nvestment budget allocated Tor provincial planning and nanagement wl district .nput D Provincial budget illocation established for listrict infrastructure O&M Iomponent5- hpport to Project mplementation .Adequate organizational Support by DNPO and D Disbursements o f funds , apacity and systems in by U C A are done efficient11 0 Project Quarterly and )PPFs to U C A and PPU llace to manage and mdontime. 4nnual Reports ianagers nonitor project activities. b WB Supervision D Procurement is done ini timely fashion and VIission Aides-Memoire according to agreed I:* Project Audit Reports procedures. 0 Mid-TermReport 0 Implementation Activity Plans, Budgets, Zompletion Reports Investment Plans, Procurement Plans, Financial Monitoring Reports, Activity and Output Monitoring Report2 are . 0 Project audit reports are preparedo ntime andthe - 37 -  iuditopinion is not qualified. ~~ 'roject Components 1 iub-components: :omponent) Outputs) 7omponent1 - JS$ 7.3 1 million *:* Bi-annualmonitoring 1.Timely disbursementsof 'articipatory District reports, including financial GOM counterpart funds 'laming monitoring reports 2. Effective response of 7omponent2 Local - JS$ 19.24 million *:* Management and GOMdirectors to M Q A nvestment Grants financial reports, management reports and procurement records, audits 7omponent3 Local - JS$ 7.15 million contract, audits and ldministration Capacity technical reports 31dg Zomponent 4 - JS$ 1.36 million lecentralization Policy ;upport Zomponent 5 Support to - JS$6.94 million Iroject Implementation - 38 -  Annex 2: Detailed Project Description MOZAMBIQUE: Decentralized Planning and Financing Project By Component: Project Component 1 US$7.31 million - Participatory District Planning The objectives o f Component 1are to (i) public sector capacity for district planning and develop accountable plan implementation, and (ii) develop capacity among rural communities to effectively participate in district planning and ensure local administrationaccountability for plan implementation. The Component will support up to 49 district administrations infour provinces to prepare and implement multi-sectoral territorial development plans with the participationo f civil society and rural communities. This process will enable district administrations to mobilize resources from different sources (government's investmentbudget, non-government organizations and donors as well as local civil society and private sector actors) for the implementation of the agreed District Development Plans. The district plans to be supported bythe Component include: 0 District (Strategic) Development Plans (Plano Distrital de Desenvolvimento or PDD) 0 Three Year RollingInvestment Plans (Plano de Investimento Publico or PIP) 0 Annual Investment Plans (Plano Annual de Investimento or PAI) District Development Plans are important not only as an venue for integrating typically unarticulatedplanningprocessesconcerningpublic service provision, infrastructure investment, and local economic development and as a source of mediumterm guidance to annual planning processesbut also as a framework for mobilizingpartnerships among governmental, NGO and private sector actors inthe local development arena. The districts' Annual InvestmentPlans will contribute to the GoM budgetingprocess by providing proposals for use inthe Provincial Investment Budget which originate at district level. Close coordination with sector directorates at provincial level will be key to linkingdistrict plans with sectoral investment policies, planning modalities, works standards and funds available for O&M. For the community-level investment mechanism allocations neednot be reviewed at provincial level since the micro-projects will not be listednominally inthe provincial budget or have recurrent cost implications. All districts are expected to be eligible for project support to participatoryplanning, with sequencing to be determinedbased on assessment o f capacity and expressions of commitment by District Administrators. Districts will be selected annually by eachprovincial government and approved the DNPO and Steering Committee at central level based on agreed eligibility criteria. Districts indicatedby the provinces to receive LocalInvestment Grants inthe coming year will receive priority attention for training inAnnual Investment Planning. - 39 -  Sub Component 1.1 Develop Public Sector Capacity for District Planning This subcomponent will provide support to district administrations to establish and operationalise District Planning Teams and to prepare strategic and annual plans. I t will provide the teams with the methodological tools, training, technical assistanceand mentoring to undertake planning tasks and to review and improve district plans where they already exist. It will also improve the working conditions for effective participatory planning. A Provincial Planning Support (PPS) Team will developed and strengthened to provide mentoring for district personnel inthis process. This subcomponent's activities include: 0 Development of District PlanningManuals, 0 Training o f Trainers i.e. Provincial Planning Support Team members 0 Training o f District Technical (Planning) Teams 0 Seminars for Local Administration Personnel including District Administrators 0 Support DAs inproviding timely and complete information to CCDs inrespect of the process andprogress in district plan implementation. 0 A t least one annual workshop per province for sharing o f experience Sub Component 1.2 Develop capacity of civil society and rural communities to effectively participate in planning and ensure local administration accountability for plan implementation. Target institutions and beneficiaries of this subcomponent will include: consultative fordcouncil members, community andtraditional authorities, local interest group representatives, other community leaders and members. This subcomponent will provide support to communities for organizing structures (District Consultative Councils or CCDs as well as more local representative fora) in order to participate effectively indecision-makingand hold local administrations accountable. CCDs members will be accountable to the communities who selected them, and will convey community concerns and priorities to the District Administration and Consultative Council. Activities to be financed under this subcomponent include: 0 support for GOM dissemination of guidelines for the hctioning o f CCDs 0 identification, contracting and training o f district-based civil society facilitators 0 support for the development o f a ParticipationNetwork ineach Province to provide capacity buildingand exchanges of experience. Through the Component 1technical assistance contract, this subcomponent will provide training to District Consultative Council and Local Fora members. The Technical Assistance contractor will identify, contract and train an appropriate civil society organization based in each district to act as facilitators of community representation and deliberation at locality fora, with special attentionpaidto gender dynamics and the participation o f frequently marginalized groups inthe promotion o f government -civil society dialogue at the level o f Administrative Post and District. - 40 -  Sub Component 1.3 Support for the development and implementationof a communicationsstrategy This subcomponent will support the development and implementationof a communications strategy, inorder to ensure that the context inwhich district planning and district councils are operating is characterized by increasing levels o f awareness, inclusion and accountability among bothpublic sector and civil society actors. Project Component 2 US$19.24 million - Local InvestmentGrants The objective of this component is to buildthe capacity for decentralized management of small-scale local level public investmentsby establishing a small infrastructure grants mechanism. Component 2 will promote methods and systems for district administrations to allocate budgets for small infrastructure investments(maximum $200,000 per district per annum) whilst strengthening capacities for financial and works management by GOM line units and local administration staff through learning-by-doing usinggovernment systems. The MPF/DNPO will conclude a Memoradum of Understandingwith each Province for the purpose of carrying out subprojects under the LIG component of the Project. The M O U will include an agreement to provide to the DPPF a grant from the grant, on a non-reimbursablebasis, to be used according to the procedures set out inthe Development Grant Agreement and Project ImplementationManual. Access o f districts to LIGs ineach province will be phasedby year leading to all 49 districts inthe four provinces beingpotentially eligible by year 4. Based on agreed criteria relating to commitment, capacity and past performance, provincial governments will indicate which districts have satisfied the eligibility criteria and from these which will gain access to LIGs in each year. This gradual expansion will ensure that management capacity is built inboththe provincial governments and project coordination units to support the districts sufficiently. The Local Investment Grants (LIG) will constitute a grant category to be disbursedto the Provincial Directorates o f Planning and Finance (DPPF). Eachprovincial government i s therefore responsible for managing and reporting on LIG use by the districts under its authority. Financial management procedures will be those usedby the GOM, strengthened as deemed necessary to meet World Bank standards and to facilitate improvements inquality and timeliness. At district level, LIG funds will be administered by District Accountants (I)under the authority o f the District Administrator. Inadditionto training courses andoperational support for financial administration personnel, the project will finance two other significant capacity buildingmeasures. First, the Management Quality Assurance contractor (see section 3.1) will provide a periodic diagnostic and error-correctionmechanism for provincial and district accounting, procurementand financial reporting. Secondly, each province will be provided with a project funded Provincial Accounting Supervisor. This mid-levelaccountant will be responsible to provide on-the-job guidance to the -41 -  civil servants managing LIG funds at provincial and district levels inorder to ensure that they have access to practical assistancein implementing the systems and procedures requiredby the GOM and the Project ImplementationManual. The Department of Public Buildings(DPOPH/EdificaqGes) will manage procurement and supervise the physical execution o f public buildingconstruction. Each provincial department will identify at least three of its mid-leveltechnicians-who will be providedby the project with manuals, training and requiredequipment-to assume planning, procurement and supervision functions for DPFP financed investments with the support of a project contracted Provincial Works and ProcurementAdvisor. The DPFP will make use of, and inmany areas improve, the government's existing systems for works management. Manuals and standardbiddingdocuments are being developed which satisfy both government and Bank requirements. Standardized infrastructure guidelines and planning manuals will also ensure that DPFP financed investments conform to the policies and technical standards of each sector. District level systems for "micro-projects" planning and management will be developed basedon regional CDD type models, emphasizing local accountability, community-based execution and use of local artisans. DPFP grant funds will be used for implementingsubprojects determined priority investments in district plans but not coveredunder the GOM budget. The DPFP will finance three types of LI Grants, which differ based on the type of investments and the respective responsibilitiesof the district andprovinces intheir management LIG 1(estimated at $ 4.4 million or approximately 22.8 % of total LIGrants) will finance District Administrative Infrastructure. This refers to offices and other administrative buildingsinthe districts as well as housing for key district staff with mid-levelqualifications. Planning and management o f LIG1will be the responsibility of the provincial DPAC (public administration directorate) as the line agency responsible for managing district administration personnel and infrastructure. LIGl grants will increase from an average o f up to $15,000 per district per annum to up to $30,000 per district per annum where warranted by performance. LIG 2 (estimated at $ 11.3 million or approximately 58.9 % of total LIGrants) will finance Socio-Economic Infrastructure inthe districts. Investments under this grant facility will be selectedbased upon annual plans resultingfrom participatory planningprocesses. The menuof eligible investments for LIG2, determined through consultations with provincial and district authorities, includes primary schools, healthposts, rural water supply and sanitation, feeder roads and bridges, small scale communal irrigation systems and rural markets. Standard plans and cost guidelines will be established for each type of work. Works funded by LIG 2 will be undertaken by private contractors and their execution verified by private sector inspectors. Financial and works management responsibility will be sharedby the province and the district for LIG 2. The province will be responsible for overall financial management and reporting on grant funds used by districts. The districts will produce monthly financial reports to the provinces based on approved procedures on the basis o f which provincial financial reports will be prepared. The DPOPH will be responsible for the procurement o f these contracts. LIG2 grants will increase - 42 -  from up to $75,000 per district per annum to up to $200,000 per district per annum where warrantedby performance. LIG 3 (estimated at $ 3.5 million or approximately 18.3 % of total LIGrants) will finance Community Infrastructure Improvementsfor very small scale investments (micro-projects) implementedjointly by District Administration and local communities. LIG 3 will be managed entirely at district level inorder to buildcapacity inbasic financial and works management by district administrations. The amounts of grants will initially be quite modest and subsequently be increased when sound management by the DA has been demonstrated. LIG3 will finance items such as rehabilitationor expansion o f existing buildings; small road improvements, bridges or culverts; latrines, fences or other supplementary infrastructure and durable goods for use inpublic facilities. A negative list will be defined for this facility inorder to ensure that LIG 3 does not finance commercial investments for which other forms of financing (e.g. micro-grant) would be more appropriate. A manual of standardmicro-projects plans will be prepared, periodically updatedand provided to district planners. Community-based artisans will be contracted by the District Administration to assist beneficiary communities inthe execution of LIG3 funded micro-projects. LIG 3 grants will initially be up to $15,000 per district per annumand may increase to as much as $50,000 per district per annum should performance warrant. An important element of this component is the performance basedallocation system to be applied among districts eligible for Local Investment Grants. Districts will all receive an equal initial Local Investment Grants intheir first year o f access. A simple annual performance assessment will indicate the quality of community participation, planning, financial management and works supervisionundertaken in each district. Ineach annual budget cycle, subsequent LIG allocations will be adjusted to reflect the results of this performance assessment. These annual performance assessments will be undertaken by provincial governments and Provincial Project Units.The results of this performance assessmentswill be presented by MPF for reviewjointly with the Bank as a basis for approval of each year's work plan and budget. A further important aspect of LIGimplementation is downward accountability to communities. Local Community Oversight Committees will be responsible for monitoring micro-project execution and will serve as the interlocutor between the CCD and target beneficiaries. Provincial officials andproject staff can verify contractor performance during execution by involvingthe Community Oversight Committee insubproject monitoring. (I)District Accountants and the District Works Techniciansdiscussedbelow under subcomponent 2.2are newpositions being created within the civil service with the support of the DPFP. The will be institutionalized in allprovinces and districts aspart of M P F and MAE'Seffort to strengthen the management capacity of District Administration Project Component 3 US$ 7.15 million - CapacityBuildingfor Local Administration The objective o f Component 3 is to increase the professionalknowledge and skills of local administration personnel. The Component will finance training for the staff of 49 District Administrations and of associatedprovincial departments in4 provinces to increase their capacity - 43 -  to plan and coordinate district development activities, to mobilize and manage resources and to deliverbasic administrative services to the public. Subcomponent3.1: CapacityBuildingfor LocalInvestmentManagement This subcomponent will strengthen district administrations and relevant provincial departments in order that they are capable of managingthe funds and the contracts which will permit approved LIGfunded subprojects to be effectively and accountably implemented. Two principle areas of capacity buildingare contemplated: in financial administration and insmall works procurement and supervision. Inthe financial administrationarea, the component will support training ofprovincial anddistrict staff relatedto LIGmanagement. Accountants inthe Investment Section of the Provincial Planning and Budget Department will be trained and supported by the project in order to develop requiredcapacities. At district level, the District Accountants will be trained to assume the routine responsibility for LIG use andreporting. Inthe works management area, the project will similarly provide support to relevant provincial and district public works staff inorder to ensure that the procurement and execution o f local infrastructure investments financed by LIGrants will attain an adequate level of transparency, quality and efficiency. These two areas will be further strengthened through the procurement and management of the Management Quality Assurance (MQA) consultancy. This consultancy will provide ongoing independent oversight o f financial, procurementandworks management relatedto LIG funding. The existence o f this oversight function permits greater decentralization of responsibility to local administration (provinces and districts) while ensuringadequate control and reducing exposure of MPF and the project to excessive fiduciary risk. The M Q A contractor will routinely assess the management of the Local Investment Grants by provincial and district institutions and officials in order to identify and correct deviations from approvedprocedures and practices inprocurement, financial management and works supervision. Subcomponent 3.2: CapacityBuildingfor LocalPublicAdministration Inorder to develop the human resource base which will be required for more comprehensive and institutionalized decentralization duringthe coming years, this subcomponent will support the training of local administration staff ingeneral public administrationand governance. It will principally support the implementation of the GOM Public Administration Training System (SIFAP) which has been developed by MAE to address the structuralproblem of under qualified local administrationpersonnel. Subcomponent 3.2 will finance training o f several types: Training inthe core functions of district administration, including support for implementingthe GOM's SIFAP Public Administration Training Systemwhich provides training curricula, methodologiesandmanuals as well as a core of trained trainers for basic (7th-9th grade) and middle(10th-11th grade) level modules incore areas including: general public administration, - 44 -  public law, and ethics; human resource management inthe civil service; and budgetary management/ financial administration. SIFAP will also provide specific leadership and management curricula directedto District Administrators, Chefes de Secretaria and Chefes de Post0 Administrativo, etc. Training: inother areas (outside the SIFAP) identified as priorities by provincial and district officials A maximum of 20% o f eachprovince's annual training budget will be available for such discretionary training activities which may be contracted in or to which provincially selected participants may be sent. This subcomponent will employ a demand responsive and locally managed approach to planning and implementing training programs through the project financed Provincial Training Budgets. The DPACs will be responsible for the provincial training programs as the organizational units responsible for overseeing the District Administrations and for managing their personnel. In addition, the DPACs are the field representatives of MAE, the ministry responsible for the GOM's Public Administration Training System's (SIFAP's) development and implementation. A regionaltechnical assistance contract will provide periodic support to the DPACs for the planning, coordination, administration and monitoring o f the Provincial Training Programs, including the identification of potential training providers inresponseto each province's priorities. Special provisions will be made inthe project and set forth inthe Development Grant Agreement for the reimbursement by the provinces for costs relatedto training services provided by the Government's regional training institute (IFAPA). Technical assistancepersonnel will work with DPACs to undertake a Training Needs Assessment for district personnel and then to develop a mediumterm HumanResource Development Strategy. The TA provider will assistthe provincial governments' DPACs to formulate their respective Annual Training Plans with reference to this HRD strategy. A locally contracted administrative assistant reporting to the DPAC will assure that the logistical and organizational arrangements for training courses are made. Project Component 4 US$1.36 million - Component 4 - Support for Decentralization Policy The objective o f Component 4 i s to support the development o fpolicies and methodologies conducive to greater decentralization of the fiscal, administrative and governance regimesinrural Mozambique. Guidedby the DPFP Steering Committee and managed by the MPF/DNPO with the administrative support o f the UCA, the component will provide resources as part o f a collective effort among several donors and partners to support MPF led decentralizationreforms across key government agencies. Inpartnership with UNDP and UNCDF and their respective bilateral co-financing agencies (principally the Governments o f Norway and the Netherlands) the IDA grant will provide financing for three areas ofactivity: (i) DecentralizationPolicy Analysis and Definition (ii) DecentralizationMethodology Development and Dissemination (iii) DecentralizationTraining for Central Agency Policy Makers and Technicians - 45 -  Support for (i) (ii) consist of financing for consultancies, bothinternationaland national and will as appropriate, for stakeholder consultations requiredto refine proposed polities and methodologies, and for editingand publication of manuals to promulgate their results. Based on extensive consultations at central, provincial, and local levels and between Government and its donor partners (21,a guiding agenda for DPFP supported reform activities has beenagreed with Government, including specific actions to be undertaken relatedto the following areas: 0 Restructuring and reorientation o f district administration 0 Legitimation and strengthening o f participatory processes, representative structures, and accountability relations at local level 0 Strengthening of the institutional basis for district level fiscal management 0 Formalizationof local development planning and participatory planning methodologies and of the status o f local plans 0 Increasingthe discretiono f provinces and districts in setting priorities and managing a greater share o f the public investment budget. Support for (iii) will consist o f funding for the participationof Mozambicanofficials innational, regional and international training courses, conferences and exchange visits aimed to increase their awareness and technical knowledge concerning decentralization instruments andprocesses. Support will be made available through the U C A to the core ministries guiding and supervising the DPFP: Planning and Finance, State Administration, Agriculture and Rural Development and Public Works and Housing. However, support may also be made available for relevant decentralization-related initiatives by other government institutions such as the Ministryo f Environmental Coordination whose Directorate of Territorial Planning i s involved inlocal land use and development planning, the Ministryo f Women and Social Work whose focus on poverty and marginalized groups i s relevant to the DPFP's objectives, and the Ministries of Health and Educationwhose efforts to decentralize service delivery are clearly linkedto the DPFP's broader institutional reform agenda. Duringproject formulation, it was agreedbetween the Bank and the Ministers ofPlanningand Finance and State Administration that further clarification of the GOM's policy regarding decentralization i s relevant to the success o f the DPFP and will be critical to its intended contribution to the longer-term reformprocesses favoring improved local governance, enhanced local administrative capacity and an increased fiscal resource base for Mozambique's rural districts. However, political uncertainty regarding existing legislative initiatives to reform local administration and constraints imposedby impendingelectoral cycles mitigate against the definition o f such a medium-term policy framework before DPFP effectiveness. On this basis, the GOM has agreed to present at Mid-Term Review (projected for early 2006) a Letter of Sector Policy for Decentralization. Followingthis letter, the work plan for Component 4 Support can be adjusted as necessary duringthe latter years of DPFP implementation to further the agenda it will define. More significantly, the GOM Letter of Sector Policy for Decentralization will provide the basis for collaboration during 2006 and 2007 among Government, the Bank, and other donor partners indeveloping a National Program for Decentralization and indesigningthe follow-on project to the DPFP. Resources have been - 46 -  budgetedunder Component 4 to support this process. Upon agreement of an Annual Reform Work plan and Budget betweenMPF and the Bank, the UCA will manage the policy-related consultancy and training activities to be financed from the DPFP under Component 4. Procurement of consultants will be organized by the UCA, with Technical Group members and other relevant government personnel participating intheir selection. The U C A will administer contracts and project funds in support o f the specific consultancies and training activities programmed. (2) Since 2000, an "Informal Donors ' Working Group on Decentralization " chaired by UNDP hasprovided a venuefor coordination of programs and collaboration on the development of a collective reform agenda around whichpartnerships with the G O M can be organized. During the DPFP Pre-Appraisal Mission in July 2002 thisjoint donor agenda was discussedwith the Ministers of Planning and Finance and State Administration and accepted by the Government, the WB, and other Donor's Group members as a basisfor the assistance to reform described under this component Project Component 5 US$6.94 million - Component5: Support for ProjectImplementation The objective of Component 5 is to finance project management, monitoring and evaluation and the formulation ofthe next project insupport of decentralization. Sub Component 5.1 ProjectManagement DPFP will provide financing for the effective functioning of the Project Coordination and Support Unit(UCA) inthe MinistryofPlanning and Finance andProvincialProjectUnits(PPUs) inthe Provincial Directorate of Planning an Finance ineachprovince. The central-level UCA will have a core staff to oversee all components of the project andreport to the GOM and the World Bank under the grant agreement. The U C A will be responsible for procurement and financial management and for consolidating work plans, budgets and implementationreports from all components and all provinces. The U C A will manage TA contracts and oversee the work of TA providers. It will provide support and guidance to involved ministriesat central level regardingplanning and implementation of DPFP supported activities and will support and supervise provincial activities through its collaboration with the Provincial Directorateo f Planning and Finance and their respective PPU ineach province. The UCA will also be responsible for ensuringthe effective implementation of the procurement systems and procedures inthe participating provinces and districts. The Provincial Project Units (PPUs) inthe four provinces will undertake and oversee project specific planning and reporting, coordination, financial management, and procurement requirements. The PPUs, headed by a Provincial Coordinator, will report both to the Provincial Director of Planning and Finance and to the Project Coordinator inthe UCA. The PPU will be responsible for procurement and financial management as well as the preparation of work plans, budgets and reports for all project activities undertaken within the province. The PPUwill ensure coordination among and provide administrative support to provincial government departments, district administrations, and DPFP financed TA providers. The procurement and financial - 47 -  management for works and associatedgoods and services financed by Local InvestmentGrants under component 2 will not bemanageddirectly bythis PPUbutrather by GOM staff inthe Provincial Directorates and inDistrict Administrations supported by project staff and TA personnel. Sub Component 5.2 Monitoringand Evaluation Giventhat DPFP is the first effort of the GOMto scale up from pilot initiativesto a regional program covering four provinces, there a needto carefully monitor its implementation and capture both successes and shortcomings. This component will support the monitoring of the progress in DPFP implementation and incapacity buildingfor decentralized planningand financing activities undertaken by the districts. DPFP will provide financing for the development of an M&E system to generate information necessaryfor operational monitoring as well as the evaluationof operational systems and institutional change inlight of emergingpolicy objectives. The M&E system will needto capture performance data concerning local administration along with planning, management, participationand accountability criteria for use inthe District Performance Assessment System discussed under Component 2. The DPFP M&E system should enable the identification of bottlenecks inorder to improve performance and signal opportunities or needs for improved systems and/or additional resources. Since the G O M has expressed its desire to move toward a national program of decentralized planning and finance, a national M&E framework will beneededto allow for coverage o f all provinces. Giventhat at present the GOM program i s currently supported by a number of projects, MPF has expressed its desire to standardize information requirements across projects as far as possible and where necessary, allow for additional project specific information to be generated. Inthis respect, this component will contribute to the development of a common M&E frameworkjointly with MPF and UNCDF. A central level M&ESpecialist financed by UNCDF will be located inMPFDNPO responsible for M&E o f the National DPFP. Inaddition, the U C A will recruit and M&E Specialist to work closely with the aformentionedNational M&E Specialist, but with specific responsibilities for M&Eofthe World Banksupported DPFP. Furthermore, at provincial level, eachPPUwill recruit a Monitoring Technician responsible for monitoring activities under the project at provincial level. The establishment of a comprehensive M&E system for the project will be essential to ensure that the lessons from DPFP are captured andutilized to improve existing project design over time. It will also be critical for the design of a scaled up national program or for making alternative choices interms of how decentralization should be implemented. Periodic diagnostic and evaluation studies are foreseen inorder to respondto specific concerns which arise duringimplementation as a result of routine monitoring. A mid-termreview ofthe project will be conducted inorder to determinehow best to consolidate and to advance the decentralizationprocess inrural districts based upon evidence from experience - 48 -  on the ground and from progress on the policy milestones agreed with the GOM. A comprehensive independent evaluation will be undertaken duringthe fourth semester o f project implementation inorder to provide substantive input for the mid-term review, assessing the effectiveness o f project activities and the relation o f project-supported outputs to specified objectives and outcomes. Sub Component 5.3 Future ProgramFormulation Based upon the implementation experience o f the DPFP, ifthe decision i s made to move toward a more comprehensive decentralization program, project resources could be usedunder this component for the preparation o f such a future national program. It i s anticipated that preparation of the documentationfor the nationalprogram will start duringthe thirdyear o f implementation. Lessons emanating from the MTR will be usedto design the national program as well as any follow-on IDA funded investments which may be agreed with the GOM, subject to future agreements related to policy and operational considerations. - 4 9 -  Annex 3: Estimated Project Costs MOZAMBIQUE: Decentralized Planning and Financing Project Local Foreign Total US $million US $million US $million Participatory District Planning 1.93 6.24 8.17 Local Investment Grants 0.00 19.24 19.24 Capacity Buildingfor Local Administration 4.50 3.48 7.98 Support for Decentralization Policy 0.69 0.75 1.44 Support for Project Implementation 6.59 0.99 7.58 Total Baseline Cost 13.71 30.70 44.41 Physical Contingencies 0.00 0.55 0.55 Price Contingencies 1.33 0.00 1.33 Total Project Costs' 15.04 31.25 46.29 Total Financing Required 15.04 31.25 46.29 Local Foreign Total Project Cost By Category US $million US $million US $million Civil Works 0.22 0.22 0.44 Goods & Equipment 0.00 5.47 5.47 Consulting Services 6.29 4.04 10.33 Training 2.75 1.73 4.48 Incremental Operation Cost 4.44 0.00 4.44 Grants 0.00 19.24 19.24 Physical Contingencies 0.00 0.55 0.55 Price Contingencies 1.34 0.00 1.34 Total Project Costs' 15.04 31.25 46.29 Total Financing Required 15.04 31.25 46.29 I Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 46.29 (US$m). Therefore, the project cost sharing ratio is 90.73% of total project cost net of taxes. - 50 -  Annex 4 Economic Justification Summary MOZAMBIQUE: Decentralized Planning and Financing Project 1, Background:DistrictBudgetAllocations The intergovernmentalfiscal system inMozambique assigns a portion of the annual state budget (OE) to provinces, including investment funds through the national Public Investment Program (PIP). The provincial budget has two components -priority and non-priority sectors. The priority sectors' budgets, capital and recurrent, are determined by the sectoral ministriesat the central level, with some input from the provinces during the planning stage. The non-priority sector capitalbudget is formulated by the provincial government. The recurrent budget i s largely a function of staffing decisions at central level. The residual between the provincial capital budget ceiling and sectoral ceilings for priority sector, becomes the allocation to the non-priority sectors. While discretionary capital spendinghas beenvery low (average 2% total capital budget) and has even fallen as a percentage of the total, there has beenreal growth inthe amount of non-priority sectoral allocations o f 53% from 1998-2000 and 27% from 2000-2001. 2. Recurrent expenditures to districts are determined at provincial level as part of the provincial sector budgets. The district budget has no legal standing. Aggregate personnel expenditure levels are determined centrally while districts are responsible for proposing the goods and services component of their recurrent budgets. However, given the absence o f funds available for district development budgets, the lack o f district budget legal status and limitedbudgetmanagement capacity, districts do notmanage the capital budgetnor the civil service component o f the recurrent budget. The DPFP intends to address these weaknesses through its various components in order to strengthenthe district administrations capacity to planand implementsmall local investments. 3. The policy reformand capacity buildingcomponents support the development of a strategy for increasing district human and financial resources for more effective service delivery inthe mediumto long term. Inparticular, emphasis will be placedon improving administrative skills (planning, human resource management), technical skills (design, procurement, contract management) and financial skills (financial planning and budgeting, accounting, etc.). The full impact o f the capacity buildingprogram will only be realized over the long term but inthe medium and long term it should improve the districts' capacity to improve the conditions for increased economic growth and poverty reduction through the deliver of local infrastructureand services. 4. The LocalInvestment Grants form approximately 50% o f the total grant and are expected to deliver short term economic benefits under the DPFP. These are, however, intended as the primary instrument for increasing local administration capacity to plan and implement small infrastructure investments inthe district. The DPFP framework involves the development of a system o f participatory planning and investment, usinglearning-by-doing through Local Investment Grants. These consist o f three types: (i) LIGl for District Administrative Infrastructure ($4.4 million), (ii) LIG2 for Socio-Economic infrastructure -51 -  inthe districts ($11.3 million), and (iii) 3 for Community InfrastructureImprovements LIG ($3.5 million). 5. The LIG component aims to strengthen the capacity of district administrations to accountably plan and manage small infrastructure investments inthe districts, through the development of annual plans that fit within the framework o f a 5 year DDP. As a result of this demand-basedapproach, the specific compositionofthe DPFP investments cannot be determined a priori. Inaddition, the small size of the investments to be financed and the needfor agile, simple procedures inthe capacity constrained district context, makes it difficult to justify the effort and expense of calculatingconventional economic rates of return. However, most sectors (including health, education, roads and water) have defined minimumstandards for small investments,allowing DPFP to support least cost selection of bids that meet these minimumstandards and which comply with the environmental checklist, given locally available capacity and technology. 6. Thejustification o f the DPFP rests on demonstrating the following two hypotheses: (i) that the DPFP processes that are put inplace are functional and sustainable and (ii) that the DPFP investments planned and implementedfollowing the processes do achieve the desiredoutput. 7. The first of these hypotheses will be tested duringthe project but is expected to be justified for the following reason. Acceptable systems and procedures have been designed by the GOM for provincial and district management o f small scale infrastructure investments, but are currently badly understood by local administration personnel and weakly implemented. The DPFP does NOT intend to use a parallel system of procedures butto improve the existing government systems andprovide the necessary instruments and training to ensure their effective and efficient application. This "mainstreaming" approach will reduce complexity and enhance sustainability. The grant funds will therefore flow through the DPPF o f the province according to improved, but standard government procedures, with increased efficiency and effectiveness due to significant capacity building efforts under the project. The intention i s therefore to strengthenthe capacity of the districts to manage increased revenue transfers over time, thereby increasing the confidence o f the G O M to enhancethe demand-driven decentralized approach to provision o f infrastructure and service delivery by local administrations. 8. The secondhypothesis assumes that the decentralized planning and financing framework for local investments leads to the identification, selection and prioritization of economically and socially viable investments. While evidence on decentralization i s mixed, this i s largely a function o f whether fiscal and administrative decentralization are pursued together and whether there effective beneficiary participation inplanning along with downward accountability to communities inplan implementation. Frequently administrative decentralization i s not accompanied by fiscal and capacity buildingefforts. (see Ndegwa Working Paper). The DPFP aims to avoid these risks ina limitedbut concerted way. By ensuring that administrative reform and capacity buildingefforts are complemented by - 52 -  additional financial resources are available through the LIGs, learning-by-doing will result ineffective deconcentrationofplanning andmanagement (see Annex 2 for detailed description). 9. Evidence on Economic Rates of Return Where financial and technical support is available to local administrations, the evidence suggests that small scale projects involving limitedinvestments ininfrastructure generally have highrates o f return compared with larger-scale investments. There are numerous examples from African countries. Under the LGDP Iin Uganda, upon which the DPFP i s closely modeled, the MTR 2002 assessments for the education and roads sectors as a whole from the social and economic benefit perspectives are as follows: 0 cost-effectiveness ratios of the education sector investments - 24%-30% cost-effectiveness ratios o f the road sector investments - 29%-37% 0 cost-benefit analysis ratios for a typical water subproject investment - 15%-20% 0 overall social benefits - 100% o f LGDP Iinvestments, and 0 overall economic benefits - 100% of the LGDP Iinvestments 10. The ex-post analysis of the Zimbabwe Urban I1project concludedthat "one of the greatest achievements o f the Urban I1project was to make scarce resources available for urban local authorities to access, improve and maintain quality infrastructure which i s expected to lead to better living standards for the population". While the complex nature o f the benefits coupled with a lack of data made it impractical to calculate the ERR of the various primary infrastructureprojects, for the Urban I1housing and related infrastructure subprojects, a sample of projects ledto the calculation o f an average ERR o f 24.3%. This was double the GOZ's Public Sector InvestmentProgramhurdle-rate o f 12%. Under the Zimbabwe RDC Pilot Project, the assessment concluded "there i s increasedpositive economic impact as a direct result o f the project. The provision o f infrastructure i s a major achievement of the project. Furthermore, the cost o f implementingthese projects i s effectively reducedthrough the mode of implementation which involves comprehensive provincial review and monitoring of district level project planning". 11. Inearlier projects, such as the Ghana LGDP (1994), the improvements inroads and drainage were expected to produce ERRs ranging from 68-100% and markets, bus stations and sewerage o f 15-35%. For the Chad Public Works and Capacity Building Project (1994), ERRs were 20-60% for draining improvements and 20-30% for urban roadrehabilitation. At project completion o f the Second UrbanDevelopment Project in Djibouti (1999), ERRs o f 20-30% were confirmed for improvements inroads and drainage inseveral neighborhoods. Ex post rates o f return for road rehabilitation inthe recently completed Social FundI1Project in Madagascar ranged from 41% to over 100%. 12. The DPFP menu of investments is similar to that o f the projects mentioned above. I t is expected that most investments will be in social and economic sectors (roads, education, health, drainage, water etc.), some indistrict housing and office infrastructure (ring-fenced as LIGl) and a small amount for community-based rehabilitation and improvement of - 53 -  infrastructure (LIG3). 13. Educationand health sector investments The investments insmall education andhealth care facilities generally result ingains inthe efficiency of the education system while the out-of-school benefits include the improvement of the income-earning potential and skills of graduating students, among others. The constructiono f new health facilities contributes towards decentralized access by ruralpopulations to preventative as well as curative healthcare services. The positive effects would be fewer work days lost through illness and death, increased quality o f life and reducedhousehold expenditure on medical care, transport and supplementary food. A comparative analysis o f the costs o f standard desks and classrooms procured under Uganda LGDP and non-LGDP approaches (discretionary and conditional) show significant differences inunit costs. 14. Roads sector investments Many roads inrural Mozambique are ina state o f disrepair and many needed tertiary roads do not exist, mainly due to lack of funds from the central government and limited own-source funding of the local administrations. The availability of funds from DPFP-type projects inother countries have resultedinmany benefits, including vehicle operating cost savings from reduced road roughness, savings inpassenger and goods travel times, improved access to public facilities and markets by remote rural populations, savings in road maintenance costs and accident costs and benefits interms of avoided higher costs of later reconstruction. Where traffic i s generally low, the mainbenefit of upgrading roads, footpaths and associated drains i s to improve access for public transport. A cost effectiveness index depends on the density of population near the roadfootpath, with cost-effectiveness increasing with density. 15. Water supply investments Inmany similar projects, water supply sub-projects oftenprovidenew supplies and protection of existing supplies at schools and clinics. InUganda's LGDP, the typical choice was for a stand-pipe investment at parish level. The average ERR was 17% on a standard standpipe likely to serve 100 households. The benefits were based on willingness to pay and timekost savings. The benefits of providingclean and reliable water supplies are many -time and effort-savings by the main water carriers (especially women) , reduced livestock and human illness causedby water-borne disease and a more productive rural population due to increase inwater quality and quantity. 16. Social Benefits The infrastructure investments under DPFP are small and district-based, including water, drainage, solid waste management, sanitation, markets, clinics, primary schools, tertiary roads etc. I t is difficult to quantity the benefit of each individual project. However, in aggregate it i s possible to demonstrate that these improvements inthe physical environment and delivery o f services have positive effects on the health and productivity o f the community. Most district populations suffer from diarrhea, fever, malaria, tuberculosis etc. These are infectious diseases exacerbated by worsening physical living - 54 -  conditions. Household memberssuffer loss of working days and school days due to illness. 17. Employment Generation Although employment generation i s not a specific objective o f the DPFP, employment gains are expected to be significant. Mozambique is constrained by the existence of small-scale contractors inrural areas with appropriate skills. This i s largely due to the limited, lumpy and unreliable nature of investments made by districts that result inerratic demand and untimelypayments. It i s expected that DPFP LIG funds, increasingly reliable and predictable procurement processes and the specific capacity buildingactivities planned for the private sector, will result inemployment gains with a significant multiplier effect. For example, ex-post observation inZimbabwe shows that jobs were created inthe small and medium-scale domestic contractors and supply firms. Inaddition, giventhe nature of the physical investments made under the DPFP (schools, healthposts, roads, water supplies, markets etc.), it i s expected that a number of local employment opportunities will be created. It should offer some additional opportunities for off-farm employment for the rural population and maintenance of existingjobs inthe more built-upareas. 18. CapacityBuildingthrough Learning-by-doing Although the above sections discuss the social and economic benefits o f particular types of investments ininfrastructure, it must be emphasizedthat the objective of the DPFP is one of capacity-building, with service delivery an indirect objective. As a result the major efforts o f the DPFP are inbuildingcapacity of district administrations and provinces to provide infrastructurethrough learning-by-doing usingDPFP LIGs and the training programs to be supported under component three. GivenMozambique's scale and diversity, in order to effectively implement the PARPA poverty alleviation program it is critical that local administration buildthe capacity to deliver services inan efficient and effective manner.As the Minister of Finance expressedit, "PARPA is the what, DPFP is the how". Inmaking resources available, along with support for learning-by-doing and additional training and policy reform, the DPFP will support districts to rigorously plan investments with their communities, develop skills to turn these plans into implementable projects and contracts and to manage these investmentsmore effectively than before. These efforts cannot but result inmore efficiently designedand managed sub-projects by the local administrations, inaddition to a greater overall number o f projects. The district eligibility andperformance evaluation system of the DPFP is such that it shouldprovide strong incentives for the local administrations to efficiently and cost-effectively deliver services to their constituents in a transparent and accountable manner. 19. Fiscal Impact According to Mozambique's Public Expenditure Management Review o f 2001, neitherthe deconcentrating nor the decentralizing reforms pose risks for the fiscal balance at present. "Neither the deconcentrated provinces and districts nor the decentralized municipalities have unsustainably large entitlements to central government resources. Moreover municipal debt i s modest and largely short term (and regulatedby the MPF). Second, both district and municipal capital and recurrent expenditures are inline with their - 55 -  corresponding revenues. At present there does not appear to be a risk o f budget deficits at either the district or municipal levels. However, further improvements inthe quality and quantity o f service delivery at the district andmunicipal level will be constrained by available own source revenues as well as central government transfers." 20. The size o f the DPFP i s not expected to change this picture o f local budget deficit risks. However, it i s expected to support the improvement inservice delivery at a local level due to increased availability o f resources through the LIGs.Within the project's lifetime, it i s expected that significant policy decisions must be made regarding changes to the intergovernmentalfiscal transfer system including the establishment o f districts as a budget entity and increased discretionary transfers to both provincial and district capital budgets. The project will also seek to support nascent efforts to improve own-source revenue bases and collection efficiencies. However, given the weak fiscal base inmany rural districts, it i s not expected that significant proportions o f district budgets will be funded with own revenues for the foreseeable future. Emphasis will continue to be on expenditure management but revenue-raising incentives and programs will be included under the LIG, capacity-building and policy reform components. 21. Summary Insummary, the discussion above indicates that the two hypotheses-functional and sustainable processes and intendedoutputs achieved ininvestments - are likely to be viable. It must, however, be emphasized that the objective o f the DPFP i s capacity buildingo flocal administrations rather than large-scale immediate and direct benefits to the population per se. However, buildingthe capacity o f local administrations, evidenced by small-scale investments indistricts under DPFP, should signify the potential for considerable increases inrural service delivery andproductivity inthe long term. The net present value o f investments incapacity buildingwill be difficult to attribute and quantify, but should neverthelessbe considerable. This is also, however, conditional on the long term GOM commitment to increasing deconcentration and decentralization of fiscal and administrative functions to lower levels o f government and to increasing downward accountability o f local governance inMozambique. - 56 -  Annex 5: Financial Summary MOZAMBIQUE: Decentralized Planning and Financing Project Years Ending / + IMPLEMENTATIONPERIOD Year1 1 year2 I Year3 [ Year4 1 year5 IYear6 IYear 7 Total Financing Required Project Costs Investment Costs 8326.0 7230.1 9127.3 11560.0 10047.0 0.0 0.0 Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 8326.0 7230.1 9127.3 11560.0 10047.0 0.0 0.0 Total Financing 8326.0 7230.1 9127.3 11560.0 10047.0 0.0 0.0 Financing IBRDllDA 6927.3 6390.0 8298.8 10667.4 9716.7 0.0 0.0 Government 1398.7 840.1 828.5 892.6 330.3 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 8326.0 7230.1 9127.3 11560.0 10047.0 0.0 0.0 Mainassumptions: -57-  Annex 6(A): Procurement Arrangements MOZAMBIQUE:Decentralized Planning and Financing Project Procurement 1, The project has five components: (i) Participatory District Planning; (ii) Investment Grants; Local (iii)Capacity Buildingfor Local Administration; (iv) Support for Decentralization Reforms; and (v) Support for Project Implementation which will be under the responsibility o f the National Directorate for Planning and Budget inthe Ministryo f Planning and Finance. Management o f Local Investment Grantsand Training Budgets under components 2 and 3 respectively will be decentralized to provincial govemments through their ProvincialDirectorate of Planning and Finance. 2. The Ministry o f Planning and Finance, which will have overall responsibility for the implementation o f the project, will establish a Project Coordination and Support Unit(UCA) to manage the project. The UCA, which will include a Project Coordinator, a FinancialManager, and a team o f Procurement Specialists (duringthe first year after Grant Effectiveness, and thereafter, at least on full-time Procurement Specialist with additional support as may be deemed necessary by the association, all such professionals with qualifications experience and terms and conditions acceptable to the Association) trained inBank's procurement rules, will be responsible for (a) oversight and management o f the whole decentralized procurement system, (b) carrying out the I C B procurement o f goods and services for the Participatory District Planning component (c) carrying out all procurement o f goods and services for the Decentralization Reform component, (d) carrying out the procurement o f goods, works and services, as needed, for the U C A itself, (e) carrying out any I C B based procurement o f works financed by the LIGgrant funds, (0for reviewing and assuring the quality o f procurement by the provinces anddistricts for works under the Local Investment Grants Component and for training services under the Capacity Building Component, and (8) for development o f procurement capacity in UCA, provinces and districts. Procurement o f works, goods, and services financed under the Local Investment Grants component will be carried out directly by the provincial and district administrations, with (i) technical assistance from a ProvincialWorks and Procurement Advisors specially contracted to support them, and (ii) oversight by the Management Quality Assurance Contractor and the UCA. 3. Consulting services, goods and works financed by IDA under this project will be procured in accordance with the provisions o f the World Bank Guidelines for Selection and Employment o f Consultants by World Bank Recipients (the Consultant Guidelines) published inJanuary 1997, revised inSeptember 1997 andJanuary 1999, andthe Guidelines for Procurement underIBRDGrants and IDA Grants, January 1995, revised January/August 1996, September 1997 and January 1999. For any International Competitive Bidding(ICB) for goods and works, the implementing agencies will use Standard BiddingDocuments and contracts issued by the Bank. For the selection o f consulting firms, the implementingagencies will use the Request For Proposal (RFP) for selection o f consulting firms and contracts issuedby the Bank. For works and goods under National Competitive Bidding(NCB) the implementing agencies will prepare National Competitive Bidding(NCB) documents acceptable to Bank. For procurement o f works under US$30,000 and goods under $30,000 by provinces and districts, fvred price contracts will be awarded on the basis o f written solicitation issued to at least three qualified suppliers after evaluation o fbids received inwriting. - 58 -  ProcurementMethods 4. It is not possible to determine inadvance the exact mix o f works, goods, and consultant services to be procured under the Local Investment GrantsComponent, becausethe grants mechanism is designed to operate on a demand-driven basis inwhich the districts and provinces will select their own packages o f activities each year. However, an estimated projection o f aggregate amounts o f procurement under each category was made at appraisal for purposes o f overall procurement planning. The methods to be used for procurement are described below, and the estimated amounts for each method are summarized inTable A after the appraisal. The proposedthreshold contract values for the use o feachmethodare shown inTable B. Procurement o f Works 5. Works procured under the Local Investment Grants may include construction, expansion, improvement or rehabilitation o f schools, health posts, administration buildings, administrative staff housing, rural roads and small bridges, potable water wells, pumpsand small pipedsystems, latrines, markets, small irrigation structures, and other small scale community level infrastructure. Works contracts equal to or above US$0.5 million are not anticipated. Consequently, the project would not be expectedto use ICB procedures for works procurement. Works contracts estimated to cost US$lOO,OOO or less will use simplified NCB documents (already approvedby Bank for use inthe Municipal Development project) consistent with the complexity o f the work and the needs o f the local works contract industry. Contracts below US$0.5 million equivalent will be awarded following N C B procedures, usingstandard biddingdocuments agreed inadvance with IDA. 6. Smaller works contracts estimated to cost less than US$30,000 equivalent will be procured on the basis o f at least three quotations received inresponse to a written invitation, which will include a detailed description of the works, including basic specifications, the required completion time, a basic form o f agreement acceptable to IDA, and relevant drawings, where applicable. 7. For District and Province level grant fund related procurement involving costs less thanUS $ 5,000, Bank Guidelines for Simplij?ed Procurement and Disbursementfor Community Based Investments will apply. Procurement o f Goods 8. Eligible goods under the Local Investment Grantscomponent will include fi.uniture and equipment associated with LIG financed infrastructure construction or rehabilitation investments or construction materials purchased by district administrations as inputsto community-based infrastructure subprojects. Goods to be procured under the other components will include vehicles, computers, office equipment and W t u r e , etc. Where possible, contracts for the same goods will be grouped into biddingpackages o fmore than US$200,000equivalent andprocured following International Competitive Bidding (ICB) procedures, usingBank-issued Standard BiddingDocuments (SBDs). Goods with estimated values o f US$200,000 or less per contract may be procured usingNational Competitive Bidding(NCB) procedures and standard biddingdocuments agreed with IDA. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$30,000 equivalent per contract may be procured using shopping procedures based on a model request for quotations satisfactory to IDA. Limitedquantities o fvehicles and office equipment as specified inthe Procurement Planmay be - 59 -  procured from UNDP's Inter-Agency Procurement Service Office inaccordance with the provisions o f paragraph 3.9 o f the Guidelines. Selection o f Consultants 9. Consultant services will be contracted under this project inthe following areas o f expertise: support for participatory district planning, management quality assurance for local investment grants, support for planning and coordination o f training, institutional development, studies, training, design and supervision o fcivil works, andrelated subjects. 10. Firms: All contracts for firms, except for small and simple contracts estimated to cost US$lOO,OOO equivalent or less, would be procured using Quality and Cost Based Selection (QCBS) in accordance with Chapter I1o f the Consultant Guidelines. Services for tasks that meet the requirements set forth inparagraph 3.7 o f the Consultant Guidelines and are estimated to cost US$lOO,OOO equivalent or less per contract may be procured inaccordance with provisions o f paragraphs 3.1 and 3.7 of the Consultant Guidelines. Shortlists o f consulting firms for services estimatedto cost US$lOO,OOO equivalent or less per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultants Guidelines, unless international eligible consultants have expressed interest. 11. Individuals: Specializedadvisory services would be provided by individual consultants selected on the basis o f their qualifications for the assignment and hired inaccordance with the provisions o f paragraphs 5.1 through 5.3 o f the Consultant Guidelines. 12. Sub-projects (Grants Component): The project will finance implementation o f investment sub-projects determined on priority investments indistrict plans.The grant approval criteria have been laid out but do not require ay contribution by the district or community. However, financial management and accounting systems are being introduced to ensure proper use and account o f the grant funds. Procurement for the subprojects will follow simplifiedprocedures appropriate to the amount o f the grant. ODeratina Costs 13. Operating costs such as office supplies, telephone charges, fuel and maintenance for project vehicles, in-country travel, document reproduction, and similar items may be procured using administrative procedures as set forth inthe Project Implementation Manual andwhich are acceptable to IDA. The plan andbudget for the UCA's Operating Costs will be reviewed and approved by the Bank annually. PriorReview of Procurementby the World Bankand the ProjectCoordinationUnit 14. "Prior review" refers to the submission o f procurement documents for "no objection" by the supervisingandaccountable entity, which may be: (a) the World Bank according to the Procurement Guidelines, or (b) the Project Coordination and Support Unit(UCA). The proposed thresholds for prior review by Bank are summarized inTable B. The prior review by the U C A is also indicated in Table B. - 60 -  ProcurementManagement 15, Procurement activities will be carried out by the Project Coordination and Support Unit(UCA) and the provincial and district administration (under supervision o f the UCA). The U C A will include full-time Procurement Specialists whose responsibilities will include: (i) maintaining a data base on procurement actions for all contracts, (ii) carrying out and/or review o f procurement actions for all project components prior to their review by the World Bank, (iii) assist and facilitate procurement actions under the project, (iv) provide technical assistance and training to personnel o f the U C A and the [provincial and district administration, (v) coordinate with and support the consultant Works and Procurement Advisors who will provide direct technical assistance on subproject planning, procurement and contract supervision to the provincial and district administration, (vi) maintain files o f all standard procurement documents, (vii) prepare quarterly procurement reports, (viii) assist the Bank to carry out annual procurement reviews, and (ix) oversee semi-annual procurement audits by independent external agencies and take action on the reports arising therefrom. The specific tasks o f each o f the procurement specialists will be defined by the Project Coordinator. 16. Each province will have a ProvincialWorks and Procurement Advisor posted to the Public Buildings Departmento f the ProvincialDirectorate o f Public Works and Housing. The Public Buildings Department staff, supported by the Advisor and overseen by the Project Procurement Specialist based inthe UCA, will undertake all procurement for LIG financed subprojects managedat provincial level. Duringfirst six months after effectiveness these individuals will receive special training on procurement procedures and procurement documentation. The training programs will be repeatedly to build capacity. Further, as the number o f districts inthe program increases, the work load on the provincial staff will expand. At this time, additional procurement staff will be providedto the provinces, as needed. Procurement RiskAssessment 17. The main entities to assess is the UCA, the provincial offices and the district offices. U C A has done some procurement inthe context of the project preparation activities. It is a new organization that has one procurement specialist with some prior procurement experience ina Bank funded project. However, as most o fthe procurement inthis project will be conducted without prior review by Bank, and as mucho f it will also be done by the provinces and the districts who have very limited exposure to such procurement, the risk for the project is rated High. Further, the capacity o f U C A needs to be enhanced by employing a senior and experience procurement staff (initially for one year period) with capability to organize the overall system o f decentralized procurement, to monitor its operation and to guide the development o f the procurement activities andto develop the capacities o f the widely spread out procurement staff inthe provinces and the districts. Plans and funds have also beenincluded inthe project for capacity building and for period procurement audits. 18. Actions that will be taken to minimize risks o f procurement problems are: (i) provision o f training inprocurement to UCA staffandthe ProcurementOfficer, to ProvincialWorks andProcurement Advisors and personnel o f the Public BuildingDepartment, and to District Accounts and Works Technicians; (ii) performance of periodic procurement audits, including field inspections, by independent external experts inprocurement work; (iii)preparation o f a procurement plan with the participation o f all the relevant institutions and individuals; and (iv) creation o f a monitoring and filing system for all procurement actions which would be maintained by the UCA's Procurement Specialist, and (v) periodic training andcapacity buildingo f staff with a non-fungible budgetfor procurement training. - 61 -  RiskMitigationMeasures Action Timing Action by Provision o f Training inprocurement to: Initial within three by independent 0 UCA staff months o f effectiveness external experts in 0 Procurement Officer and then periodically (six procurement 0 Provincial Works and Procurement months to one year as work Advisors needed) 0 Personnel o f Public Building Department 0 District Accounts and Woks Technicians Periodic Procurement audits and field Annually by independent inspections external experts in procurement work Preparation o f Procurement plan By negotiations and By UCA with thereafter reviewed and participation o f all updatedperiodically relevant (annually) individuals and institutions Creation o f a monitoring and filing Within three months o f Procurement system for all procurement actions effectiveness specialist U C A Provide non-fungible budget for By Appraisal Recipient procurement training ProcurementPlan 19. At appraisal, the World Bank and DNPO preparedthe procurement plan for the project which will provide the basis for the aggregate amounts for the procurement methods (per Table A). At the beginning of each calendaryear, the UCA will updatethe ProcurementPlanwith a detailed procurement schedulefor the coming year. ProcurementManualas partof ProjectImplementationManual 20. The Project Implementation manual beingpreparedwill have a separate detailed set of chapters spelling out the various procures and the roles and responsibilities at UCA, the provinces and districts and guidance on use of different methods of procurement, among other topics. The manual will also contain Bank's June 8,2000 Memorandum Guidance on Shopping. - 62 -  Procurement Reportingand Supervision 21. A Procurement Management Report, showing procurement status and contract commitments, will be compiled quarterly by the U C A for inclusion inthe project's quarterly progress reports. 22. The Bank will carry out an annual ex post review of procurement actions not subject to prior review. This should cover a sample o fnot less than 20 % of the contracts signed. Procurement methods (Table A) Annex 6(A) ProcurementArrangements MOZAMBIQUE :DecentralizedPlanningandFinancingProject TableA: Project Costs by ProcurementArrangements (US$millionequivalent) (0.37) (0.37) Goods & Equipment 6.02 6.02 (4.82) (4.82) Consulting Services 11.23 0.79 12.02 (9.65) (0.33) (9.98) - Training 2.00 1.65 3.65 (2.00) (1.65) (3.65) - Incremental Operating Cost 4.90 4.90 (3.94) (3.94) Grants 19.24 19.24 (19.24) (19.24) TOTAL 6.02 0.46 19.24 6.83 11.23 2.34 46.29 (4.82) (0.37) (19.24) (5.88) (9.65) (1.87) (42.00) - 63 -  Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' Contract Vatu ect to Threshold W (US$thousand s) I. Works >500 ICB Prior (WB) 100-500 NCB Prior (WB) 30-100 NCB Prior(WB) Firstthree, the prior(UCA) 5-30 3 Quotations Post(WB), Prior(UCA) YR1, thenPost(WB and UCA) <5 Simplified shopping Post (WB and UCA) !. Goods >200 ICB Prior(WB) 50-200 NCB Post(WB) 5-50 3 quotations Post(WB), Prior(UCA) <5 Simplified shopping Post(WB and UCA) 1.Services :irms >loo <loo QCBS Prior(WB) CQ Prior (WB) YR1 then Post(WB) idividuals >50 IC Prior(WB) 10-50 IC Firstthree, then Post(WB) <IO IC Post(WB), Prior(UCA) YR1 then Post(UCA) Total value of contracts subject to prior review: 12.25 Overall Procurement Risk Assessment: High Frequency of procurement supervision missions proposed: One every six months (includes special procurement supervision for post-review/audits) RiskMitigation measures: See paragraph 17 above. "Thresholds generally differ by country and project. Consult "Assessment o f Agency's Capacity to Implement Procurement" and contact the Regional ProcurementAdviser for guidance. - 64 -  Annex 6(B): Financial Managementand DisbursementArrangements MOZAMBIQUE:DecentralizedPlanningand FinancingProject Financial Management 1. Summary ofthe FinancialManagementAssessment Organizational Structure The Project exists at three levels; central, provincial, and district (see detailed org. charts at the end of this Annex). The implementingagents o f this Project include the National Directorateof Planning and Budget (DNPO) inthe Ministry of Plan and Finance (MPF), and the Provincial Directorates o f Plan and Finance (DPPFs) and District Administrations (AD) inthe Provinces of Sofala, Manica, Tete and Zambezia. The three levels perform the following activities: . Central level: .. Project supervision by an inter-ministerial committee Project management by the DNPO Project implementation and coordination with provincial-level implementing agents by the UCA (or PCU) at the DNPO .. Provincial: . Project supervision by a provincial inter-ministerial committee Project management by the DPPF Project implementation and coordination with district-level implementingagents by the Provincial Project Coordination Unit (UPP). The Provincial UPP also works directly with DPPF staff involved inthe management o f the Local InvestmentGrants Component (LIG Component). District (LIG Component): . .. Project supervision by the DPPF and Provincial UPP Project management by the DPPF incoordination with the District Administrator Project implementation by the District Administration (AD), including the involvement of the new positions o f District Accountant and Works Technician. Project Components The Project has five components as follows: 1) ParticipatoryDistrict Planning 2) Local Investment Grants 3) Capacity Buildingfor Local Administration 4) Support for DecentralizationPolicy 5) Support to Project Implementation - 65 -  Strengths and weaknesses of the controlenvironment inMozambique Financial management in Mozambique i s weak. Systems that are designed well on paper are not implemented in practice. Also, there are pieces o f the puzzle missing, such as a comprehensive and up-to-date set of Procedures Manuals for government budgetingand accounting that includes Project financial management procedures; uniform application throughout the government o f systems for financial management and budgetary execution; and information systems sophisticated enough to produce timely and accurate information for reporting and control purposes. Add this to a weak internal and external audit system, and a weak judiciary, and there i s very little accountability inthe system. Reforms are underway in all o f the areas mentioned. Stronger systems and oversight capacity are being built. However, as the country requires external financing to meet its development goals, especially inthe fight to reduce absolute poverty, it i s not practical to hold all assistance until such time as the control environment i s strong enough to function on its own. Therefore, Projects take a "ring-fenced" approach to ensure funds are utilized as per the objectives agreed on for Project implementation. Supervision Financialmanagement supervision will be carried out regularly by the project FMS at least once a year. Inaddition, the project would be submittedto regular SOE reviews as requiredby the World Bank. .. The FMS will also: . Conduct a FMsupervisionbefore effectivenesddisbursement; Review the quarterly FMRs as soon as they are submitted to the World Bank; and, Review the annual Audit reports and Management letters from the external auditors and follow-up on material accountability issues by engaging with the TTL, Client, and/or Auditors. Accounting System, Accounting Policies and Procedures The Government accounting system is based on manual, single entry, cash-based system. Human capacity for modern accounting i s extremely weak, especially in the provinces. The quarterly execution reports prepared by the DNCP (since 2000) do not permit a comparison between budget allocations and actual expenditures by sector. Inspite ofthese weaknesses, the Projectwill needto adopt systems that are not incompatible with those of government. This i s inpart due to the capacity-building objectives o f the Project, which envisages strengthening the capacity o f local government to plan, execute, report on, and maintain local investments, under government systems. - 66 -  Therefore the accounting system will use government procedures as they exist on paper, while insisting on proper application o f those procedures. In order to achieve this, intensive training, and inspection and oversight o f the system to ensure compliance, will be required. Project management will also carefully study what additional procedures will need to be adopted at the implementingagents to ensure complete and accurate recording andreporting. The central UCA will use a double-entry cash-based system to produce consolidated financial data on the entire project. This will be maintainedon an information system still to be determined. The Provincial UPP will also be trained to use the double-entry cash-based system, and it is envisaged that both central and provincial levels will adopt the same software to manage project data and reporting. The Province and Districts, which will work the LIG Component, will use a single-entry cash based system. A computerized Grants financial management module i s being developed for the Provinces, and manual books of registry will be used in the Districts. The Districts will function as collectors of primary-level data, and will report to the Provincial DPPF. It will be up to the Province to incorporate district-level financial data into the integrated financial accounts and to then send this data to the central level for overall consolidation and reporting. Books of registry In addition to any information system installed, and the books, such as bank books, needed to maintain an accurate and complete record of transactions, the various implementing agents will maintain a set of additional books of registry for control purposes. These books include: 1. A FixedAsset Register at each level 2. A Contracts Registerat each level 3. Books of control for document deliveries and controlled stationery such as checks Budgeting For the purposes of the WB grant financing of centrally-managed components, the U C A will produce annual procurement and disbursement plans that will be used to monitor and plan cash flow needs. For the LIG Component, the Project Management unit will communicate budget limits (as the State does) to the implementing agents (the Provincial DPPFs), and budgets will be prepared in accordance with government practice and then consolidated into the overall Project Budget and ImplementationPlan. The UCA and UPP Coordinators will be responsible for authorizing expenditures for their respective components in accordance with the agreed budgets. Reporting (Financial Monitoring Reports) .. The following consolidated quarterly FMRswill beproducedby the UCA: Sources and Uses o f Fundsby Project category Uses o f Funds by Project Component - 67 -  .. Output MonitoringReport (type of monitoring informationto be defined) Procurement MonitoringReports The formats were finalized during negotiations and the Project will be capable of producing the FMRsby effectiveness. Project Financial Statements In addition to the monthly reconciliations and quarterly monitoring reports, the Project will produce annual Project Financial Statements for analytical and audit purposes. These Financial Statementswill be composed of: 1, A Consolidated Statement of Sources and Uses o f Funds(showing IDA and Counterpart Funds as well as funds provided by donors); 2. A Statement reconciling the balances on all Bank Accounts to the bank balances on the Statement of Sources and Uses o f Funds; 3. SOE Withdrawal Schedule, listing individualwithdrawal applications relatingto disbursementsby the SOE Method, by reference number, date and amount; 4. A Cash Forecast for the next two quarters; 5. Notes on significant accounting policies and accounting standards adopted by management when preparing the accounts; andon any supplementary information or explanations that may be deemedappropriate by management to enhance the presentation o f a "true and fair view.I' Monitoring Project monitoring will take the following forms: ... Management oversight by the UCA of the Provincial UPP and the LIG component, and by the Provincial UPP o f Provincial and District LIG financial management; Quality Assurance contract for quarterly supervision and review o f the LIG Component implementation; Annual external audit of the Project finances. Impact of Procurement Arrangements on Financial Management Procurement at the central level will be under the management o f the Senior Procurement Specialist and it i s expected that all the international procurements and other large national procurements would be managed out o f the UCA. At the provincial and district level, procurement will be under the management of the UPP for components other than the grants. This unit will be closely supervised by the UCA. For the LIG, there will be criteria established for the procurement o f works and services under the grant component that will endeavor to ensure a simplified yet controlled procurement process. The models that already exist on other community-basedprojects for simplifiedprocurement will apply and will be adapted to this Project. There will be directly hired procurement staff at the provincial level to oversee the procurement for grants. - 68 -  Staffing and Training The central UCA has a financial manager on staff. A central-level accountant, reporting to the Financial Manager, with relevant qualifications will needto be recruited. The financial management capacity at the four Provincial Directorates of Planning and Finance is weak. In the Provincial Directorates of Planning and Finance most o f the staff at the Department of Public Accounting do not hold an accounting qualification. The staff at the Provincial Directorates of Planning and Finance does not have experience in handling World Bank-financed projects. However, some staff has experience in handling financial management o f other donor-funded projects. They have been exposed to the concept o f accounting and reporting to various levels (including central level and donors). The Project will appoint a Supervisory Accountant to the Provincial UPP. This Supervisory Accountant will report to the Provincial Project Coordinator. This Supervisory Account will work exclusively with the DPPF Accountant appointed to manage the LIG Account, and the Districts managing LIG funds. The UPP will also appoint another accountant to the team to manage transactions for other DPFP components. The DPPFs will also appoint a qualified and experienced Provincial Grant Accountant, acceptable to the Bank, to manage the Local Investment Grants (LIGs). Reporting to the Director of the DPPF with oversite by the Supervisory Accountant, the Provincial Grant Accountant should be capable o f managing financial management operations o f the Local Investment Grants at the provincial level. District Administrations have very weak financial management capacity. None of the districts visited have experience inhandling the World Bank-financed project. The staff handling financial management issues at districts administration is not experienced and qualified accountants. Each participating district administration will need intensive training to be able to manage grant accounts. The District Administrator and hisker staff will work under the guidance of the Supervisory Accountant and in direct collaboration with the Project Accountant at the DPPF on financial management o f the Local Investment Grants (LIGs). In order to be eligible for local investment grants, the participating Districts will need to appoint District Accountants acceptable to DPPF to coordinate the implementation and financial management of project activities at the District level. Training on the new financial management system will be initiated before project effectiveness. Additional on-the-job training will most likely be necessary. - 69 -  RISKASSESSMENT Country Risks The overall conclusion of the Country Financial Accountability Assessment (CFAA) dated December, 2001 i s that `)public sector financial management systems in Mozambique are very weak, as evidenced by the Report of the Tribunal Administrativo of the Government General Accounts Report for 1998(1)and 1999, and will require substantial strengthening over several years. In the interim, risk of waste, diversion and misuse of funds are assessed as high. The public sector financial environment in Mozambique denotes a situation of high fiduciary risk: material receipts and payments are excludedfrom the budget andfrom Government accounting and reporting system; accounting systems and standards are outmoded; internal and external auditing require substantial support; and parliamentary oversight requires strengthening ... Efforts have been made in recent years to reduce the fiduciary risk through (among other measures) the strengthening of the internal audit capacity of the IAD, and the creation of external audit capacity within the AT. Both of these efforts (as well as others) need to be intensij?ed, because there is still a lot of work to be done in this area. '' (I) TheGovernmentGenemlAccountsReport (Conta GeraldoEstado, CGE)w apubkshedandaudized the TAfor thefirst time during2000 Project Risks Again from the CFAA: "Because of the highfiduciary risk, IDA has taken special measures to ensure adequate financial management of its portfolio. Project management units are ofen established to manage IDA-financed projects and Bank funding is "ring-fenced" to mitigate fiduciary risk. Accounting staff is hired as consultants, typically on salaries higher than civil service salaries, to work on projects, even when a Ministry implements those projects. IDA projects are invariably audited by one of the "Big Four" international auditfirms. " Specific to this Project, but not unique in Mozambique, are the risks o f decentralized financial management ina weak control and low capacity environment. Government accounts are regularly late and incomplete. Accountants at the Provincial level interviewed on other aspects o f Project design, mentioned the weak compliance of districts with government reporting procedures, and the weak capacity of the provincial level to insure accountability at the district level. The same problems and delays are experienced betweenProvincial and Central level. Risks include: 1) Illiquidity at all levels delaying project implementation through lack of counterpart funds; 2) Weak financial management capacity delaying implementationthrough faulty and untimely reporting, or misapplication o f resources; 3) Delays inimplementation due to the time and capacity required to train staff to an adequate level to manage a ring-fenced, and decentralized Project management structure. -70-  Risk Assessment H I S l M l N Comments Inherent Risk 1. Corruption X 2. Poor governance X ** 3. Weak Judiciary X 4. Weak Management capacity X ** OverallInherent Risk X * Control Risk 1.Implementing Entity X ** 2. Funds Flow X Counterpart funds 3. Staffing X ** 4. Accounting Policies and X ** Procedures 5. Internal Audit X ** 6. External Audit I I / X I I ** I 7. Reporting and Monitoring X ** 8. Information Systems X ** Overall Control Risk X ** * In order to mitigate the weaknesses o f the FM systems in Mozambique, a "ring-fenced'' financial management strategy, with dedicated bank accounts, and Project Financial Procedures Manuals, will be ** developed for this Project. These items are considered moderate, not substantial or highrisk as long as mitigating factors, as described in the FM Action Plan, are put in place, and a separate Project Coordination Unit is set up at central and provincial levels. 2. Audit Arrangements Internal Audit The Inspectorate General o f Finance (IGF) (Inspecpio Geral das FinanGas), has limitedcapacity to oversee Project implementation. Each Central and Provincial Directorate of Planning and Finance has a DepartmentlSection o f Revenue and Internal Audit (Departamento/Sec@o de Receitas e Fiscalizapio). In those Departments/Sections there i s a shortage of experienced staff in auditing and accounting as well. Taking into account that the internal audit functions are weak, there needs to be strong supervision and quality assurance at all levels of the Project. Therefore, the day-to-day supervision o f accounting functions will be assured by the organization structure of the Project, which calls or a Financial Manager at the Central Level, and Supervisory -71 -  Accountants at the Provincial Level contracted by the Project. A Management Quality Assurance contract will be signed to perform reviews of the implementation o f the LIG Component and compliance with Project procedures. External Audit Relevantly qualified, experienced and independent auditors will be appointed on approved terms o f reference. The external audit will cover all World Bank funds and Counterpart funds. The IDA Grant Agreement will requirethe submission o f audited financial statements (consolidated) to the Bank within six months after the year-end. Besides expressing a primary opinion on the audited financial statements in compliance with International Auditing Standards (IFAC/INTOSAI pronouncements), the auditor will be required to include a separate paragraph commenting on the accuracy and propriety o f expenditures withdrawn under SOE procedures and the extent to which these can be relied upon as a basis for grant disbursements. Regarding the Special Accounts, the auditor will also be expected to form an opinion as to the degree of compliance with World Bank procedures and the balances at the year-end. In addition to the audit report, the auditor will be required to prepare a separate Management Letter giving observations and comments, and providing recommendations for improvements of accounting records, systems, controls and compliance with financial covenants in the IDA Agreement. 3. DisbursementArrangements Banking Arrangements: World Bank grants in Mozambique are generally controlled through separate bank accounts (Special Accounts (SA)) managed by a Project Coordinating Unit. Normally, inWB grant management in Mozambique, the G O M agrees to open a separate Project Account (PA) where counterpart funds are deposited in agreed amounts and managed by the U C A to fulfill counterpart financing requirements. This Project will adopt the SA and PA structure. The Provincial Project Units (UPPs) will manage provincial-level Second Generation Special Accounts (SGSAs) for IDA funds and Project Accounts for government funds. The DPPF will be a grantee under Component 2 and will receive grant disbursements from the SA. These grants are 100% grant-financed, and will be managed by a government accountant, reporting to the DPPF, who will be supervised as well by the Project's Supervisory Accountant at the Provincial level. The Grant account will receive advances from the Special Account at the beginningo f the year on submission o f approved plans, and thereafter will receive replenishments o f eligible expenditures to continue to finance approved activities. The Recipient may withdraw an amount from the Special Account sufficient to meet eligible expenditures for a period of 90 days. For the Special Account 90-Day Advance, applications for replenishment to the special accounts should include a reconciliation statement for the special account in the standard format showing, the deposits received from the Bank, the amount -72-  advanced to each decentralized project location, on the date on which each advance was made and the amount awaiting documentation from each o f these locations. In addition, the reconciliation statement should identify each lower level UPP which did not account for an advance within the 90-day accountingcycle with an explanation for the delay. Districts will open accounts to receive Grant disbursements. Each district will maintain two accounts, one for larger works contracts, which will be managed as a zero-balance account, only receiving transfers when invoices are presented for payment. The second will be managed on an imprest basis, receiving an initial advance, and then replenishment on presentation o f adequate justifications o f eligible expenditures. Disbursement Method: Disbursements will be transaction-based (replenishment, reimbursement, direct payment and payments under Special Commitments) with full documentation or against statements o f expenditure as appropriate. Use of Statement of Expenditure: Disbursements will be made on the basis o f SOEs for: (i) contracts with consultant firms less than $100,000 equivalent each; (ii) individual consultants less than $50,000 equivalent each; (iii) contracts for civil works less than $100,000 each; (iv) contracts for goods and equipment less than $200,000 each; and (v) training, incremental operating costs, grants and audits. Definition of Incremental Operating Costs: The term "Operating Costs" means the incremental expenses incurredby the Recipient on account o f the Project implementation, management and monitoring, including maintenance o f information system, office supplies, insurance for, and maintenance and operation o f vehicles, travel and salaries o f support staff, and travel o f civil servants involved inProject support activities, excluding salaries o f civil servants. SpecialAccount: A Special Account will be opened and maintained ina bank acceptable to IDA and managed by the Project Coordinating Unit. Based on the project' s five year implementation, the Authorized Allocation o f the Special Account will be $2.8 million, representing the estimated amount needed for a four-month period. It has been agreed that there will be Second Generation Special Accounts established for the UPPs, in Meticais, and that funds would be advanced to cover expenditures for a 90-day period rather than the usual 30 day period. Applications for replenishment to the Special Account should be submitted monthly, regardless o f amounts disbursed, and must include reconciledbank statements as well as other appropriate documentationneeded to support the 90-day advances and Second Generation Special Accounts which are to be established for the UPPs. (see discussion above) Flow of Funds: The chart at the end o f this Annex illustrates the banking and flow o f funds arrangements. - 73 -  Expenditure Category Amount in Financing Percentage US$ million (1) Works 0.2 100%of foreign expenditures 80% o f local expenditures (2) Goods 4.7 100% of foreign expenditures 80% of local (3) Consultants' Services (excl. Trainers) 8.7 86% (4) Training and Audits 3.4 100% (5) Local Investment Grants 19.2 100% of amounts disbursed (6) Operating Costs 3.7 80% (7) Refunding of Project PreparationAdvance 1.9 Amount due pursuant to Section 2.02(c) of the DGA (8) Unallocated 0.2 ITotal Project Costs 42.0 Total IDA 1 42.0 1 CONCLUSION The project financial management risk i s assessed as being very moderate provided that the financial management arrangements are properly implemented and the financial management action plan satisfactorily addressed in practice. Based on the evaluation above, the Project will satisfy Bank financial management requirements if it complies with the following plan. Financial Management Action Plan Action Due Date Conditionalitv FMRformats agreed Negotiations Negotiations Qualified and experienced Financial 'rior to negotiations. Must be in Manager appointed to the Project imeto be trained on FMS Coordination Unit to supervise the entire financial management structure o f the Project. Relevantly qualified external auditor iffectiveness Condition of appointedon approvedterms o f references. Effectiveness Financial Management System (FMS) Effectiveness Condition of designedand installedat the central level. Effectiveness This includes: . Procedures Manual Information System - 74 -  .. Training Abilitv to DroduceFMRs Financial Management System (FMS) Prior to disbursements to the :ondition of .. designedand installed at the provincial provincial level. 3ffectiveness to level. This includes: 'rovince Procedures Manual InformationSystem Training Qualified and experienced Project Prior to disbursement o f grant 2ondition of Accountants appointed to the Project funds other than grants to a Iisbursementof Coordination Units o f the Provinces to Province. Must be intime to 'roject Funds to manage the flow of funds at provincial level be trained on FMS he Provincial UPP outside o f the Grants. Qualified and experienced Supervisory Prior to disbursement of grants Condition of Accountants appointed to the Project to a Province. Mustbe intime Effectiveness of Coordination Unitsof the Provinces" to to be trained on FMS Grants to the supervise the management o f the Grants Provincial level account at the Provincial Directorateso f Planning and Finance and inparticipating Districts. Financial Management System (FMS) Prior to disbursements designedand installed at the district level. .. This includes: . Procedures Manual Information System Training Designated staff appointed to handle the Prior to disbursement o f LIG2 Condition o f financial management issues of the Project and LIG 3 to each District. Eligibility for at participating Districts. Mustbe intime to betrained Grants on FMS. Management Quality Assurance contract Within six months of signed, and evaluation of the Grants' Effectiveness financial management compliance as part o f M O A TORS. * Initially intwo provinces a supervisory accountantwill be appointedto each province. Ifthe volume of work does not warrant a position for eachprovince, fiture SupervisoryAccounts can work 1 per 2 provinces or regionally. - 75 -  Organization Charts of the DPFP: Central, Provincial and District Levels I Comite de Supervisao MPF, MAE, MOPH, MADER 1 I I Grupo Tecnico MPF, MAE, MOPH, MADER n 'i I-I CootdenadorTwnlco 1 ' I I- - 76 -  I 0.0 de Edlflcawes.DPOPH 1 Planeamawnto e Ordenamento Terrltorlal, TBVllM PlaaneameoloTB"IO"Bl . - 77 -  [ ., Equipe de Apoio Tecnico II D P O P H ~ ; II DPPF; -1 ~~ na Planificacao Assessor de Obras Supervisor de Contabilidade 8. `.'\ 9 ___________I_ Eiementosdo 1 Grupo Tecnico Auxiliar de de Planiflcacao 1 _j Pessoal Existente do Quadro PessoalNovo no Quadro - 7%-  t Disbursement and Flow of Funds Arrangements for the DPFP Washington Central Credit Account Treasury Account .<3 CENTRAL LEVEL USD % Suppliers of Goods and Account USDlMTs Services +%MTs --t PR VIN IAL EVEL Central Treasury Account MTs at Province Provincial Special MTs LIG 1 Administrative Infra. Province 1 LIG 1 Suppliers Grants of Goods and Account Services 1 MTs MTs DISTRICT LEVEL District 1 District 1 District District 4 LIG 2 Soci -Econ. Infra. MA LIG 3 Commu ity Infra. LIG 2 Suwliers - 79 -  Annex 7: Project Processing Schedule MOZAMBIQUE: Decentralized Planning and Financing Project I I I ~ First Bank mission (identification) 06/22/1998 0612211998 Appraisal mission departure 11/01/2002 05/05/2003 Negotiations 07/25/2003 07/25/2003 Planned Date of Effectiveness 0111512004 Prepared by: Lance Morrell Preparationassistance: Bank staff who worked on the project included: Name SDecialitv Lance Morrell Team Leader Alan Carroll Team Leader Kate Kuper UrbanSpecialist Aniceto Bila Operations Officer Joao Tinga Financial Management Analyst Marius Koen Senior FinancialManagement Specialist Subhash Dhingra Senior Procurement Specialist Natalino Nascimento Civil Engineer LaurenWojtyla Financial Specialist Louis Helling Decentralization Specialist Albert0 Ninio Senior Counsel John Hatton Environmental Specialist Bridie Champion Disbursement Officer LuKang Program Assistant IsabelNhassengo Procurement Assistant Rildo Santos Team Assistant - 80 -  Annex 8: Documents in the Project File* MOZAMBIQUE:Decentralized Planning and Financing Project A. Project Implementation Plan B. Bank Staff Assessments 1. Proposed "Environmental Impact Assessment" and "Resettlement Policy Framework" for DPFP, John Hatton -- March, 2003 2. "Diagnosis o f Public Sector and Private Sector Systems and Capacities for Decentralized Management of Small-Scale Public Works," Natalino Nascimento- June, 2002 (in Portuguese) 3. "Participation, Transparency, and DownwardAccountability inDistrict Planning in Mozambique," Rodrigo Serrano -- August 2002 4. Financial ManagementAssessment Report, Joao Tinga, Lauren Wojtyla and Marius Koen -- October 2002 and updated June 2003. C. Other Small-scale Infrastructure inMozambique," Louis Helling -- August, 2000 1. "The Policy and Institutional Framework for DecentralizedPlanning and Management of 2. "Strategy Document for DecentralizedPlanning and FinancedProgramme" (Draft, Version 3 revised),DNPO/MPF & UCA -November, 2001 (inPortuguese) 3. "Report o f Initial Assessment Missions to the Provinces," UCA, DNPO/MPF- February, 2002 (inPortuguese) 4. Financial Flows and Financial Management Systems for Provincial and District Administrations," Adrian Fozzard -- February, 2002 5. "Baseline Study and Capacity BuildingProposals concerning Management o f Public Building Constriction at Provincial and District Levels inthe Context o f PPFD," Mahomed Ayob - March, 2002 (in Portuguese) 6. "Identification of Best Practices for Community Animation inthe District Planning Process," Patrick Matakala and Eunice Cavane -March, 2002 (inPortuguese) 7. "Conditions for the Expansion o f PPFD inNew Provinces and Districts," Gulamo T a j e~ Anselmo Zimba -- April 2002 (in Portuguese) - 81 -  Context of PPFD," Francisco Mucanheia e Filimone Meigos -- April 2002 (inPortuguese) 8. "Diagnosis o f the Institutional Capacity BuildingNeeds of District Administrations inthe 9. "Report o f Provincial and Central Level Consultations concerningthe PPFD Strategy Document," Henriques AndrC e Anselmo Zimba - June, 2002 (inPortuguese) 10. "Dossier o f Documentation for DPFP Pre-AppraisalMission," UCA & DNPO/MPF -July, 2002 (inPortuguese) 11, "Analysis o f the Flow of Funds, Flow of Information, and Documentary Processesof the Mozambican Government Investment Budget (01) System As I t Relates to Project Financial Management," (revised version) Lauren Wojtyla - October, 2002 Anselmo Zimba -- February, 2003 (inPortuguese) 12. "Baseline Assessment of Existing Human Resources inManica and ZambCzia Provinces," 13. "Technical Note: Formal Bases for Community Participationand the Organization for Consultation inDistrict Planning," J. Oscar Monteiro -- December, 2002 (in Portuguese) Consultation in District Planning," J. Oscar Monteiro -- December, 2002 (in Portuguese) 14. "Legal Opinion: Formal Bases for Community Participation and the Organization for Draft)," - U C A & DPFP Technical Team w/ Filimone Meigos -- March 2003 (inPortuguese) 15, "Guidelines for Community Participation and Consultation in District Planning (Discussion "Approaches to Sectoral Coordination of Small Scale Rural Investment," (Discussion Draft), Jeremy Gottwals & Anselmo Zimba -- March, 2003. *Including electronic files - 82 -  Annex 9: Statement of Loans and Credits MOZAMBIQUE: Decentralized Planning and Financing Project 26-Jw-2003 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO49878 2003 MZ-EMPSO 0.00 120.00 0.00 0.00 68.10 36.50 0.00 PO72080 2003 PUBLIC SECTOR REFORM 0.00 0.00 0.00 0.00 27.47 6.38 0.00 PO78053 2003 HIV/AIDS Response Project 0.00 0.00 0.00 0.00 58.89 0.00 0.00 PO69824 2002 Higher Education Project 0.00 60.00 0.00 0.00 60.55 -3.52 0.00 PO01808 2002 MZ-MUNICIPAL DEVELOPMENT PROJECT 0.00 33.60 0.00 0.00 30.47 4.92 0.00 PO73479 2002 MZ - Communication Sector Reform 0.00 14.90 0.00 0.00 13.30 -0.63 0.00 PO01785 2002 MZ-ROADS a BRIDGES MMP 0.00 162.00 0.00 0.00 176.03 48.29 0.00 PO01808 2001 Mineral Resources Project (NRMCP) 0.00 18.00 0.00 0.00 16.40 2.06 0.00 PO49874 2000 ENTERPRISE DEVELOPMENT 0.00 26.00 0.00 0.00 16.62 14.48 0.00 PO70305 2000 Coastal and Marine Biodiversity MGMT 0.00 5.60 0.00 0.00 5.10 4.80 0.00 PO42039 2000 RAILWAY a PORT RESTR 0.00 100.00 0.00 0.00 68.83 45.69 0.38 PO35919 2000 COASTAL MANAGEMENT 0.00 5.60 4.11 0.00 3.48 3.53 2.35 PO01786 1999 Education Sector Strategic Program(ESSP) 0.00 71.00 0.00 0.00 54.44 52.60 0.00 PO01799 1999 AGRIC SECTOR PEP 0.00 30.00 0.00 0.00 18.97 20.14 0.00 PO52240 1999 NATIONAL WATER I1 0.00 75.00 0.00 0.00 66.66 34.75 0.00 PO39015 1998 NATIONAL WATER I 0.00 36.00 0.00 0.00 23.44 20.68 0.00 PO01759 1997 TRANSBORDER PARKS 0.00 0.00 5.00 0.00 0.19 5.00 0.00 PO01792 1996 HEALTH SEC RECOVERY 0.00 98.70 0.00 0.00 10.79 21.20 0.00 PO01804 1994 MZ 2nd road and coastal 0.00 188.00 0.00 1.66 12.99 14.42 14.30 PO01780 1994 MZ GAS ENGINEERING (ENGY) 0.00 30.00 0.00 3.47 0.30 4.22 4.22 Total: 0.00 1074.40 9.11 5.12 733.03 335.54 21.25 - 83 -  MOZAMBIQUE STATEMENT OF IFC's HeldandDisbursed Portfolio May 30 2003 - InMillions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 SEF Grand Prix 0.46 0.00 0.00 0.00 0.27 0.00 0.00 0.00 1999 SEF ROBEIRA 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00 1998 BIM-INV 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.00 2000 BMF 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 1997/01 MOZAL 25.00 0.00 0.00 0.00 13.32 0.00 0.00 0.00 1999 Maragra Sugar 10.30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1992 Polana Hotel 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 2000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.45 0.00 0.00 0.00 1997 SEF CPZ 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 1997 SEF CTOX 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.00 2000 SEF Cab0 Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.00 Total Portfolio: 39.13 0.50 0.00 0.00 16.62 0.50 0.00 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 1999 Mozal Swap 9.00 0.00 0.00 0.00 2003 Novobanco RI 0.00 0.00 0.20 0.00 Total Pending Commitment: 9.00 0.00 0.20 0.00 - 84 -  Annex I O : Country at a Glance MOZAMBIQUE: Decentralized Planning and Financing Project Sub- POVERTY and SOCIAL Saharan LOW- Mozambique Africa income Development diamond' 2002 Population,mid-year (millions) 18.4 686 2,495 Life expectancy GNI per capita (At/as method, US$) 200 450 430 GNI (Atlas method, US$billions) 3.7 306 1,072 Average annual growth, 1996-02 Population (%) 2.1 2.4 1.9 Laborforce (%) 2.1 2.5 2.3 GNI Gross per primary Most recent estimate (latest year available, 1996-02) capita nrollment Poverty (% ofpopulation below nationalpoveWline) 69 Urban population (% oftota/poPulation) 34 33 30 Life expectancyat birth (years) 41 46 59 Infantmortality (per 1,000live births) 126 105 81 Child malnutrition (% ofchildren under5) 26 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 57 58 76 illiteracy (% ofpopulation age 15+) 54 37 37 - Gross primaryenrollment I%of school-age population) 92 86 95 Mozambique Male 104 92 103 Low-incomegroup Female 79 80 87 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1982 1992 2001 2002 Economic ratlos. GDP (US$ billions) 3.6 1.9 3.4 3.6 Gross domestic investmenVGDP 6.0 15.6 26.5 23.7 Exports of goods and services/GDP 8.3 13.9 21.8 23.5 Trade Gross domestic savings/GDP -11.9 -17.2 12.8 8.9 T Gross nationalsavingsIGDP 5.4 3.6 Current account balancelGDP -13.7 -19.0 -46.7 Interest payments/GDP 0.0 2 3 0.2 0.8 Total debVGDP 3.5 276.8 129.5 128.1 Total debt service/exports 0.2 19.7 7.6 8.4 Present value of debVGDP 26.7 Presentvalue of debvexports 78.9 Indebtedness 1982-92 1992.02 2001 2002 2002-06 (average annualgrowth) 1 -Mozambique GDP 2.4 8.1 13.0 8.3 GDP Der caDita 1.1 5.7 10.6 6.1 i Low-incomegroup I STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of Investmentand GDP (%) (% of GDP) Agriculture 33.8 32.0 26.7 26.8 T Industry 32.6 16.3 27.6 27.7 60 Manufacturing 7.6 15.3 15.4 40 Services 33.6 51.7 45.7 45.5 20 0 Private consumption 97.7 104.6 76.4 60.1 -20 General governmentconsumption 14.1 12.6 10.8 11.0 I Imports of goods and sefvices 26.2 46.7 35.4 38.2 -GDi - O ' G D P 1982-92 1992-02 2001 2002 (average annualgrowth) Growth of exports and Imports(x) Agriculture 3.1 6.7 12.6 7.2 I Industry -3.7 17.3 20.1 15.1 40 Manufacturing 18.8 27.2 6.2 Services 8.6 3.1 8.1 0.3 20 Private consumption 0.2 4.3 -2.1 10.9 0 Generalgovernmentconsumption 0.0 5.4 17.9 14.7 -20 Gross domestic investment 5.6 12.0 -10.0 3.9 Imports of goods and services -1.9 4.3 -14.9 16.6 * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - a5 -  Mozambiaue PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 1 Inflation (%) 1 Domesticprices (% change) 50 Consumer prices 17.7 45.1 9.0 16.8 40 Implicit GDP deflator 17.5 44.6 10.6 10.8 30 20 Government finance 10 (% of GDP, includes current granfs) 0 Current revenue 19.2 20.3 18.2 18.0 97 96 89 00 01 02 Current budget balance 3.2 4.4 3.7 2.2 -GDP deflator Overall surplusldeficit -5.0 -10.0 -16.5 -15.8 - 0 ' C P I I TRADE 1982 1992 2001 2002 (US$ millions) Export and Import levels (US) mill.) Total exports (fob) 229 139 703 682 11,500 T Cashews 44 18 31 51 Prawn 39 65 81 108 Manufactures 14 13 13 1,000 Total imports(ci0 745 1,063 1,263 Food 72 99 500 Fuel and energy 41 43 I I Capital goods 396 525 0 Exportprice index (1995=100) 90 90 87 85 96 97 98 99 00 01 Import priceindex (1995=100) 110 93 82 61 Exports Imports O2 Terms of trade (1995=100) 81 97 106 106 BALANCEof PAYMENTS 1982 1992 2001 2002 (US$ millions) 1 Current account balanceto GDP (%) I Exportsof goods and services 337 304 1,008 1,187 0 Importsof goods and services 893 860 1,578 1,637 5 Resource balance -556 -556 -570 -650 -10 -15 Net income -20 -183 -254 -190 -20 Net current transfers 0 0 -25 -30 Current account balance -497 -352 -1,604 -35 Financing items (net) 356 392 1,607 -40 Changesin net reserves 141 -40 -3 -192 .45 -50 Memo: Reserves includinggold (US$ millions) Conversionrate (DEC, /ocallUS$) 37.8 2,566.5 20,703.6 23,678.0 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Comporltlon of 2002 debt (US) mlll.) Total debt outstandingand disbursed 125 5,130 4,450 4,610 IBRD 0 0 0 0 IDA 0 417 777 985 G: 371 Total debt service 1 63 69 103 IBRD 0 0 0 0 IDA 0 3 7 7 Compositionof net resourceflows Official grants 101 726 656 Official creditors 60 171 93 229 Private creditors 0 -3 -30 -37 Foreign direct investment 0 25 480 Portfolioequity 0 0 0 E: 1.028 World Bank program Commitments 0 289 229 180 - E Bilateral Disbursements 0 1 IBRD 106 52 149 3 -IDA D other multilateral F Private -- Principalrepayments 0 0 3 2 > - IMF G Short-tern - Net flows 0 106 49 147 Interestpayments 0 3 4 5 Net transfers 0 103 44 142 >= - 86 -  Additional Annex 11: Summary MOZAMBIQUE: Decentralized Planning and Financing Project Summary of UNCDFExperiencein Nampula Beginning in 1995, the UNCapital Development Fund(UNCDF) carried out a small-scale infrastructure development project inNampula Province. As a result o f implementation difficulties attributed to weak institutional linkages to local government structures, low levels o f community participation inplanning and implementation, and resultant concems regarding ownership and sustainability, this project was reformulated. The successor project "Support to Decentralised Planning and Finance inNampula Province" began implementation in 1998. The Nampula DPFP was developed inclose collaboration with the UNDP supported Economic Management Programme whose Technical Assistance Component to the National Directorate o f Planning and Budget(Output 2.2) supportedthe development o f strategic and operational planning and budgeting systems at provincial, and later, at district level. As a result o f this collaboration, inSeptember 1998 the MinistryofPlanningandFinance (MPF) andtheMinistryof StateAdministration (MAE)jointly published a set o f official Guidelinesfor District Development Planning. On the basis o f these guidelines, the Province o fNampula supported by the UNCDF project embarked upon a pilot programme to promote more effective district development planning and community participation through the devolution o f increasing administrative and financial responsibilities to the district level. The programme is executedby the Provincial Directorate o f Planning and Finance (DPPF), as an integral element o f the decentralised planningprogramme o f the MPF. As part o f the Nampula pilot initiative, the UNCDFand the Government o f the Netherlands provided funding to the provincial capital investment budget to enable direct fiscal transfers to the district level. A technical assistance component, partly funded by the UNDP, operates alongside these initiatives with the principal objective o f building capacity and creating the conditions for the effective programming and management o f these funds andthe resultinginfrastructure investments. From January to July 2000, an external Mid-Term Evaluation (MTE) o f the Nampula DPFP was undertaken. The MTE grantedthe Project with developing an effective and replicable system for participatory and decentralised district planning. The "Nampula approach" was recognised by the G o M and donors as one o f the most coherent and potentially sustainable initiatives o f its kindinMozambique. At the same time, the MTE acknowledged that the pilot phase was far from complete and notedthat there were a number o f key aspects that required further support, particularly inthe areas o f participation, plan implementation, local financing, capacity buildingand local economic development, inorder to make the approach more replicable. InOctober 2000 a stakeholder workshop was heldinMaputo to review the findings ofthe MTE. At this time, the G o M expressed its official interest not only inreplicating the methodologies developed in Nampula but inworking to upscale the DPFP into a National Programme with the support o f the UNCDFNNDP, the World Bank and bilateral donors. This interest provided further justification for the continuation o f the Nampula project, not only as an important "laboratory" or testing ground for the national programme but also as a "school" which can help to provide advice andtraining for personnel from other provinces. As a result, a second phase o fthe UNCDFLJNDP DPFP was approved in2002 with bilateral co-financing - 87 -  from the Netherlands, Norway and Switzerland. PhaseI1continues to support Nampula Province in improving and consolidating DPFP systems as well as piloting new elements such as district finance including revenue mobilizationand recurrent cost budgeting, strengthening local economic development and natural resource management dimensions o f district plans, and linkingdistrict planningto town planningin small rural municipalities. Inaddition, Phase 11will introduce the DPFP approach to Cab0 Delgado Province andprovide support to MPF at central level for decentralization policy development and monitoring and evaluation as well as to the Ministry o f Public Works instrengthening systems for procurement, management and maintenance o f local infrastructure investments. Since the GOM request inOctober 2001 for IDA support inexpanding DPFP coverage to the four provinces o fthe central region and infurther developing the policies and methodologies required for the eventual formalization o f a National Program for Decentralized Planning and Finance, the WB Task Team and the PPF financed DPFP Coordination and Support Unit (UCA) inthe MPF have worked closely with UNCDF staff andproject personnel. A joint U N C D F N B mission at the early stages o f WB supported project formulation and frequent contacts at headquarters and field level have reinforced this collaboration. UNCDF personnel have reviewed and commented upon preparatory studies and on draft P A D elements duringproject preparation. At present the following specific areas of collaboration are foreseen before andduring the first year of IDA financed DPFP implementation: development o f ajoint framework for monitoring and evaluation (to be adapted and applied at project level as required); development o f manuals and training materials for district planning methodologies (based on Nampula materials refinedto facilitate field use by personnel at various levels); development o f official GOM guidelines for community participation and consultation indistrict planning (based on Nampula experience and on the results o f studies and consultation processes supported by the PPF); development o f common procedures and standarddocuments for decentralized works procurement and contracting (jointly with MOPH usingmaterials from Nampula and those adapted from M D P to fit DPFP requirements); support for GOM decentralization reform processes (linkingUNCDF decentralization advisor inMPF with DPFP funded policy consultancies and capacity building activities). Insubsequent years, further areas oftechnical collaboration insupport ofpolicy andmethodology development and fieldtesting will be defined. It has been agreed that an annualjoint IDA-UNCDF supervision mission will provide a basis for planning this collaboration, monitoring progress inreform and field operations, and coordinating the development o f future financial and technical assistance to the GOM's nationaldecentralization program should policy and institutional conditions warrant. - 88 -  Additional Annex 12: Monitoring and Evaluation MOZAMBIQUE: Decentralized Planning and Financing Project Objectives of the M&E System An effective M&E system will be put into place as a means of assessingthe progress, impact and sustainability of the DPFP, as well as generating information and lessons to inform and guide the future development o f the national decentralization program. The M&E system will be sufficiently comprehensive to meet the requirements o f the different stakeholders(]), whilst at the same time beingrelatively simple to implement giventhe capacity constraints faced inthe field. Inaddition, the M&Esystem for the DPFPproject will havethe following specific objectives: 0 To provide the GoM and the World Bank with regular monitoring information regarding project performance andprogress, thus enabling them account for funduse and to take corrective action where necessary. 0 To provide project management and support teams at the national, provincial and district levels with timely and accurate information to assist inthe ongoing management, planning and review o f the program. 0 To track progress against Key Performance Indicators as defined inthe project logical framework as well as indicators requiredfor Performance Assessment o f District Governments (SADD). 0 To specify a community-basedmonitoring system that provides key information for the exercise of community oversight of district planned and managed activities. 0 To strengthen government and civil society capacity inmonitoring and evaluation of local development planning andplan implementation. Types of Reporting and Monitoring Activity reporting and compliance monitoring will be undertaken on a regular basis to ensure that the activities detailed in the project manual and annual work plans are being carried out in an efficient and accountable manner. A particular focus will be on ensuring that the management of the Local Investment Grants (LIGs) by provincial and district institutions and officials i s in compliance with established financial management and procurement procedures. Performance monitoring and evaluation will assess the extent to which project activities are achieving their stated outputs, outcomes and results, as a basis for an effective ongoing process of implementation, supervision and review. This will require effective systems and procedures are put in place to document, measure and evaluate progress; to take corrective action where necessary; to disseminate information, lessons and best practice to all key stakeholders; and to solicit feedback from project partners and beneficiaries. Two kinds o f data will be routinely collected and presentedfor each component: 1) Progress (Activity) Reporting 2) Results (Output) Monitoring - 89 -  Progress Reports will be produced by each provincial government with the assistance o f Provincial Project Units and technical assistance providers on a quarterly and annual basis for Components 1-3 (Decentralized Planning, Local Investment Grants, and Capacity Building Components). Progress reports for Components 4 and 5 (Support for Decentralization Reform and Project Management) will be prepared at central level by the UCA. These reports will consolidated and linked to standard Financial Management and Procurement Reports on a quarterly basis to constitute the project's Financial Monitoring Reports for submission to the World Bank. Annual Progress Reports will track achievements vis-his approved annual workplans and will be presented in preliminary form in time for the annual review mission each November. Results MonitoringReports will be produced once each year and will track outputs against targets defined for each Key Performance Indicator (KPI) as well as indicators to be used for the District Performance Assessment System (SADD). Annual Results Monitoring Reports will be presented in preliminary form for consideration during the November annual review mission and finalized during the first quarter o fthe subsequentyear. Institutional Arrangements for M&E Effective institutional arrangements will be put in place to coordinate and oversee the M&E mechanisms established for the DPFP project. These arrangements will need: To operate at all levels (national, provincial, district and community) with data collection and presentation responsibilities clearly defined at each level. To be based, as far as possible, on the institutional arrangements for project implementation, so as to linkmonitoring to the ongoing processeso f project planning, implementation and review. To ensure that M&E information from each level i s aggregated and disseminated to meet the information needs o f each type o f stakeholder. To be harmonized, as much as possible, with the institutional arrangements of other related programs and projects inthe field o f decentralizationand district planning. To encourage participation and partnership in M&E processes andperformance improvement by the differentstakeholders at all levels. Given the range and volume of data to be collected and reported through these processes, a manageable and standardized set o f reporting and monitoring forms have been designed, together with instructions on how and when to complete them and are included in the project M&E manual. Mechanisms will be put inplace to coordinate, aggregate and consolidate the data so that it meets the specific requirements of target users at different levels. At the provincial level the Provincial Project Coordinators and Monitoring Technicians will play a lead role in gathering and consolidating data, with the M&E Specialist in the U C A playing a similar role at the national level. Mechanisms and instruments will also be put inplace to validate the accuracy and reliability o f the information provided in the various monitoring reports. These will take a number of forms, -90 -  including: 0 Regular field visits and spot-check visits to the districts by the UPP, TA contractors and provincial staff to assess the accuracy o f district level information and reports. 0 Regular field visits and periodic spot-check visits to the provinces and districts by U C A staff (and inparticular the UCA's M&E Coordinator), as well as by central government officials (members of the Steering Committee and its Technical Group). 0 Community and beneficiary surveys (to be conducted as part of the qualitative monitoring contract) 0 Specially commissioned external assessments, where there i s aparticular cause for concern about the reliability of the information andreporting systems. 0 Bi-annual supervision missionsby the World Bank, ledby the Task Team Leader. 0 Mid-term and other forms o f project evaluation Given resource constraints and the large number of districts that will be coveredby DPFP project, a quality assurance approach will be adopted in carrying out these processes. Provinces and districts that are found to have reliable monitoring and reporting systems in place will be visited less regularly than those that do not. Performance Indicatorsfor M&E Quantitative and qualitative indicators have been developed for the DPFP to assess the impact of the project and to measure progress towards project outcomes and outputs. A number o f process indicators have also been identifiedto measure such things as the efficiency and effectiveness of program activities. With respect to the longer-term impact o f the project, the main focus will be on its institutional impact rather than on its downstream contributions to poverty reduction and socio-economic development. This is not because the downstream impact i s unimportant but because the main objective of the DPFP i s to generate practical lessons, methodologies and instruments to inform the emerging national decentralization program and to create the necessary capacities and conditions under which it i s possible to decentralize further functions, responsibilities and resources to the district level. The DPFP M&E system will also track the infrastructure investments financed by Local Investment Grants to provinces and districts, including those for administrative infrastructure (LIGI), socio-economic infrastructure (LIG2) and community infrastructure (LIG3). LIG related data will include the nature o f investments financed; information related to their procurement, physical and financial execution; and the nature of local participation in their planning, implementation and expected benefits. The Management Quality Assurance (MQA) contractor will play a particularly important role in ensuring that LIG provided resources are correctly used by provincial governments and district administrations. With respect to indicators relating to community participation, a sample baseline survey of community perceptions o f the district governments will be carried out by the Participation -91 -  Monitoring (PM) consultancy that will be contracted by the U C A to monitor and report on qualitative aspects o f community involvement inplanningand plan implementation. Analysis, Assessment and Evaluation of Project Performance and Impacts Monitoring information will be analyzed, assessed and reviewed on a regular basis to inform the on-going processes o f planning and review. This i s to ensure that corrective action i s taken promptly to address obstacles and constraints to project progress and performance. These processes will largely take place at the provincial and national levels. However, at the district and sub-district levels progress reports will be prepared for discussion by the consultative councils. An integral and distinctive feature of the assessment and review mechanisms will be the introduction o f the District Performance Evaluation System or SADD, as the basis for the determination and adjustment of LIG2 and 3 grants for the subsequent year. The purpose of SADD is to identify, acknowledge and reward good practice rather than to punish under-achievement. Districts with the lower rating will be provided with guidance and support to enable them to improve their performance insubsequent years. An independent mid-termevaluation of the DPFP will take place during the second half of 2005 to evaluate all key aspects o f the project. This evaluation will assess progress toward the project's development objective, outcomes and outputs, to evaluate the extent to which the critical assumptions are holding, to recommend mid-termadjustments where necessary in project design and operation, and to assess the kinds o f policy and legislative reform that are still necessary to ensure the future success and sustainability of the project in the context of the Government's decentralization policies and programs. The independent mid-termevaluation will be followed by (and help to form the basis for) a formal Mid-Term Review of the DPFP in the first quarter of 2006. Participation, Dissemination and Feedback Processesfor M&E Mechanisms will be put into place at all levels to ensure broad stakeholder participation in the monitoring and evaluation processes themselves, and more especially in the processes of dissemination and feedback. These will help to create awareness and accountability in the M&E processes, to ensure that lessons and best practice are effectively disseminated for the purposes of replication and policy change, to facilitate the exchange of information about models and approaches to decentralization at the district level, and to solicit a wide range of ideas and suggestions for overcoming constraints and taking the participatory planning processesforward. At the national level these mechanisms will include the holding o fperiodic stakeholder workshops (comprising govemment ministries, development partners, NGOs, academics and researchers and other interested parties) to discuss lessons learnedfrom the World bank financed DPFP project, as well as from the UNCDF supported project and other related initiatives. More regular updates and discussions will also take place at the informal Donor Group on Decentralization that i s convened and chaired by the UNDP in Maputo. A t the provincial level, consideration will be given to establishing stakeholder working groups on decentralization, along the lines of the group - 92 -  that has recently been established in Nampula. Inter-provincial workshops will also be held to enable the provinces involved inthe DPFP to compare progress as well as to exchange experience and lessons learned. At the district level, a summary of the findings and recommendations o f the annual provincial monitoring reports will be producedfor discussion and comment by members o f the consultative councils and local fora. Capacity Building and Institutional Linkagesfor M&E A capacity buildingprogram will be designed and implemented for the DPFP in order ensure the efficient and effective operation of the M&E systems put in place. This will be targeted in particular at officials at the provincial and district levels who are involved inor have responsibility for M&E, as well as at members o f consultative councils and local fora at the district and sub-district levels. Training will also be provided for UCA staff and members of the Technical Group (which supports the National SteeringCommittee). It will also be important to develop effective linkages with other relevant M&E and MIS systems inorder to maximize the efficiency and benefits of data collection and analysis. At the global and strategic levels the DPFP M&E system will exchange data with the PARPA monitoring system as well as those linked to the Public Sector Reform Strategy and SIFAP as well as MADER's Rural Development Strategy and PROAGRI. In addition, at the operational level the project will collaborate with the UNCDF projects and other provincial support programs employing the DPFP approach in order to avoid unnecessary duplication o f effort, as well as to facilitate collaborative M&E activities and the exchange of information and ideas regarding M&E tools and methodologies. Close linkages will also be developed with academic, research and survey organisations with relevant M&E experience at the district level, as well as with NGOs, cooperation agencies and other organisations that have or are developing systems for community-basedmonitoring o f local development activities. (1) As noted earlier in this report the target users of the M&E system will include (i) national government ministries, especially the MPF, MAE, MADER and the MPOPH; (ii) the World Bank; (iii) provincial governments; (iv) districts, administrative posts and localities; (v) communities and NGOs; and (vi) other development partners. - 93 -  REPUBLICA DE YWANBlQUE MlNlSTERlODO PLAN0 E FINANGAS GABINETEDA MlNlSTRA N' a34nswwm Maputo,August)3,2003 Mr. Ducus y.nS Country Director for kzrmbique TheWorldRank office Subject: Letter of Sector Commitment Oecenbrlitedffrnning and Finance - Projact Dear Mr.Mans, I am writing on behalf of the Government of Mozambique in order to express the govemment's commitment to the implementation of ttre Decentralized Planning and Finance Pmject (DPFP). The DPFP represents the govemment's effart to strengthen the rob of the districts and the rural communitiesin the planning and management of ha1 c)evelopmnt and is a vital contribution to the process of g b h / m h s taking . place in Mozambique. I believe that the outcome of this project will be the improvement of kxal administration capacity to plan in a participatory way and to an eficient and transparent management of the msoums channelled to poverty alleviation in the ~ r aareas. l , The government of Mozambique has started a gradual decentralization of the public administration aimed at making planning and management of local development prvcesses more effective. One of the aspects of this pnxess is the modemisat& of public msoum planning tools at thepmvincial and district levels, as &/ as processes interconnecting the state administration and local mmunities. In order to reinforce this process. the Govemment of Mozambique asked the WorM Bank, UNCDF and otherpartners for support regarding the preparation of the programme, and a strategy design was imdiate/y staded so as to direct the expansion of DPFP at the national level. The DPFP is being designed based on the Govemment's main policy orkntatkm methods, namely its 2000.2004 five year programme, the Absolute Poverty Reducthn Action Plan (PARPA), the Strategy for the Public Sector Refom, and the State Financial Administration Refom, Programme. The Action Plan for Absolute Poverty Reductbn, which is increasingly becoming the method that directs state institutions, emphasizes the importance of gcmd govemance at the /mal level including decentralizedplanning and the development of bask infrastructums, as key objectives of its implementation. The Govemment's Programme sees the participation of citizens in the social and economic life of the country as the ideal apptwch to find better Solutbns for the  problems faced by local communities. Thus, dialogue is the government's basic method in the consultationand search for better ways of addressing tjw needs of the population. The fiveyear programme allows for the decentralization and c)econcentration of public administration as pillars of the state's modemisation process. The transfer of responsibilities and specific competencies to Coca1 bodies, thus legitimatising their initiatives and pmvkiing them with tools for deliveringsenhs, is an impodant basis for the decentralisationprocess. A way of tracking the attainment of this ob&tiive is by the existence of decentralised public organisations which am autonomous and transparent in the decision making processes and effective m delivering of public services. Recently, under the govemmentk propasal, the Parliament approved the Local State Bodies Act with a view to establishing a public administrationthat is mom appropriate to the present development p m s s of the country. The Local State Bodies Act establishes organisatbnal principles and noms for the functioningand competencies of state bodies at thepmvince, district, administrativepost and kcality levels. Thislaw is going to "tribute to fie materialisation of the deconcwntration and decentralization of public planning and management processes. As part of these efirts the government is designing a National Planning and Decentralised Finance Programme. The design of this pmgramme is based on the pilot experience in NampulaProvince, where such methodologieswem tried in the last few years in order to put into practice participatory district planning within the framework of the Mozambican state system. The programme aims at gradually introducing in the national tem'tory, amongst other things, the following elements: (i) Strategic and participatory districtplanning. (0 Participatory governance in the design of the District Development Plans and through local community participation in the implementation of district plans, (iii) Introduction and or strengthening of public msoum programming tools at district level; (iv) Appropriate prpcedures for ihe management of funds directed to public investment projects at district level; and (v) Decentralized system for the preparatrbn, negotiation and management of contracts, as well as the implementation and quality contml of small scale public wolks at the district level. The Decentralized Planning and Finance Project (DPFP) is going to intpduce these elements in Zambezia, Tete, Manica and Sofala provinces based on the WorM Bank financing. In addition to the elements mentioned above, institutional capacity buiMing of local actors will be a key element in the implementation of DPFP. taking into amunt that all the work will be cam'& out through the people and institutions that belong to the communities, districts and pmvincial bodies. This will contribute to individual training and the impmvement of the functioning of said institutbns, thus guaranteeing the sustainability of the process and work methods. This issue wiN be discussed in mom detail in a letter of Sector Policy to be provided prior to the r" review of thepmject in 2006. The Govemment of Mozambique is equally committed to fhe mobilisatbn of msoums and partnerships aimed at speeding up the introduction of the DPFP methochkgkal ftamework to the remaining provinces of the country in order matenalise the National Decentralized Planning and Finance Program in the forthcoming years. Thus OWP, together with other initiatives taking place in the country, is pangto deepen the decentralisation process throughproviding support to development and dissemination of new tools and planning end management methodologiesfor local government.  . . .. Wth a view to creating the necessary conditions to implement the National Decentralized Planning and Finance Program, in the project's appraisal mission, which took plam in May 2003, the follawhg aspects to be canied out by the government were agreed upon: Provide the legal basis br the reoqjanisatbn of public administrationat district level (Local State Bodies Act Approved by the Parfiament) - a Recognize the legitimacy of the District Cons~ltativeCouncils within the framewrkofDistrict Planning(Firstversionoftheprepared Guidelineswhichis cunently in consultationat theprovinciallevel). Revision of the District Administration stafi in order to assure the required profile for the decentralized management of investments: fina&accounting and supervisionof small scale works. Establish the &a1 framework for District Development Plans within the . framework of the NationalPlanning System Provide methodologicalguidance for district finances:/ma/ mevenue, budgeting. spending and amuntancy, etc. . Increasing the percentage of the State Budget allocated to ttre districts via provincial budget to fund discretionaryinvestments Establishing the district as a Budget Unit Thus,.the Decentralised Planning and Finance hject is in a tangible way going to . contributeto: Meet PARPA's objectives with regard to the reduction of a h l u t e poverty through planning and management of msoums at district level, h i c h . addresses the basic needs of rural communities and promotes local socio mnotnic development. Strengthen institutions and local actors that belong to the community, the :,: districts and provincial bodies at the same time contributing to individual tmining and improved performance. Develop working methodologies within the norms defined by the State's central bodies to support the provinces and the districts in the development of p m s s e s and methods, which com-cpondto the reality of each area of the country. Support consultationprocesses and d k t i v e decision making institutions in a way that ensures the partkipation of various civil Society members in the districts, particulady women and the mast disadvantaged people in nml communities,thus giving greafer importance to &a1 actors. As such, the DPFP is an integralpad of the currentpublic sector mefixmprocess. The decentralisation of planning and budget subsystems and budget execution is 81) important objective of SISTAFE, which will allow for a greater Rexibility in transpamnt _-  ,.. .. 8- planning end management of reswms at local level by public manegers. The LocaJ State Bodies Refom,is aimed at fonnelishg the r r h of the Dishict Gowmmnt as 8 budget unit as well as reinfarclng its d e as a public seN)cB and "I/devebptmnt manager through a new orgenisational model. In #nctushn, t b Gomment of Mozambique wishes to &rate its interest m ttm i-ta- dtheDecentralisedFinance andplenningprgiect andistropeturthat IDA wll suppod the Gowemmt in the cunent rempracess in order to i m p w the penWmance of ttm publk sector with a view to reducing M u t e poverty and increase the abiiity d h a / instilubns toplan in a paMipetoty way and implement in a transparent mannerpublic initiatives at district level. MinisterLofuPknning a d Finance h D i uh g o