Document o f The World Bank

Report No: 25474

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED DEVELOPMENT CREDIT

IN THE AMOUNT OF SDR 36.7 MILLION (US$50.0 MILLION EQUIVALENT)

AND A DEVELOPMENT GRANT

IN THE AMOUNT OF SDR 55.0 MILLION (US$75.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF UGANDA

FOR THE

SECOND LOCAL GOVERNMENT DEVELOPMENT PROJECT

May 2,2003

Water and Urban 1 Tanzania and Uganda Country Department Africa Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective November 2002)

Currency Unit = Uganda Shillings (USh) USh = US$0.0005

US$1 = USh 1853

APA CAS CBG CCLRE

CF CFAA

CMC CPAR CQ cso CTB DANIDA DFA DFID DLGTB DSP EFMP I1

EMP ESIA ESMF

FDS FMM FMR FPA GOU GPN HIPC HLG HRD HPPG ICB IFMS WI LCS LDG

FISCAL YEAR July 1 -- June 30

ABBREVIATIONS AND ACRONYMS

Assistant Program Accountant Country Assistance Strategy Capacity Building Grant Coordinating Committee for Local Revenue

Enhancement Consolidated Fund Country Financial Accountability

Cofinancing Monitoring Charts Country Procurement Assessment Report Consultants Qualification Civil Society Organization Central Tender Board Danish International Development Assoc. Development Financing Agreement British Department for International Dev. District Local Government Tender Board Decentralized Support Program Second Economic and Financial

Environmental Mitigation Plan Environmental and Social Impact Assessment Environmental and Social Management

Fiscal Decentralization Strategy Financial Management Manual Financial Monitoring Report Financial Performance Assessment Government o f Uganda General Procurement Notice Highly Indebted Poor Countries Higher Local Government Human Resources Development Harmonized Participatory Planning Guide International Competitive Bidding Integrated Financial Management System Key Performance Indicators Least Cost Selection Local Development Grant

Assessment

Management Project

Framework

LG LGA LGDP I LGFC

LLG LRE M & E MC MIS MOFPED

MOLG MTEF

MTR NEMA

NGO O&M PCU PEAP PER PIP PMC PMU PPDPA

PRSC PRSP QCBS RP RPF SPN TBS TOT LJNCDF UBOS

Local Government Local Government Assessment Local Government Dev. Programme Local Government Finance

Lower Local Government Local Revenue Enhancement Monitoring and Evaluation Municipal Councils Management Information System Ministry of Finance, Planning and

Economic Development Ministly o f Local Government Medium Term Expenditure

Mid Term Review National Environmental

Management Authority Non Governmental Organization Operations and Maintenance Project Coordinating Unit Poverty Eradication Action Plan Public Expenditure Review Project Implementation Plan Project Management Committee Project Management Unit Public Procurement and Disposal

of Public Assets Authority Poverty Reduction Support Credit Poverty Reduction Strategy Paper Quality and Cost Based Selection Resettlement Plan Resettlement Policy Framework Specific Procurement Notice Tender Board Secretaries Training o f Trainers United Nations Capital Dev. Fund Uganda Bureau of Statistics

Commission

Framework

Vice President: Callisto E. Madavo Country ManagedDirector: Judy M. O'Connor

Sector ManagerDirector: Jaime M. Biderman Task Team LeadedTask Manager: Lance Morrell

UGANDA SECOND LOCAL GOVERNMENT DEVELOPMENT PROJECT

CONTENTS

A. Project Development Objective

1. Project development objective 2. Key performance indicators

B. Strategic Context

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

C. Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank and/or other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

2 2

2 4 6

9 10 11 12 12

13 13 14 14 16 19 21

F. Sustainability and Risks

1. Sustainability 2. Critical r isks 3. Possible controversial aspects

G. Main Grant Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1 : Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 1 1 : Letter o f Sector Policy Annex 12: Monitoring and Evaluation - Supervision Arrangements

21 22 24

25 25

27

27

28 32 39 40 44 45 54 69 70 71 73 75 95

MAP(S) IBRDNo. 32245

UGANDA Second Local Government Development Project

Project Appraisal Document Africa Regional Office

AFTUl

Date: May 2,2003 Sector Manager: Jaime M. Biderman Country ManagedDirector: Judy M. O'Connor Project ID: PO77477 Lending Instrument: Specific hvestment Loan (SIL)

Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: [combined IDA Grant for Debt

For LoanslCreditslOthers: Amount (US$m): US$125.0 million (including a US$75.0 million Grant and US$50.0 million Credit)

Team Leader: Lance Morrell Sector(s): General water, sanitation and flood protection sector (35%), Primary education (30%), Roads and highways (25%), Health (10%) Theme(s): Municipal governance and institution building (P)

Vulnerable]

FY Annual

Cumulative

Proposed Terms (IDA): Standard Credit Financing Plan (US$m): Source BORROWER IDA DENMARK: DANISH INTL. DEV. ASSISTANCE (DANIDA) AUSTRIA, GOV. OF (EXCEPT FOR FED

IRELAND, GOV. OF NETHERLANDS, GOV. OF THE (EXCEPT FOR MOFNMIN.OF DEV.COOP.) IDA GRANT FOR DEBT VULNERABLE Total:

CHANCELLERY-DG DEV COOP)

2004 2005 2006 2007 34.10 39.80 40.10 1 1 .oo 34.10 73.90 114.00 125.00

Local 14.20 36.50

1.70 0.30

7.50 15.00

75.00

Foreign Total 0.60 I 14.80

13.50 0.70 0.00

0.00 0.00

50.00 2.40 0.30

7.50 15.00

0.00 I 75.00 I 150.20 I 14.80 I 165.00

A. Project Development Objective

1. Project development objective: (see Annex 1)

Improve Local Government institutional performance for sustainable, decentralized service delivery.

2. K e y performance indicators: (see Annex 1)

0 0

75% o f Local Governments (LGs) with a three year rolling Development Plan 75% o f Higher Local Governments (HLGs) submitted final accounts on time to the Office o f the Auditor General 35% o f LGs registering 20% increase in own revenue (taxes, user charges and fees) from baseline year 2002103

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 20886

The current CAS covers the period o f FY2001-2003. The next CAS i s under preparation and i s scheduled for delivery in the third quarter o f FY2004. The Second Local Government Development Project (LGDP 11) was originally planned as a PRSC focussed on decentralization for delivery in FY2004. This PRSC was therefore not in the pipeline o f projects identified in the FY2001-2003 CAS. During the Mid-Term Review o f the on-going Local Government Development Program (LGDP I) which was undertaken in February 2002, it was determined that the capacity at the Local Government level was not yet ready for the PRSC modality. To maintain the momentum o f reforms and institutional building carried out under LGDP I, it was determined that a deepening o f the achievements under LGDP I wi l l be required. The LGDP I1 will therefore provide the bridge between LGDP I and the decentralization PRSC which i s envisioned in the next CAS cycle.

Date of latest CAS discussion: November 16, 2000

LGDP I was designed as a pilot project and has the following development objectives: (a) test the feasibility o f implementing constitutional and legal mandates with respect to decentralized service provision and evolution o f the development budget; (b) build the capacity o f the Ministry o f Local Government, the Local Government Finance Commission and a sub-set o f local govemments for improved service delivery, accountability and transparency; (c) introduce and test alternative service delivery mechanisms through private sector beneficiaries, communities and stakeholders; and (d) monitor and evaluate project implementation for actual experiences and good practices for formulating an appropriate strategy, implementation o f modalities and phasing for eventual scaling up nationally over time. LGDP I1 would incorporate the lessons learned under LGDP I and make the program national in scale, seeking to improve delivery o f basic services to support economic growth and poverty reduction in line with the Government’s decentralization policy.

Uganda’s PRSP implementation i s supported by the Poverty Reduction Support Credit (PRSC) with the prime objective o f improving efficient allocation o f resources and service delivery. The PRSC also supports the Plan for Modernization o f Agriculture which i s intended to develop structures and capacities at the local level. One element o f the poverty reduction strategy which needs additional support i s the cross sectoral aspect o f decentralization. In this context, LGDP I1 i s intending to fill the technical and financial need by providing the much needed support for the successful implementation o f decentralization program in Uganda.

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As indicated in the CAS, one o f the areas IDA’S future lending program and portfolio improvement strategy should focus on i s the decentralization from the center to the district councils which i s expected to be a major challenge in the medium term and already affects the implementation o f some projects, particularly agriculture extension and social sector interventions. Local capacity must be strengthened; sound procedures for funding district councils must be adopted; and a solid framework for accountability needs to be established. Therefore, LGDP I1 i s an important program o f reform which i s consistent with Bank’s CAS and the country’s PRSP agenda. This makes the LGDP I1 resources necessary for the government in the medium term and the grant nature o f it w i l l ensure that GOU can borrow and not hamper i t s progress towards debt sustainability. In addition, the grant element o f LGDP I1 and PRSC will signal to the GOU, the Bank’s commitment to helping Uganda achieve i t s debt targets.

Transfers to the local governments are programmed at around 34 percent per annum currently in the budget and o f this IDA i s the single major donor financier through i t s support through PRSC and LGDP II. This i s undoubtedly central to addressing the economic growth and poverty reduction agenda in Uganda.

Given that the current CAS was prepared prior to the introduction o f the IDA Grants in September 2002, the allocation o f the use o f the grants in Uganda will be covered in the next CAS. I t i s expected that the IDA grants w i l l be allocated to the PRSC in the upcoming CAS. LGDP I1 (in addition to PRSC) was selected for grant financing because of:

(1)

(2)

(3)

(4)

(5)

i t s complementary character in Bank’s Uganda program in addressing poverty reduction together with PRSC; the project’s innovative approach to donor collaboration in supporting the decentralization process which i s central to Uganda’s development challenges; the GOU’s commitment to reducing the debt burden has placed unfair burden on the smooth implementation o f the Poverty Eradication Action Plan (PEAP) and decentralization program; the GOU also feels that the popular support and commitment to the decentralization initiative w i l l be strengthened by the grant financing; and LGDP I1 has a significant capacity building component.

Decentralization in Uganda ’s CAS: Given the increasing share o f fiscal decentralization in Uganda, the LGDP I1 operation supports the decentralization program both at the level o f institutional development and the financial resources. In addition, LGDP I1 i s complementary to PRSC2 and 3 and will promote achievement o f the PEAP objectives. In the current CAS, one o f the key lessons o f OED‘s Country Assistance Evaluation for Uganda stressed that the Bank should address decentralization in depth.

Strong Development Impacts: This particular operation i s essential also because it i s an instrument to mobilize broad grant support around the decentralization process. This i s l ikely to have stronger demonstration effects for the future.

Government preferences: Government has expressed particular interest in grant financing for the decentralization program because they see it as a means to draw greater and broader support for this cross cutting reform program. In addition, this reduces the government’s burden on debt build up which has been a concem as the debt service ratio has reached unfavorable levels.

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The rationale for adjusting the IDA allocation will be based on the following factors:

0

0

0

Evidence o f ability to accommodate within the Medium Term Expenditure Framework (MTEF) ceilings; Existence o f a gap between budgeted and available funds that can not be covered by grant funds; Evidence o f progress in decentralization, in particular Fiscal Decentralization Strategy (FDS) implementation and greater need for addressing weak capacity and/or poor local governments.

Moni tor ing System and Results.

Since the inception o f LGDP there has been considerable attention given to developing a systematic performance monitoring system. Under LGDP 1, IDA assisted with the development o f the software necessary for systematic input and output monitoring. Under LGDP 11, this system will be rolled out and training provided for staff responsible for Monitoring and Evaluation (M&E) such that monitoring information will be generated systematically.

IDA resources will be channeled to the Consolidated Fund based on the annual LG assessments which will be carried out in AugusdSeptember each year to identify the LGs which w i l l be eligible for LG Development Grant. Similarly, other donors w i l l also channel their resources based on the agreed criteria. These will ensure that a transparent and coherent monitoring system i s available to assess the eligibility o f LGs and appropriate resources are channeled into the Consolidated Fund.

In addition, since IDA’S resources are provided increasingly as budget support, GOU has developed a systematic budget performance monitoring which reports on resource utilization. Currently, GOU produces quarterly, hal f yearly and annual reports on details o f budget execution which provides vital information for monitoring the program. In addition, the Poverty Action Fund (PAF) monitoring system, which was set up by GOU in 1998 as a mechanism for monitoring the channeling o f HIPCs debt relief into spending programs, directly supports poverty programs. This system has a detailed output monitoring system which covers a large part o f LG activities.

In addition, every year the GOU produces a PRSP progress report which provides an assessment o f the PRSP implementation which comments on the service delivery and LG performance. Also, annual Public Expenditure Review (PER) reports provide detailed analysis o f central and LG budget performance and concerns. All these will be complemented with the periodic national service delivery surveys which will assess the impact o f decentralized service delivery programs.

2. M a i n sector issues and Government strategy:

The Government’s strategy for economic transformation i s spelled out in i t s PEAP, a medium-term development plan that guides government policy and provides a framework for detailed sector and local government plans. The PEAP was f i rs t drafted in 1997, after 18 months o f consultation with key stakeholders. I t was revised in the MarcWApril o f 2000 and a summary o f the revised PEAP was presented as Uganda’s Poverty Reduction Strategy Paper to the boards o f the Bank and the International Monetary Fund in May 2000.

The PRSP focuses on four key pillars: (a) creating an enabling environment for economic growth and structural transformation; (b) ensuring good governance and security, including improvement in public service deliveiy and decentralization; (c) directly increasing the ability o f the poor to raise their incomes;

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and (d) directly increasing the quality o f l i fe o f the poor.

A cornerstone o f the Government’s strategy i s i t s decentralization policy. This policy i s mandated by the 1995 constitution, and i t s basic structure i s laid out in the 1997 Local Governments Act. It i s further elaborated in the Ministry o f Finance, Planning and Economic Development “Letter o f Sector Policy on Fiscal Devolution, Control and Management o f Public Expenditure” o f October 1999, which was a. joint letter for LGDP I and Second Economic and Financial Management Project (EFMP 11). I t i s important to note that local governments play a key role in implementation o f the Government’s PEAP/PRSP, including primary education and health, as well as physical infrastructure. Thus, the evolving relationships between central and local governments, including most sectors, i s crucial to the success o f Government’s strategy. These relationships include inter alia fiscal and institutional capacity dimensions. Also o f vital concern for the strategy i s downward accountability at the local level, based on transparent and highly participatory decision making and monitoring o f implementation.

LGDP I was designed as a demand-driven project, with i t s implementation carried out in the context o f hard budget constraints, transparent eligibility and access criteria for participating in the project aimed at achieving improved service delivery standards. LGDP I provides a modality for transferring development funds from the Center to the local governments in line with the provisions o f the Constitution (1995), and the Local Governments Act, 1997, as amended. This i s to ensure that services that have been mandated to the local governments are not only sustainable, delivered on a timely basis, and with value for money, but also are delivered through a process which i s fully in accordance with the law and regulations. Those local governments which have accessed the funding w i l l only continue receiving this funding if they continue to meet the minimum conditions. The internal and the national assessments determine the level o f performance, against a set o f predetermined indicators, o f the beneficiary local governments. Those which score favorably against the indicators have a reward in the form o f an increase by 20% o f the allocation o f the previous year while others scoring below a minimum threshold have their previous year’s allocation reduced by 20%. Under tranche 1 o f LGDP I, development grants were provided to 54 HLGs, increasing to 65 HLGs under tranche 3 out o f a total o f 74 HLGs. LGDP I1 i s conceived as the second phase o f LGDP I. It w i l l involve al l 74 HLGs and more than 1000 lower level local governments (LLGs).

An assessment o f the results o f the LGDP I Development Grant tranches 1 & 2 was carried out by the Government o f Uganda. Under tranche 1, a total o f 1,896 projects were completed, and the overall quality o f 86% o f those projects were rated as satisfactory or higher by the respective local governments. Under tranche 2, a total o f 2,849 projects were completed and 88% o f those projects were rated as satisfactory or higher. The total cost o f the completed projects in tranche 1 was Ush 10.6 bil l ion and Ush 18.8 bi l l ion in tranche 2. The average cost o f al l investments in tranche 1 was US$2,773 while in tranche 2 it was USS3,609. The LGDP-financed projects created significant employment at the local level since the projects were generally labor intensive. Labor represented 31% o f the total project costs in tranche 1 and 24% in tranche 2. The participation o f female workers in LGDP projects was also significant with about 17% o f the total person days being provided by women in tranche 1 and 24% in tranche 2. An analysis o f the investments financed from tranches 1 and 2 by sectors indicates consistency with the National Program Priority Areas, namely education (30%), roads (25%), health (lo%), sanitatioddrainage (lo%), water (14%). The total development grants to LGs in 2001/2002 amounted to US80.3 million, o f which the share o f LGDP I was US17 .8 million. For 2002/03, LGDP I share o f the total development grants was US22.7 mi l l ion out o f US$82.9 million. Under LGDP 11, the LGD grants would increase as a result o f the folding in o f other bilateral grants into the program and the increased IDA resources.

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3. Sector issues to be addressed b y the project and strategic choices:

As implementation o f LGDP I took hold, it became evident to Government that there was a fundamental inconsistency between numerous, sector specific and conditional grants to local governments (primarily donor supported) and the discretionary development budget support to local governments (LGs) provided under LGDP I. The discretionary development budget support has l i t t le conditionality with respect to sector allocation at the local level, leaving these allocation decisions to be made according to local priorities defined through a transparent and participatory decision-making process, thus providing an emphasis on downward accountability to local communities. In contrast, sector specific and highly conditional grants to local governments primarily promote accountability upward, to the sector ministry or special purpose fund providing the conditional grant.

The Government undertook a study on fiscal decentralization in 200 1, and this has evolved in the development o f i t s Fiscal Decentralization Strategy , the piloting o f which was approved by Cabinet in June 2002. Through the FDS, the Government has made the strategic choice to mainstream the LGDP approach to fiscal decentralization, emphasizing improvement in decentralization o f public service delivery through greater autonomy and downward accountability o f local governments. LGDP I1 directly supports this strategic choice o f Government, and other donors are increasingly supportive o f this approach. These donors are demonstrating a willingness to replace numerous, sector specific conditional grants with discretionary development budget support that comprise a predictable, transparent and sustainable intergovernmental fiscal transfer system that i s consistent wi th (a) the legal mandates for local government service delivery, (b) a significant local revenue base that i s effectively mobilized, and (c) an overall hard budget constraint on fiscal transfers that i s consistent with sound macroeconomic fundamentals.

Throughout the Region, a key issue affecting the local government sector i s the sustainability o f local government investments. To adequately address this issue requires that the technical, financial and planning capacities o f the LGs to properly operate and maintain these investments be strengthened. The Mid-Term Review (MTR) o f LGDP I also has flagged this issue, as a growing number o f local governments are having difficulty in providing the ten percent investment counterpart requirement as a condition for receiving local development grants for new capital investments. The MTR also flagged significant, recent declines in local government own-source revenue mobilization. This increases the concern that the sustainability o f new investments to be financed under LGDP 11, as well as the capital stock existing at the launch o f LGDP II, could be undermined. A strategic principle for the design o f LGDP I1 (as well as for implementation o f Government’s FDS) i s that only (with very rare exceptions) local governments that are financially viable should be making new investments. The principle o f financial viability would mean a local government should be able to demonstrate that the new investment, as well as existing capital stock, will be adequately operated and maintained. Thus, access to local development grants for capital investments (see section C. 1) w i l l be conditioned to the local government demonstrating i t s ability to have adequate financial resources for counterpart funds (current account surplus) for the operation and maintenance o f existing investments as well as those to be financed under LGDP II. For local governments that do not meet the financial viability criterion for access to local development grants, support will be available to assist them to meet this criterion in the future under the proposed local government capacity building and local government revenue enhancement components o f LGDP II. This principle i s consistent with the Government’s FDS, and i t would also be a strategic part o f the design o f a future decentralization PRSC. In summary, a strategic choice under the project i s to provide incentives for sound local government fiscal performance, sanctions for under-performance, and support to improve performance.

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C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Through a combined Grant (US$75.0 million) and Credit (US$50.0 million), IDA will finance a portion o f the combined Government and external assistance budgets for policy development and operational activities, both ongoing service delivery and new initiatives. The IDA Grant will finance all the activities under Component 2 (Local Development Grants). The IDA Credit will finance those activities under Components 1,3,4 and 5.

Local Government Capacity Building Local Government Revenue Enhancement Project Management and Coordination 6.80 4.1 6.20

Total Project Costs 165.00 100.0 125.00 Interest during construction I 0.00 I 0.0 I 0.00 Total Financing Rewired I 165.00 I 100.0 I 125.00

% of Bank-

100.0

100.0 The project has five components: (Annex 2 details description o f the project components)

Component 1 - Support for the Decentralization Process. This component consists o f activities to support the improvement o f the LGs to plan and implement projects which will be funded by the Local Government Development Grant (Component 2), activities to support the development o f a national LG capacity building strategy and strengthening o f the Human Resource Development (HRD) functions in LGs, and support o f annual workshops through which progress towards decentralization in Uganda will be assessed, and establishment o f an analytical and design basis for the development o f a decentralization budget support instrument. It would also provide support to the national assessment system, operationalization o f the planning guidelines and information systems, and audits o f the accounts o f all LLGs for the f i r s t two years o f the Project.

Component 2 - Local Development Grants. This component w i l l continue and extend the financing o f local infrastructure investment through supporting a system o f central-local intergovernmental transfers.

Component 3 - Local Government Capacity Building. This component w i l l provide capacity building grants to LGs.

Component 4 - Local Government Revenue Enhancement. This component w i l l finance technical assistance at both the policy and operational levels.

Component 5- Support to Project Implementation. This component will consist o f activities to support project management, monitoring, evaluation and audits o f the accounts o f the Project.

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2. Key policy and institutional reforms supported by the project:

The Government o f Uganda (Cabinet) endorsed the FDS in mid-2002. LGDP will lead the primary modality for the design and implementation o f the decentralization o f the development budget under the FDS. I t i s intended that the grant system initiated through LGDP w i l l become a fundamental feature o f the intergovernmental fiscal framework in Uganda during the l i fe o f the operation and thereafter.

3. Benefits and target population:

As all Ugandans live in a local government jurisdiction, all would be potential beneficiaries o f the Project. Through implementation o f an efficient, equitable and sustainable intergovernmental fiscal system, all local authorities should have the resources to meet at least minimum service level standards and coverage. Thus, beneficiaries should include local govemments and their institutions and their constituents, as well as private contractors for implementation o f substantial parts o f local government programs.

Specific benefits may not be identified at this time. However, based on current experience, typical benefits o f the project would be: (i) employment generation, open up markets, promote increased private sector participation in the provision o f services; (ii) improved public health and environmental conditions; (iii) decreased production costs due to lower vehicle maintenance and transport costs resulting from road improvements; (iv) greater empowerment o f local communities and improvements in quality o f l ife; and (v) improved environmental management o f local government capital works.

4. Institutional and implementation arrangements:

The overall project implementation period i s 4 years. The institutional and implementation arrangements for the projects will be as follows:

(i) Ministry of Finance, Planning and Economic Development (MoFPED) i s responsible for ensuring macro-economic stability. Since the National Planning Authority i s not yet operational, the MoFPED i s also responsible for coordinating all development plans at the national level. Districtlmunicipal councils are required to develop three year roll ing development plans incorporating investment plans from lower Local Governments (LGs). MoFPED receives the development investment plans from the districts/municipalities and incorporates them in the overall national investment budget. Disbursements to LGs under components 2 and 3 o f the Project shall be made by MoFPED based on the advice o f the M o L G on whether a LG has met the access requirements for receiving both the development and capacity building grants or only the capacity building grant.

(ii) Ministry of Local Government (MOLG). M o L G will be the executing ministry o f LGDP I1 and also the agency responsible for Components 1,4 & 5. M o L G will manage the project by coordinating the activities across the various components and evaluating LGs' performance with respect to project implementation. The primary role o f M o L G i s inspection, monitoring and coordination o f LGs. In addition, MoLG w i l l be responsible for advising and publishing the transfers to ensure transparency and accountability. M o L G w i l l also, where necessary, offer training and technical advice to LGs, do compliance verification and mentor those LGs which have qualified for access to funds under Components 2 & 3 to enhance and improve their performances. M o L G will monitor and evaluate the performance o f LGs to ensure compliance with national policies, regulations, standards, procedures and adherence to guidelines. Local Governments which fail to comply with such performance measures will be subject to sanctions. A Program Coordination Unit (PCLJ), currently the Project Management Unit (PMU), will support M o L G in the management and coordination o f the various Project activities. The PCU will provide technical back-up support to M o L G and ensure that M o L G gradually take over

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responsibility for the non-Project specific management tasks in accordance with the M o L G institutional alignment strategy. This strategy i s important for the sustainability o f the Project after 2005/2006.

I July-August

August-September

October

(iii) Local Governments wi l l be responsible for implementation o f Components 2 & 3 o f the project based on their ability to meet the minimum access criteria.

M o L G convenes Annual Decentralization Forum Local Governments carry out Internal Assessment National Assessment/Reporting LG commence planning and budgeting (BFP) process

Finalization o f National Assessment Reports LG Finalize Final Accounts

5. Monitoring and Evaluation arrangements: (See more details in Annex 12)

NovembedDecember

January-June

Joint government and donor monitoring o f the Project w i l l occur on a regular schedule. The Government and donors have agreed that the performance monitoring will be done through a three-pronged approach:

MoLG/MoFPED issue Indicative Planning Figures to LGs LG submit BFPs to MoFPED Local Governments finalize and approve Three Year

Development and Capacity Building Plans PCU Finalizes Annual Procurement Plan (in May)

(i) The annual Local Government Assessment for minimum governance criteria and performance measures which i s a bridge process to a more comprehensive compliance inspection;

(ii) The periodic (quarterly and annual) monitoring o f the Key Performance Indicators (KPIs) and;

(iii) Monitoring o f strategic areas o f revenue enhancement, co-financing and output impact assessment through revenue tracking and the co-financing monitoring charts (CMC) introduced under LGDP I

The assessment o f the Minimum Conditions and Performance Measures will continue to be a central pillar for LGDP Il monitoring and valuation mechanism. It will be done in two phases: (i) the internal assessment by the District/Municipality o f their sub counties/division and town councils; and (ii) the national assessment team will assess the District/Municipality during August/September o f every year. On basis o f reports from the internal assessment and national assessment, an independent assessment team (comprising both local and international experts) will annually appraise the assessment process.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

LGDP I1 could have pursued the pilot and testing mode o f the first project. However, the MTR (February 2002) provided broad, positive results with respect to the development objectives o f LGDP I. Based on this evaluation, the Government officially requested, in April 2002, that the Bank support

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preparation o f LGDP 11, based on the recommendations o f the MTR. Although the MTR provided generally positive feedback, it should be noted that it also highlighted serious concerns, most notably the weakening o f local government resource mobilization. In response to this concem, the proposed LGDP I1 includes a new component for local government revenue enhancement.

Some consideration was given to following up on LGDP I with a PRSC. This alternative was rejected as too risky. LGDP I1 i s viewed as a “bridge” between LGDP I (piloting and testing instruments to support improved local government service delivery, and not including all local governments) and a potential decentralization PRSC. During implementation o f LGDP 11, Govemment will evaluate the pilot phase o f i t s Fiscal Decentralization Strategy, adjust the strategy as appropriate, and begin implementation in all local governments. The M T R and draft Implementation Completion Report (ICR) o f LGDP I1 w i l l provide important inputs for the Government and the Bank to evaluate the potential benefits and r isks o f a future decentralization PRSC that ideally would be initiated as LGDP 11 i s closing.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector issue

Ban k-f i nanced Restoration o f key infrastructure services Improvement o f service delivery standards Institutional strengthening o f Kampala City Council to support the development o f decentralized local urban management Financing o f key deferred infrastructure needs

Alternative basic service delivery to improve service delivery standards

Institutional support to strengthen Kampala City Council’s reform program

Test the feasibility o f implementing constitutional and legal mandates with respect to decentralized service provision and devolution o f the development budget to LGs Build capacity o f the MOLG, LGFC Secretariat, and LGs; rest and institute alternative service delivery mechanisms through the private sector, beneficiary

Project

Grst Urban Project (Credit

’roject has been completed, lutcome rated S.

:206-UG)

Jakivubo Channe lehabilitation Project (Credit 203-UG)

.oca1 Government Ievelopment Program (Credit 2 95 -UG)

Latest Supervision (PSR) Ratings

(Ban k-finance Implementation

Progress (IP)

S

S

S

projects only) Development

Objective (DO)

S

S

S

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communities and other stakeholders in Kampala City Council.

Capacity building to support economic and financial management

Capacity building in the Local Governments

Small scale infrastructure rehabilitation to improve the living standards and working conditions o f some o f the poorest community. Other development agencies Strengthening o f key institutions at central government level, MoLG, LGFC and the Uganda Local Authorities Association (ULAA) and enhancing the capacity to further implement GoU's decentralization policy in an increasingly efficient and effective manner.

IP/DO Ratings: HS (Highly Satisfactory), S I

Highly Unsatisfz

Second Economic and Financial Management Project (Credit 3297-UG)

Institutional Capacity Building Project

Program for Alleviation o f Poverty and Social Costs o f Adjustment (Credit 2088-UG). Project has been completed

DFID - Decentralization Support Program (DSP)

(Satisfactory), U (Unsatisfactory), HI

A key design feature o f LGDP I was to incorporate the findings o f Uganda's Participatory Poverty Assessment Report which details the perceptions and insights o f the poor with regard to various aspects such as the nature o f poverty, socialleconomic strategies, serviceslinfrastructure, governance, and security. 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 in the participatory consultative process with the beneficiary communities. In addition, a detailed Community Participation Review exercise was conducted in the early preparatory stage o f LGDP I to analyze and document various demand-driven approaches to investment planning, decision making and implementation. This analysis provided the basis for defining the participatory approach to the project drawing on the best practices that were identified. Most government projects, however, have tended to be "top-down'' with "vertical or parallel" structures although quite a number o f projects in Uganda have been conceptualized and implemented using the participatory approach, mainly by NGOs. These projects omitted and/or limited the involvement o f the key stakeholders or target beneficiaries in the decision making and implementation phase. As a result, such projects have been regarded as "external", lacking beneficiary support, commitment, and ownership and, therefore, have not been sustainable. In this context, the lessons learned from these previous activities include:

(i) Lack o f community consultation resulting in adverse public reaction; (ii) Lack o f ownership due to inadequate involvement o f the client in the decision making process; (iii) Unsustainable investments due to inadequate attention to operations and maintenance; and (iv) Inadequate capacity o f the client to effectively manage investment contracts.

Successful implementation o f LGDP I has been dependent on a strong sense o f ownership by the clients,

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effective community participation and consultation, identification o f the most appropriate, affordable, cost effective solutions taking into account both capital and maintenance costs, proper design, selection o f qualified contractors, a strong construction supervision team to oversee those investments which include civ i l works construction, and proper provision for operations and maintenance. Some o f these aspects were successfully incorporated in the LGDP I which included micro investments at the community level in four pilot municipalities. The Mid-Term Review o f LGDP I provided the following main conclusions:

a) b)

c)

d)

The project development objectives are s t i l l relevant and achievable by the project; Capital investment in local infrastructure b y local authorities, funded by the LGDP, have been generally proceeding successfully; Progress with ensuring the sustainability o f local service delivery has been slow-this i s particularly evident in the area o f local resource mobilization; Improvements have been achieved in the capacity and understanding by local governments o f their roles and responsibilities, particularly in the areas o f planning, budgeting and financial management; and There i s a need to review the annual LG national assessment process, specifically in the areas o f content, procedures (possibilities for appeal), and institutional/structral issues.

e)

Thus, the main lessons learned from the partial implementation o f LGDP I are that i t s design i s basically sound and that i t s key components (support for the decentralization process; local development grants; local government capacity building; and support to project implementation) merit continued support under the proposed project. However, the MTR also concluded that the Government’s decentralization policy could be undermined if the performance o f local governments in mobilizing their own-source revenues i s not improved substantially, urgently, and in a sustainable manner. These lessons learned are reflected in the proposed component for local government revenue enhancement.

4. Indications of borrower commitment and ownership:

At the policy level, the strongest indicator o f the Government’s commitment and ownership i s i t s Fiscal Decentralization Strategy (FDS). The FDS consolidates lessons learned from several prior initiatives that aimed to support implementation o f the 1995 Constitution’s mandate for decentralization o f a substantial proportion o f the nation’s governance, including i t s f i rs t Poverty Eradication Action Plan. This plan clearly articulated the Government’s priorities for poverty reduction, and decentralization was at the heart o f the approach, as it continues to be under i t s PRSP. The Government’s commitment and ownership has also been firmly demonstrated through i t s strong support to the implementation o f LGDP I. Based on the MTR recommendations, a workshop on preliminary preparation o f LGDP I1 was held in June 2002. This workshop was attended by more than 85 participants from government and the donor community, and a broad consensus was agreed to on LGDP I1 design principles and the proposed components o f the project. Also, the Cabinet approved in principle, in July 2002, the design o f LGDP 11, based on the MTR evaluation and recommendations.

5. Value added o f Bank support in this project:

At the workshop noted above, there was a broadening consensus that the LGDP I “model” i s consistent with Uganda’s constitutional provisions for decentralized governance and i t s PRSP in general, and with the Government’s decentralization policy in particular. As noted in Section B.3, a key element o f this “model” i s the unconditional grants that promote downward accountability. This is in contrast to the programs o f most other donors that channel funds conditioned to their use for sector-specific endeavors andor with limited geographic coverage. The Bank i s broadly viewed, by Government and increasingly

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by other donors, as providing a unique and essential value added o f providing policy advice and implementation support for decentralization in a comprehensive manner, across sectors and throughout the country. There i s a growing momentum for other donors to “buy into” the LGDP “model” supported by the Bank. This has the potential to consolidate support, within Government and across donors, for the intergovernmental relations that are evolving under the Government’s decentralization policy. This consolidation o f support i s the chief value added by the Bank, to be achieved under the proposed LGDP 11, and potentially under a decentralization in PRSC.

E. Summary Project Analysis (Detailed assessments are in the project fi le, see Annex 8)

1. I Economic (see Annex 4): - Costbenefit - Cost effectiveness 0 Other (specify)

NPV=US$ million; ERR = % (see Annex 4) -

As designed, LGDP I1 involves further testing and replicating a system o f participatory, demand-driven investment allocation, planning, implementation and improved service delivery in the context o f decentralization. However, since the composition o f the LGDP I1 investments required under the project cannot be determined a priori, the justification o f LGDP rests on demonstrating the following two hypotheses: (i) that the LGDP processes that are in place are functional and sustainable; and, (ii) that the priority investments identified, selected and implemented following LGDP processes do achieve the desired outputhmpact.

The f i rs t hypothesis was tested during the MTR. The result confirmed that the LGDP processes are functional and that sustainability may require taking further local government revenue enhancement measures. The second hypothesis i s being validated on the basis o f the data generated by tranches I and I1 under LGDP I. A total o f 1,896 subprojects under tranche I and 2,849 subprojects under tranche I1 covering several sectors were financed on the basis the LGDP framework at a total cost o f Ush. 10.6 bil l ion and Ush.18.8 bil l ion respectively. The quality o f the implementation results was assessed as satisfactory at 86% and 88% levels respectively. Assessment o f the viability o f the program was based on tranche I and I1 data o f LGDP I using various evaluation approaches.

The analyses undertaken as part o f the project appraisal indicate that the proposed LGDP I1 investment i s likely to be viable. The feasibility measures indicate that the Project: (i) i s cost-effective; (ii) has high economic rate o f return; and (iii) high benefit-cost ratios and associated social and economic benefits. In the aggregate, the results o f the analyses confirm that LGDP investment framework would most likely lead to selecting and financing viable social and economic priority investment interventions by local governments. Overall, the LGDP framework i s indeed functional and provides a fairly sound process for effective prioritizing and resource allocation o f the Local Development Grant o f LGDP 11.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4)

capacity to generate revenues and in terms o f the absorption capacity. The resource envelope defined for the program appears to be realistic both when looking at the

Fiscal Impact:

Overall, the fiscal impact o f LGDP I1 i s relatively small to the Government budget but i t s potential benefit i s high. Annually, LGDP II disbursements represent about 4% o f the Central Government current

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revenue and even a smaller part o f i t s total expenditure. Moreover, while the expected impact on the ground in terms o f capacity building and poverty alleviation i s deemed significant, the overall size o f LGDP I1 investment relative to GDP i s only about 0.5%. At the central level, the fiscal impact o f LGDP II i s consistent with Government’s Medium Term Expenditure Framework and does not exceed the budget ceilings allocated for fiscal flows to local authorities and other permitted expenditures over the l ife o f the project. At local level, the key fiscal issues concern the ability o f local authorities to fund the increased operational and maintenance expenditures that an increased stock o f physical infrastructure (funded from the LGDP) entails the ability o f the various sector ministries to finance the recurrent costs associated with teachers and nurses salaries, etc. This i s dealt with under “Sustainability” below.

3. Technical:

The choice o f technology w i l l be govemed by existing national technical standards and would be arrived at through an iterative community participatory approach based on the level o f the available budget envelope, the ability o f the beneficiaries to meet the cohnding requirements and the Operation and Maintenance (O&M) costs. Local contracting industry capacity has been built to a limited extent over the last three years during the implementation o f LGDP I, and capacity has been improving steadily. Tendering and contracts management capacity o f the technical departments o f the LGs has also been built gradually and has been improving over the implementation period o f LDGP I. Thus, there i s a fairly sound base for continuous enhancement o f these capacities during the implementation o f LGDP 11.

4. Institutional:

The institutional arrangements for project implementation will be as per the government structure. At the central level, the MoLG, MoFPED, and the Office o f the Auditor General shall be responsible for the execution o f the project, ensuring that the project resources are budgeted for and disbursed within the national MTEF, and the project accounts audited as per the Development Financing Agreement (DFA) and GoU requirements respectively. At the LG level, the Districts and Municipal LGs together with their respective lower LGs shall be responsible for meeting the access requirements and utilizing the grants as per their work plans and budgets. Management o f the completed facilities, including operations and maintenance, w i l l be the responsibility o f the ownersbeneficiaries or wherever the recurrent cost implication lies. O&M responsibilities have been detailed in the Operational Manual for the Local Government Grant (Annex 1 to the Project Implementation Plan).

4.1 Executing agencies:

The Ministry o f Local Government w i l l be the executing ministry for LGDP I1 and will also be directly responsible for implementing Components 1,4 & 5. 4.2 Project management:

M o L G w i l l be responsible for executing and coordinating the activities for the project. A Program Coordination Unit (PCLJ) (currently the PMU) w i l l support the M o L G in the management and coordination o f the various Project activities. In line with the proposed mainstreaming o f the LGDP I PMU, existing programs being executed by P M U shall be gradually mainstreamed into the MoLG, in a phased manner, beginning with those activities which are routine in nature. During this mainstreaming transition period, the PCU w i l l provide only the necessary technical backup support, and will primarily concentrate on ensuring that LGDP I1 i s implemented as per I D N G o U protocol agreement. The role o f the PCU w i l l gradually change over the l i fe o f the Project wi th tasks gradually being integrated into the mainstream activities o f the MoLG. The size o f the PCU i s expected to be kept at the present level over the project time-frame, but the role o f the staff will gradually change from project implementation to consultancy and technical support to the M o L G (although the core Project management functions, l ike

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financial management will be kept within the PCU). The PCU will prepare work plans, budgets, reports and other documents, will maintain liaison with all component task managers, will disburse funds and review fund accountability, organize and oversee quarterly review meetings, procure equipment and services, monitor and evaluate the impact o f the activities and the Project WIs, contracting and supervision o f consultancy assignments and the preparation o f reports detailing consultancy findings.

4.3 Procurement issues:

Procurement under the Project shall be guided by the IDA procurement guidelines (at National level) and at the LGs level, by the Draft Local Governments (Tender) Regulations, 2001 (under sub-section (1) of section 176 of the Local Governments Act, 1997. Procurement will be carried out using M o L G structures created under the new procurement law. The PCU w i l l be responsible for the day to day procurement activities carried out by the Procurement Specialist availed by the ministry specifically to deal with procurement activities related to this project. At the LG level, the existing structures will be used in a similar manner with the Tender Board Secretaries (TBS) responsible for quality assurance o f all procurement documents prior to presentation to their Tender Boards for approval or contract award. M o L G w i l l also monitor the procurement activities at the LG level where the capacity will be systematically built and reviewed over the l ife o f LGDP 11. The Project Implementation Plan (PIP) has been prepared which outlines the procurement procedures including standard forms to be used under the project. The PIP i s a living document that w i l l be updated as new developments in the procurement reforms under the new Public Procurement and Disposal o f Public Assets Authority (PPDPAA) w i l l be incorporated subject to agreement between GoU and IDA.

4.4 Financial management issues:

The Country Financial Accountability Assessment (CFAA) carried out by IDA in 2001 in collaboration with the GoU indicated that inadequate financial accounting and auditing systems and capacities both at the center and in the LGs pose a major fiduciary risk. Some o f the reforms aimed at addressing existing weaknesses have yielded positive improvements in the accountability environment in the public sector, and will further be partly supported by the LGDP 11. A CFAA update i s planned for FY04.

The key objective o f the project’s financial management system i s to ensure that funds are used only for their intended purposes in an efficient and economical way. The key r isks that the project may face relate to staffing and LG capacity to implement the control procedures (accounting, intemal audit and inspection), funds f low delays and inadequate levels o f counterpart funding, inadequacy o f mechanisms used to identify community needs, and lack o f audit capacity. To mitigate the above risks, M o L G will establish a strong intemal control system and ensure that the PCU i s always staffed with appropriately qualified staff. A financial performance assessment w i l l be carried out annually to ensure compliance with all accountability rules and procedures as a precondition for access to development grants by LGs. Project funds w i l l also be disbursed in accordance with an agreed schedule to which the GoU will be committed.

The disbursement o f the IDA Credit to the project for components 1,4 and 5 will be done quarterly based on Financial Monitoring Reports (FMRs). Funds for components 2 and 3 will be disbursed to the Special Account. From there, the IDA funds in conjunction with those from other donors will be disbursed in quarterly releases into the Consolidated Fund (CF). From there, funds w i l l be disbursed to the LGs for investments subprojects consistent with Schedule 11, Part 2 o f the Local Govemments Act o f 1997 and using LGDP modalities. With regard to the counterpart funds for components 1,4 & 5, it i s proposed that MoLG, will apply to the Poverty Eradication Working Group to consider the activities under the above components under PAF. M o L G w i l l carry out a Financial Performance Assessment (FPA) in AugustiSeptember each year. As mentioned above, this will determine access by LGs to development grants. For components 2 and 3, consolidated quarterly financial reports will be prepared by each HLG.

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The submission o f these reports to the M O L G w i l l be a prerequisite for the release o f quarterly disbursements to the LGs.

The staffing department o f the P M U i s made up o f the Program Accountant, and an Assistant Program Accountant and an Accounts Assistant. The accounting systems, policies and procedures employed by the P M U in accounting and managing for LGDP funds are documented in the Financial Management Manual (FMM) for the project. The P M U has completed the installation o f the accounting system, based on Sunsystems software, and staff were fully trained in i t s operation. The FMM wi l l be updated to include detailed descriptions o f the accounting system and procedures. The Project Chart o f Accounts w i l l be amended to allow for project costs to be directly related to specific work activities and outputs o f the project and formats o f the various periodic financial reports.

MoFPED (Treasury Department) will be responsible for conducting the internal audit function for the project. This will be strengthened with the introduction o f new Government Financial Regulations and through the allocation o f more staff resources. The Auditor General will be responsible for the external audit o f the project and the relevant local government accounts. The audited financial statements together with the auditor’s report and the auditor’s management letter wi l l be submitted to IDA within six months after end o f each financial year.

Actions outlined in the Financial Management Action Plan will be undertaken by the project to strengthen the financial management system. The actions consist o f updating the FMM, finalization o f internal audit arrangements, completion o f the audit approach for the audit o f lower local government financial statements, updating o f the Project Chart o f Accounts, and the preparation o f Terms o f Reference for the external audit for the project financial statements. The Government will ensure that appropriate staffing arrangements are maintained throughout the l i fe o f the project.

The conclusion o f the assessment i s that the financial management arrangements for the project satisfy the Bank’s minimum requirements under OP/BP 10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status o f the project required by IDA. Satisfactory steps have also been taken to mitigate r isks arising from weaknesses in the local government financial management arrangements and these continue to yield satisfactory improvements in the local government accountability environment. Actions intended to further strengthen the project’s financial management system are outlined in the Financial Management Action Plan above.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The GOU’s National Environment Statute o f 1995 and the Bank‘s Operational Policies 4.01 requires the preparation o f an Environmental Assessment and Social Management Framework (ESMF) which establishes a mechanism to determine and assess future potential environmental and social impacts o f Local Government subproject investments under the proposed LGDP 11. The ESMF establishes the screening process or mechanism for the subprojects to enable the LGs to identify potential environmental and social impacts o f subprojects and to address them by incorporating the relevant mitigation measures into the designs o f the subprojects. I t also assesses the capacity at the District and Lower Local Governments to implement the proposed screening process and mitigation measures, including the provision o f support to communities in cases of community managed subprojects, and make recommendations as appropriate, including training needs and costs. The ESMF indicates the institutional arrangements for the environmental and social management o f future subprojects, including monitoring indicators and a costed monitoring plan. The ESMF also assesses the content, use and effectiveness o f the existing Environmental and Social Checklist prepared under LGDP I and PRSC2.

Environmental Category: B (Partial Assessment)

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The investments under Component 2 fall under various sectors such as water supply, drainage, sanitation, solid waste management, access roads, construction o f schools and health facilities. In addition, the investments are sectorally varied given that they are determined by local-level priorities which w i l l differ from one local government to another. Due to the diverse nature o f the investments, the scope o f the environmental analysis for each investment would also vary. The investments financed by LGDP I by sector have been education (30%), roads (25%), health (lo%), sanitatioddrainage (10%) and water (14%). The ESMF presents definitive, conclusive and clear procedures consistent with the Laws in Uganda and the World Bank Safeguard Policies. The ESMF report was disclosed to the public on March 26,2003 by the Government o f Uganda and the World Bank.

5.2 What are the main features o f the EMP and are they adequate?

The Environmental Mitigation Plan (EMP) which i s prepared as part o f the Environmental and Social Impact Assessment (ESIA) would consist o f a set o f mitigation measures, monitoring and institutional measures to be taken during implementation and operation o f the subprojects to eliminate adverse environmental and social impacts, offset them or reduce them to acceptable levels. The main features o f the EMP are: (i) mitigation plan which would 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 o f monitoring activities that will be linked to the mitigation measures. The EMP would also provide specific description o f institutional arrangements. In addition, the EMP would include an estimate o f the costs o f the measures and activities recommended so that the LGs can budget the necessary funds. The mitigation and monitoring measures recommended in the EMP would be developed in consultation with al l affected groups to include their concerns and views in the design o f the EMP.

5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: March 6, 2003

The project has a category B rating. The investments under this project will focus on the improvement o f the delivery o f basic services and will result in improved living conditions. The investments under the project would be sectorally varied given that they will be determined by local level priorities which will differ from one local government to another. The types o f investment are comnion community development projects whose potential environmental and social effects are well understood, unlikely to be significant, and readily manageable. Modular sector specific environmental checklists have been prepared for projects and these checklists w i l l be used to determine that the investments conform to environmentally appropriate guidelines and that they incorporate the mitigation measures defined therein. Local Governments will be required to apply the environmental checklists for appraising their investments and comply with the mitigation measures contained therein. In addition, routine checks will be made to ensure that individual investments also conform to nationally applicable environmental standards. All o f these measures are contained in the ESMF prepared for the project. The environmental checklist prepared under LGDP I wil l be revised and upgraded so that it conforms with the provisions o f the ESMF and the Resettlement Policy Framework (RPF). Under the project, an environmental and resettlement training module w i l l be developed as part o f the standardized training module for LGs. The project does not intend to displace any settler within the project location. Project design, determination o f investment sites and implementation arrangements are al l to be formulated through a participatory process. Availability o f land without any form o f encumbrances i s one o f the prerequisites for project site selection and implementation. An RPF has been prepared and Resettlement Plans subsequently developed and presented for approval if land taking i s necessary. The RPF establishes the resettlement and compensation principles, organizational arrangements and design criteria to be applied to meet the needs o f the people who may be affected by the project activities requiring land acquisition and lor

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denial, restriction or loss o f access to economic resources.

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?

Environmental screening o f subprojects would be carried by the LGs with the assistance o f their Technical Planning Committees (TPCs), Investment Committees (ICs), Project Management Committees (PMCs), and District Technical Departments (DPTs) to ensure that they carry out the appropriate ESIA when needed for each subproject. Before approving a subproject, the TPC verifies that the subprojects meet the environmental and social requirements o f the national and local governments and consistent with the overall LGDP I1 ESMF and other applicable environmental and social policies and safeguards o f the World Bank. They must also ensure that any legally required ESIA report has been prepared and approved b y the Local Government Council before the subproject i s approved for funding. Public consultations will be held with the local communities and all other interested /affected parties. These consultations w i l l identify key issues and determine how the concerns o f a l l parties will be addressed in the terms o f reference o f the ESIA. To facilitate meaningful consultations, the LGs through the PMCs, would provide all relevant material and information concerning the subprojects in a timely manner prior to the consultation, in a form and language that are understandable and accessible to the groups being consulted. Depending on the public interest in the potential impacts o f the subprojects, a public hearing may be requested to better convey concerns. To ensure that an appropriate public consultation mechanism i s developed, the TPC’s should ensure that the ESIA terms o f reference include such a requirement. Once the ESIA has been reviewed and cleared by the TPC’s and local government councils, the PMC’s w i l l inform the public about the results o f the ESIA. This approach would be consistent with the Bank’s OP 4.01 Environmental Assessment as well as Uganda’s efforts to enhance i t s public consultation process. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

Modular sector specific environmental checklists have been prepared for the project and these checklists w i l l be used to determine that the investments conform to environmentally appropriate guidelines and that they incorporate the mitigation measures defined therein. For LGDP I, monitoring and evaluation guidelines for the sub-projects were developed to monitor performance and process. These guidelines suggested what should be monitored, indicators o f achievement o f improvements, means o f verifying the improvements, frequency o f monitoring, methodology or how the monitoring w i l l be done, and finally who i s responsible for the monitoring. Additionally, for LGDP 11, these guidelines will be revised to provide clear and functional environmentalhocial issues monitoring and evaluation roles and responsibilities, and to provide monitoring indicators in order to measure the success o f the mitigation measures, cumulative impacts from implementation o f multiple sub projects, compliances with approval processes and conditions, and identifying further ESMF process-strengthening and capacity building needs. Local Governments will be required to apply the environmental checklists for appraising their investments and comply with the mitigation measures contained therein. To determine the depth o f the ESIA required, potential impacts in the following areas need to be considered: (i) social issues; (ii) 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. In addition to the RPF, an individual Resettlement Plan (RP) w i l l be prepared during project implementation for cases where land acquisition turns out to be necessary. Responsibilities for Monitoring and Evaluation o f the Mitigation Measures would be assigned to the TPC, PMCs and the National Environment Authority (NEMA).

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6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

The development objective o f the project i s improved Local Government institutional performance for sustainable, decentralized service delivery. The key social issue i s to ensure that this i s done in a socially and environmentally sustainable and gender sensitive manner. The project's planned social development outcomes o f greater empowerment and social inclusion, are that the investments identified, prioritized and funded by LGs are environmentally sound and identified and monitored in a participatory, transparent and accountable manner through the utilization o f the Harmonized Participatory Planning Guide (HPPG) for lower councils, a framework formulated and promoted by local governments and civ i l society in Uganda. Gender concerns shall be addressed by ensuring that gender mainstreaming by LGs, in planning and budgeting, are included in the performance assessment criteria and an incentive mechanism i s built into assessment process to reward good and sanction poor performers. Similarly, Local Governments working towards improved access to services that come out o f the likely investments under LGDP I1 by the often disadvantaged and marginalized groups o f people like the disabled, the elderly, the women, orphans, etc. i s paramount.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The GoU decentralization policy provides for a participatory approach to governance at the various levels o f society. The primary beneficiaries o f sustainable and decentralized service delivery resulting from improved LG institutional performance, the people o f Uganda, will participate in identifying and prioritizing and monitoring investments in a participatory manner through the utilization o f the HPPG. Indicators o f participation at the various levels have been developed and built into the guide. During the reviews o f LGDP I and the technical analysis for the design o f the project, a participatory approach was used whereby all the key stakeholders (Line Ministries, donors, Civ i l Society Organizations, LGs, etc) were consulted and a number o f feedback workshops organized to enable them to provide their inputs and validate the conclusions and recommendations o f the review reports and technical studies. As a result, Non Governmental Organizations (NGOs), CBOs and private sector service providers have been included in the LGs capacity building plans as per guidelines for minimum conditions assessment. The timing of, feedback on and team composition o f the annual assessment have been influenced to include civ i l society and donor input and representation. Similarly, a number o f bilateral donors have expressed interest to co-fund LGDP 11. Efforts to provide for incentives or mechanisms for improving support and participation for improved service delivery have been included in the' project ,e.g. the transfer o f unconditional grants that promote downward accountability, while rewarding well performing LGs. For continued participation, the participatory approach adopted during the Project design shall continue during the implementation phase through meetings, consultative and feedback workshops that w i l l support the critical participatory monitoring and evaluation including the transfer o f control o f some decisions and resources l ike the Local Development and Local Capacity Building Grant. The same policy requires LGs, through a participatory manner, to prepare three-year rolling development plans incorporating the plans o f lower LGs. This legal provision has been strengthened under the project by making it a minimum access criterion for LGs.

6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations?

Civi l Society Organizations (CSOs) including NGOs, both international and indigenous have actively participated in the district reviews o f LGDP I, stakeholders meetings, workshops, and the technical analysis for the design o f the project and this collaboration will continue during implementation, monitoring and evaluation. Civ i l society organizations have comparative advantages in areas such as advocacy, community mobilization and training. One key area where CSOs have been very active i s in

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the revision o f investment planning guides to make them more participatory. Partnerships between LGs and CSOs including NGOs in the implementation and monitoring o f LGDP I1 i s greatly encouraged. I t is, therefore, the intention that the current policy where LGs are not encouraged to use force accounts for the provision o f services shall be applied and enforced under the Project. This would allow LGs to contract NGOs/CSOs, through a competitive process, to provide services for which they have the comparative advantages. Those NGOs/CSOs, which have their own resources, shall be encouraged to complement the efforts o f the project.

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The M o L G has developed a gender mainstreaming strategy in conjunction with the Ministry o f Gender, Labor, and Social Development (MoGLSD) and other stakeholders. The M o L G i s in the process o f commissioning a consultant to develop gender proxy indicators arising out o f the strategy. These indicators shall be used for assessing LGs compliance to gender mainstreaming requirements. Plans are underway, with financial support from the United Nations Capital Development Fund (UNCDF), to conduct training o f trainers (TOT) for LGs on gender mainstreaming strategy. The MoGLSD in collaboration wi th M o L G shall be the institutions to ensure the successful implementation o f the strategy. In addition, the M o L G with LGs and CSOs input has prepared and issued to all LGs, in March 2002, a draft Harmonized Participatory Planning Guideline (HPPG) for field-testing. The draft HPPG introduces innovative approaches as to how LGs should address issues such as gender, environment, poverty, and livelihood analysis, etc (as opposed to problem based planning) while preparing their three-year development plans. In addition, the manual provides for participatory performance monitoring that will help in mapping out changes in priority investments and hence responding to user preferences while at the same time promoting community empowerment. The draft manual has been circulated widely to stakeholders (donors, NGOs, CSOs, l ine ministries) for comments, and it i s due for review in May/June 2003 after which it shall be published incorporating comments from stakeholders. The MoFPED, M o L G and the National Planning Authority (NPA) shall be the institutions for the developing o f the planning guide. Successful implementation o f the above two guides, beginning FY2003/4 (year 1 o f LGDP 11) would result into the Project achieving i t s social development outcomes o f greater empowerment and social inclusion.

6.5 How will the project monitor performance in terms o f social development outcomes?

Under LGDP I, a Management Information System (MIS) was developed for monitoring and evaluating the social development outcomes o f LGDP and also to provide the M o L G with a one-stop information center on LGs. This same M I S w i l l be used for LGDP I1 and National Service Delivery surveys that have a strong user satisfaction component to be done by Uganda Bureau o f Statistics(UB0S) will employ both qualitative and quantitative approaches. Critical monitorable indicators include the following:

0

0

% o f LGs using the harmonized participatory planning guide for lower councils % o f total expenditure by LGs for service provision contracted out to nongovernment entities

% o f LGs with institutionalized action plan on accountability and transparency including private sector

0

Training o f LGs on how to use the system are to be conducted under the remaining period o f LGDP I and during the l i f e o f LGDP 11.

- 2 0 -

Policy Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OPIBP 4.12) Safety o f Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, G P 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)*

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

A Resettlement Policy Framework (RPF) has been prepared under the project and was disclosed to the public on March 26,2003, both in Uganda 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 affected by 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. In addition to the RPF, an individual Resettlement Plan (RP) w i l l be prepared during project implementation for cases where land acquisition turns out to be necessary. The RP will include measures to ensure that displaced persons are informed and consulted on their options and rights to resettlement and compensation and provided with prompt and effective compensation at full replacement cost for losses o f assets and access, attributable to the project. 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. The GoU has been very successful in carrying out the decentralization policy as all the local government institutions and structures are in place. The screening process will take advantage o f this by assigning new responsibilities required in the RPF to the relevant local government planning bodies at the closest level to the affected communities. These planning bodies exist and are functional in Uganda.

Triggered O y e s .- NO

- Y e s 0 NO

- Y e s NO

- Y e s NO

- Y e s 0 NO

- Y e s 0 NO

Y e s - NO

I- Y e s 0 NO

- Y e s 0 NO

Y e s 0 NO

An Environmental and Social Management Framework (ESMF) was prepared for the project and was disclosed to the public on March 26,2003, both in Uganda and at the World Bank. The role and functions o f the ESMF are described above in Section 5.3. The ESMF and RPF w i l l require individual subproject ESIAs and RPs in some cases. These w i l l be disclosed to the public, prior to subproject approval, to meet relevant World Bank and Ugandan requirements.

F. Sustainability and Risks 1. Sustainability:

Sustainability issues for LGDP I1 arise at two levels: (i) sustainability o f the physical infrastructure investments made by local authorities with their receipts from the Local Development Grant (LDG), particularly if local revenues remain stagnant or decline; and (ii) the sustainability o f the LGDP capital and capacity-building transfers as an ongoing element o f the intergovernmental fiscal system in Uganda.

The former issue was clearly identified during the mid-term review o f LGDP I - where i t was noted that

-21 -

the local revenue performance o f many local authorities was deteriorating - and has remained a key source o f concern for the Government o f Uganda and donors since that time. LGDP I1 seeks to address to address this issue in two ways. First, the assessment criteria (conditions) which local authorities will need to meet in order to access their LDG allocations w i l l be tightened so as to sharpen incentives to improve local revenue performance. Second, Component 4 o f the proposed project will support an extensive set o f activities at policy, legal and operational levels to improve the own-source revenue performance o f local authorities across the country.

In respect o f the level (ii) issues, i t i s important that LGDP modality i s retained as a fundamental feature o f the intergovernmental transfer system in Uganda beyond the l i f e o f the project. Prospects for this are very good. In fact a cardinal feature o f the government’s Fiscal Decentralization Strategy (approved by Cabinet in 2002 and currently under implementation) i s that fiscal flows to local authorities for development purposes - from both donors and from central govemment - should increasingly be incorporated into the CDG mechanism. This i s given concrete expression through the joint funding o f the CDG by a number o f bilateral donors for the f i rs t time, and it i s expected that steady progress will continue to be made in this area.

2. Critical R isks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

Risk +om Outputs to Objective The sectors and donors are unwilling to old in the sector grants and district upport programs to the LGDP modality.

2ontinuous decline o f the local :overnment revenue collection.

>peration and maintenance costs (O&M) lot properly catered for by the LGs

Risk Ratina I Risk Mitiaation Measure

M

S

S

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The design o f the LGDP I1 has been made through a highly consultative process to ensure buy-in o f the principles by the various stakeholders. The increase in the discretionary funding has been made gradual.

The support to the Fiscal Transfer Strategy by GOU and the Donor Sub-Group on Decentralization i s strong and a new up-dated time-plan should be followed, introducing the FDS starting in 15 pilot LGs.

The coming initiatives, such as reform o f the Property (Rating) Decree are an important step to support the tax administration. The revenue enhancement (Component 4) w i l l mitigate this risk. Component 4 o f LGDP I1 will address, in practical terms, those tasks to be done at central and LGs in order to reverse decline in local revenue mobilization by LGs.

Clear incentives in the assessment system to cater for 0 & M

Capacity building in planning and budgeting i s rendered to LGs and i s expanded in the LGDP

In

+om Components to Outputs jovernment changes i t s policy .oncerning gradual decentralization o f he development budget

M

M

M

M

Ither programs may undermine the ncentives and features o f the LGDP I1

Budgeting guidelines with clear emphasis and guidance on the 0 & M supported by Component 1

GoU has declared the LGDP as the major vehicle for transfers o f development funds to LGs

The implementation o f the newly adopted FDS, which i s commencing from August 2002 shall mitigate this risk.

The “Road Map” developed by M o L G shows a strong support to the principles o f decentralizing the development budget to LGs.

The development o f the Decentralization Annual Review to be supported under LGDP I1 Component 1 and the Road-Map on Decentralization w i l l facilitate better coordination among the various stakeholders and programs.

The M o L G shall prepare strategy for gradual mainstreaming o f the process. M o L G will have the responsibility but w i l l be supported by a Project Office (PO) over the three years. Mainstreaming progress shall be reviewed during the MTR o f the LGDP 11.

Component 1 w i l l provide budgetary provision: to support the M o L G to roll-out the Compliance Inspection and M&E system as one o f the strategies for mainstreaming the assessment process. This shall be linked to FDS system. The assessment process and manual developed under LGDP I shall be reviewed and, where necessary, made clear, transparent, simple and covering the key performance areas. The process shall be made transparent by involving representatives from sector ministries, Central Government (CG), LGs, donors, private sector representatives. Component 1 w i l l provide support to M o L G in this process.

doLG has resources for the gradual nainstreaming o f the LGDP assessment irocess in addition to the regular routines If the Ministry

’he yearly assessment system may be lndermined by non-objective factors or ack o f capacity and lose credibility

’imely and adequate transfer o f esources to LGs may not be ccomplished

M Under Component 5, initiatives will be taken tc improve on the communication and transparency between the various stakeholders

- 2 3 -

4dequate funding and personnel at the :enter and trainable or competent staff at :he LG levels

M

M LG will lack sufficient management :apacity to handle the increase in levelopment funds

in the transfer system. Studies w i l l also be initiated to review the timeliness and accurateness o f the transfers from CG to LGs

Under LGDP I Component 1, DANIDA and the DfID SDP provide budget support for building the capacity o f MoLG. The Ministry o f Public Service (MOPS) in conjunction with M o L G have commissioned studies o f the rightsizing and the funding needs o f LG administration. Government, in line with the FDS, shall implement the recommendations under these studies.

Component 3 w i l l provide support in the capacity building activities in LGs.

A number o f initiatives on supply driven support w i l l be put in place under Component 1 to the capacity o f LGs. In addition, new planning guidelines w i l l support the LGs in planning and budgeting o f investment funds.

3verall Risk Rating

tisk Rating - H (High Risk), S (Substantial Ris

M M (Modest Risk), N(Negligib1e or Low Risk)

3. Possible Controversial Aspects:

None

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G. Main LoanConditions 1. Effectiveness Condition

(i) The Borrower has appointed a Procurement Specialist for PCU. (ii) The Borrower has opened the M o L G Project Account and an initial deposit o f Uganda Shillings

equivalent o f $250,000 has been made therein.

2. Other [classify according to covenant types used in the Legal Agreements.]

(i) Account/Audits: Books o f Accounts will be maintained for the project in accordance with generally accepted accounting principles. The accounts will be audited annually and such reports w i l l be made available within six months o f the year end. A single audit opinion will be issued on project income and expenditures, special accounts and FMRs. The Government will submit quarterly Financial Monitoring Reports in formats and contents agreed with during negotiations. In addition, terms o f reference for the external audit was agreed during negotiations.

(ii) Bank Accounts: Two Special Accounts will be opened, one for Components 2 & 3 and one for Components 1,4 & 5, in a commercial bank acceptable to IDA.

(iii) Fiscal Transfers (Comuonents 2 & 3): IDA funds w i l l be disbursed from the Special Account to the GOU Consolidated Fund Account in Uganda Shillings on a quarterly basis based on the satisfaction o f certain criteria, a financial performance assessment carried out by M o L G and submission o f acceptable documentation for previous releases.

Funds intended for the Local Development Grants w i l l be disbursed by the Bank against fully appraised and approved subprojects drawn from the LGs rolling developments plans and consistent with Parts 2 through 5 o f the Second Schedule to the Local Government Act o f 1997. Triggers for the Association's quarterly releases are follows:

(a) For thefirst year release, the receipt of:

a certification indicating that there have been no significant reallocation, deviations, suspension or partial suspension o f funds released under the third tranche o f LGDP I as compared against the Indicative Planning Figures for the Local Governments; a schedule indicating the amount o f Local Development Grants that has been released to the eligible Local Government during the preceding Fiscal Year; initial cashflow forecasts for the Local Development Grants based on the results o f the annual assessment; Participation Agreements between the Government and eligible Higher level Local Governments (districL"unicipa1ities); a document outlining the process for new District creation; and preparation by the Auditor General o f an audit strategy for the Lower Local Governments.

(b) For the second year release, the receipt of:

a satisfactory report on Financial Performance Assessment carried out by M o L G a schedule indicating the amount o f Local Development Grants that has been released to the eligible Local Governments during the preceding Fiscal Year and the amounts to be released, on a quarterly

- 25 -

basis, to eligible Local Governments for the next Fiscal Year; a certification indicating that there have been no significant reallocation, deviations, suspension or partial suspension o f funds released under the previous releases as compared against the Indicative Planning Figures for the Local Governments; Participation Agreements between the Government and the eligible Higher level Local

0

0

Governments* (*Participating Agreements will be required only for those newly created districts participating for thefirst time in the project)

0 0 0

a Local Governments (Rating) Bill satisfactory in form and substance to the Association; progress report on the implementation o f the agreed Institutional Plan; and progress report on the implementation o f the audit strategy for LLG.

(c) For the third year release, the receipt of:

0 0

a satisfactory report on Financial Performance Assessment o f LGs carried out by MoLG; a schedule indicating the amount o f Local Development Grants that has been released to the eligible Local Governments during the preceding Fiscal Year and the amounts to be released, on a quarterly basis, to eligible Local Governments for the next Fiscal Year; a certification indicating that there have been no significant reallocation, deviations, suspension or partial suspension o f h d s released under the previous releases as compared against the Indicative Planning Figures for the Local Governments; Participation Agreements between the Government and the eligible Higher level Local Governments;

0

0

0 0

a Local Governments (Rating) Act, including mass valuation regulations; and evidence o f an independent procurement review carried out in all the HLGs.

Funds intended for the Capacity Building Grants will be disbursed by the Bank against fully appraised and approved subprojects drawn from the LGs annual workplans and consistent with Schedule 11, Part 2 o f the Local Government Act o f 1997. Triggers for the releases are follows:

0

0

Participation Agreements between the Government and the eligible Higher level Local Governments; and Accountability o f the previous funds released to the Local Governments.

(iv) Counterpart Funding: (a) The Borrower will open and maintain an account (the M o L G Project Account) in Uganda Shillings in a commercial bank on terms and conditions satisfactory to the Association. The Borrower w i l l (i) make an initial deposit into such account, the Uganda Shillings equivalent o f USS250,OOO; and (ii) not later than December 31, 2003, deposit into such account, the Uganda Shillings equivalent o f US$250,000 to finance the Borrower’s contribution to Components 1,4 & 5 o f the Project. Thereafter, deposit into the Project Account on a quarterly basis during project implementation, such amounts as shall be required to replenish the Project Account to the amount o f the initial deposit. MoFPED will include LGDP I1 funds and Government counterpart contributions for Components 1,3,4 & 5 in i t s annual budgets.

(v) Accounting Systems: MoLG shall update the Project Chart o f Accounts for transactions to be undertaken by December 3 1,2003.

(vi) Management Aspects o f the Project: M o L G shall maintain with staffing and function, satisfactory to IDA, i t s PCU responsible for technical back-up support.

(vii) Monitoring and Evaluation: M o L G will submit semi-annual progress reports to IDA.

- 2 6 -

(viii)Mid-Term Review: MoLG, through i ts PCU, w i l l prepare for a mid-term review of LGDP II by February 15,2005.

(ix) Implementation: The Government would carry out LGDP II in accordance with the Project Implementation Plan (PIP).

H. Readiness for Implementation - 1. a) The engineering design documents for the first year’s activities are complete and ready for the

E 1. b) Not applicable.

-

start o f project implementation.

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

3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory - quality. - 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies x - 1. This project complies with all applicable Bank policies. L 2. The following exceptions to Bank policies are recommended for approval. The project complies

with a l l other applicable Bank policies.

Team Leader Sector Manager Country Director

- 2 7 -

Annex 1: Project Design Summary UGANDA: Second Local Government Development Project

Improve delivery o f basic services to engender economic growth and poverty reduction according to the Government decentralization policy.

Project Development 0 bjective: Improve Local Government institutional performance for sustainable, decentralized service delivery.

Output from each Component: Component I - Support for the decentralization process

I. Support to the FDS Implementation and Tools to support Decentralization of the Development Budget

This sub-component w i l l support a number o f activities which are designed to improve the abilities o f local governments to plan and implement projects in a participatory process. These

Kev Performance Indicators

Sector Indicators: Efficient and improve service delivery standards at the local government level

htcome I Impact ndicators:

75% o f LGs with a three year roll ing Development Plan 75% o f HLGs submitted final accounts on time to the Office o f the Auditor General 35% o f LGs registering 20% increase in own revenue (taxes, user charges and fees) from baseline year 2002103

Iutput indicators:

50% o f the municipalities and town councils using the new Urban Planning guidelines. 65% o f LGs using the harmonized participatory planning guide for lower councils. 50% o f LGs using the new M&E system.

Data Collection Strategy

jectorl country reports: Local Governments' financial assessment reports

aroject reports:

' Local governments financial and technical audit reports

' Development Plans 1 Annual assessment reports,

including data on gender issues

reports

reports

1 Physical infrastructure

1 Bi-annual monitoring

1 Mid-Term Evaluation 1 Implementation Completion

Report

aroject reports:

1 Annual Decentralization

1 Sector Policy Review

1 Bi-annual monitoring

1 Mid-Term Review reports 1 Minimum Conditions (MC)

and Performance Measure (PM) Assessment Reports

1 LG C B Policy Framework 1 LGs final account 1 LGs Assessment Reports 1 Implementation Completion

Review reports

reports

reports

Report (ICR)

Critical Assumptions rom Goal to Bank Mission) Stable political situation Stable macro-economic policy framework No calamities in the country (war, epidemicdendemic, natural calamities) Maintenance o f Decentralization Policy and implementation Sector support facilitating decentralized service provision

rom Objective to Goal)

Government is committed to the implementation o f PEAP strategy and FDS Government i s committed to LG revenue enhancement and depoliticization o f the graduated tax Other programs do not undermine LGDP I1 Commitment and adequate capacity in central government to mentor and provide technical back-up support to LGs

'rom Outputs to Objective)

M o L G providing strong leadership and coordinate Line Ministr ies (LMs) within the SDF Sector Ministries wil l ing to reform policies and practices in line with the decentralization policy and principles Donors willing to reform financing and programming practices within the SDF Mainstreaming o f the LGDP system as GoU processes. Successful implementation o f the FDS.

- 2 8 -

wi l l include: (i) the effective roll-out o f a unified system for performance, capacity and service-delivery monitoring and evaluation at the local level; (ii) implementation o f effective integrated planning systems such as the harmonized participatory planning guidelines, urban planning guidelines, etc. ; (iii) dissemination and ro l l out o f the Communications Strategy; and (iv) strengthening procurement systems in local governments.

ZI. Institutional Structures Surrounding Decentralization

(i) A ~ m l LG performance assessment; (ii) An institutional assessment o f the role and capacity o f M o L G to perform its new function; (iii) A national LG-Human Resource Development (HRD) strategy in place and institutionalized; (iv) Three-year LG Capacity Building (CB) and training plans in place; (v) Annual decentralization review will take place as part o f the common programming, financing and implementation modalities for decentralization established under the Strategic Decentralization framework (SDF); (vi) Preparation o f the future framework for a Strategic Decentralization Framework; (vii) Establishment of an analytical framework to provide the basis for the development o f a decentralization budget support instrument; (viii) Decentralization Strategymoad Map; (ix) Audits o f the accounts o f all LCIIIs for the first two years o f the Project; and

75% o f LGs properly carrying out the intemal assessment prior to the National Assessment (NA). A LG capacity building policy and strategy developed and adopted by M o L G by the end o f 2004. No. o f LGs that have prepared and adopted a three year capacity building plan. Three annual Decentralization Review Work-shops takes place over the project period starting by 2003104. A Strategic Decentralization Framework developed by M o L G by 2004105. Modalities and issues for a broader budget support to the Government decentralization process to be evaluated during the MTR. Annual audits for LCI I Is carried out.

1 Systemslmanuals developed under the Project are intemalized and operationalized by M o L G staff

- 29 -

(x) Local Financial Management

ZZZ. Sector Issues Related to Decentralization

Studies will be carried out to review the relationship between LG administration and deconcentrated central government technical units and review o f the LG legal framework.

Component 2 - Local Development Grants

1. Increased discretionary Development Grants transferred to LGs in a timely and transparent way.

Component 3- Local Government Capacity Building

1. Career development and skills development o f LG staff through training in relevant‘generic’ subjects.

Component 4 - Local Government Revenue Enhancement Output

1. Improved policy and legislative environment for Local Revenue (LR).

12. CG and LG politicians and

Studies on the LG legal framework and on the cross sector issues completed by 2003104.

10% increase in LG discretionary development grants over the project period. Transfer tracking study finds satisfactory releases of LDG for at least 80% o f the HLG. National assessments are rated satisfactory by the Quality Assurance Team for at least 80% o f the HLG.

No. o f LGs that have prepared a three year rolling capacity building plans. No. o f people trained disaggregated by gender. No. o f LGs that have implemented gender related training courses.

Proposals for appropriate sources to replace or supplement the GT. Rationalized system o f business taxation formulated. Training sessions for politicians and officials conducted.

0 Semi-Annual Progress Reports by the M o L G Inspectorate/PCU.

0 Training session and workshop reports

0 Approval o f consultants’ final reports

0 MTRreports

0 Donors and L M s wil l ing to fold in their District Development Programs and Sector Grants respectively to LGDP

0 LGs meeting the minimum conditions

0 No political interference in the assessment process.

0 Efficiency in the transfer system

0 Development by M o L G o an overarching National C B policy framework for LGs

0 Coordinated donor efforts in the implementation o f CB initiatives at LGs

0 LGs preparing a C B plan and using the CBG in l ine with the plan.

0 Standard curriculum developed

0 Adequate supply response from training institutions to the C B demands from LGs.

0 Government considers revenue legislations as reviewed and revised through LGDP I1

0 De-politicizing the graduated tax (GT)

0 Streamlining LG tax administration and improvement o f collection

- 30 -

officials sensitized to the importance o f LGR issues.

3. Better functioning LR systems.

4. Extension o f property tax systems.

5. Improved LG revenue monitoring.

I

Component 5 - Support to Project Implementation

1. This component will contain support to project management, monitoring and evaluation as well as some key central support activities such as the qualitative enquiries, audit support, mid-term review, final evaluation and review and control o f the transfers system under LGDPII.

Project Components I Su b-components: 1. Support for the Decentralization Process

2. Local Development Grants

3. Local Govemment Capacity Building

4. Local Govemment Revenue Enhancement

5. Support to Project Implementation

1 Regional workshops held to disseminate LRE best practices.

1 Property data collected, valuation l ists prepared and PT administration system installed in 11 pi lot LGs.

1 25 o f HLGs assisted by the help desk.

’ Annual reporting on LGR (estimates and actual) for 74 HLGs.

M o L G P C U providing the necessary back-up support and mentoring o f LGs. Annual audits for the Project prepared on time.

nputs: (budget for each :omponent) JS$23.8 mil l ion

JS$107.5 mil l ion

JSS15.0 mil l ion

J S l l . 9 mil l ion

JS$6.8 mil l ion

’roject reports:

0 Bi-annual monitoring reports, including financial monitoring reports

e Management and financial reports, procurement records, contract, audits and technical reports

procedures 0 Conducting training o f

politicians, CG officials, LG councilors & staff.

0 New PT legislation in place

0 Mainstreaming o f P M U by 2007

from Components to

0 Development o f the “Road Map” by M o L G which indicates strong support to the decentralization principles

0 Assessment process i s clear and transparent

0 Development o f the Decentralization Annual Review

Iutputs)

- 3 1 -

Annex 2: Detailed Project Description UGANDA: Second Local Government Development Project

By Component:

Project Component 1 - US$23.80 million

1. Support to the Overall Decentralization Process Sub-components:

1.1 Development Budget. Resources w i l l be provided in the following areas: (i) implementation o f effective integrated budgeting and planning systems such as the harmonized participatory planning guidelines, urban planning guidelines, district planning guidelines; (ii) strengthening procurement systems in local governments; (iii) dissemination and ro l l out o f the Local Government Communication Strategy; and (iv) effective roll-out o f a unified system for performance, capacity and service-delivery monitoring and evaluation at the local level.

Support to the FDS Implementation and Tools to Support Decentralization of the

1.2 Institutional Structures Surrounding Decentralization. This component will provide incentives to LG to improve on administrative performance and ensure proper and coordinated structures supporting decentralization and support the annual LG performance assessment system in the following areas: (i) orientation o f internal assessment teams; (ii) distribution o f the assessment manual; (iii) orientation o f the national assessment team; (iv) national assessment; (v) feedback o f the national assessment results; (vi) quality assurance o f the national assessment; and (vii) financial support to LG restructuring including severance payments to employees separated through retrenchment. An institutional assessment o f the new roles and capacity o f the MoLG to performs i t s new fknctions w i l l be developed under LGDP 11. The DFID financed DSP will parallel finance the capacity building activities which related to M O L G based on the above institutional assessment.

To support the Capacity Building for local governments, resources w i l l be provided to assist in the development o f a national strategic Capacity Building Strategic Framework and strengthening o f the LG Human Resource Development Function. Activities will include: (i) establishment o f a LG Capacity Building Policy committee; (ii) establishment and running o f a LG Capacity Building Unit; (iii) development and piloting o f a HRD course; and (iv) development o f introduction courses on new manuals to build up district resource pools. These activities are closely related to the CB grants under Component 3 and are aimed at ensuring coordination, support and quality assurance o f the LG capacity building effort.

Joint annual reviews o f the Decentralization will be conducted to review the status o f the overall process o f decentralization, improve the coordination o f initiatives and elaboration o f the “Strategic Framework for Decentralization” to ensure coherent, mutually supporting initiatives and cross-cutting (sectoral) learning and coordination. The joint annual reviews will provide clear recommendations with targets and time frames and identifying responsible institutions. The joint annual reviews w i l l support an iterative process towards better coordination o f donor and government activities supporting decentralization. A draft Strategic Framework for Decentralization will be elaborated prior to the first annual review in 2003. Support to the design o f the institutional arrangements and scope o f the future Decentralization Donor Support modality will be provided to: (i) prepare the framework for a Strategic Decentralization Framework; (ii) review the links to the central government PRSC; (iii) review, analyze and formalize the StrategyIRoad Map and the conflicts identified under the sectoral reviews to elaborate a Decentralization

- 32 -

Implementation Support Matrix; (iv) review the future organization and participation in the Decentralization Strategic Framework; and (v) develop clear recommendations for the future Decentralization Strategic Framework.

Resources will also be provided to support the design o f the institutional arrangements and scope o f the future decentralization donor support modality. Activities w i l l include: (i) preparation o f the future framework for a Strategic Decentralization Framework; (ii) establishment o f an analytic and design basis for the Decentralization PRSC; (iii) review, analyze and formalize the Decentralization StrategyiRoad Map and the conflicts identified under the sectoral reviews; (iv) review the future organization and participation in the Decentralization Strategic Framework; and (v) develop clear recommendations and modalities for the future Decentralization Strategic Framework.

1.3 Sector Issues Related to Decentralization. This component will supplement the FDS by identifying areas where sector policies, laws and practices are inconsistent andor not supportive to the overall framework o f decentralization and propose solutions to these problems. Two activities will be carried under LGDP I1 to support the resolution o f cross sector issues: (i) review o f the relationship between LG administration and deconcentrated central government technical support units; and (ii) review o f the LG legal framework ( l inks between the LG Act and other related Acts) to identify contradictions and find solutions, e.g. the leadership code and the LG Act and Public Finance and Accountability Bill.

1.4 sub-component i s to assist M o L G to coordinate capacity building for decentralization by formulating and implementing a National LG Capacity Building Strategy with the participation o f relevant stakeholders. The Strategy should provide the framework for coordination o f capacity building activities for a more demand driven process, whereby LGs themselves define training needs. LGDP I1 will provide resources in the following areas: (i) establishment o f a LG Capacity Building Policy Committee, chaired by MoLG, being responsible for formulating a National LG Capacity Building Strategy; and (ii) to support for the running o f a LG Capacity Building Unit within M o L G to serve as secretariat for the committee, and to implementing and following-up on the strategy. The unit w i l l be augmented by technical working groups that w i l l be formed to undertake specialize tasks. The working group will include key stakeholders and experts wi th the required expertise from government and non governmental organizations, and the private sector. A technical working group on standardized training will be established prior to start o f the Project and w i l l include representatives from key relevant stakeholders, including line ministries.

Strategic Framework - National Strategy and Institutional Set-up. The aim o f this

1.5 Strengthen LG H u m a n Resource Development Function. The aim o f this sub-component i s to strengthen the Human Resource Development Function o f the district and municipal councils to plan for their own capacity development and training needs - and thereby support a demand driven approach to LG training. LGDP I1 w i l l provide resources for the development and piloting o f a HRD course and introduction courses on the new manuals to build up ‘district resource pools’ (trainers in LG).

1.6 Audit of the Accounts Lower Local Government (LC 111s). LGDP I1 wil l provide resources to carry out audits o f the accounts o f all the L C 111s for the f irst two years o f the Project. It i s expected that the Office o f the Auditor General will institute a sustainable arrangements for the audit o f L C 111s.

1.7 Procurement Capacity Building a t the HLG . LGDP I1 will support the harmonization o f procurement regulations and practices o f the LGs with those o f the CG. This i s to be achieved by providing specialized training in procurement to create a core o f four procurement proficient staff in each o f the 74 HLGs and equip them to sensitize other staff and councilors who will be involved in

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procurement activities during the f i rs t year o f the program. Follow up will include further specialized training for this core staff and issues-based workshops as well as bi-annual independent procurement reviews.

1.8 Local Financial Management . This subcomponent will supplement the FDS and the Integrated Financial Management Systems (IFMS) by developing and implementing a strategy to improve financial management in those LGs which w i l l not be covered by the IFMS in the short to medium term. The strategy will draw on the preliminary study conducted as part o f the 2002103 PER. I t will expand on the study and develop concrete and specific proposals for improving financial management in the identified LGs. Resources will also be made for the implementation o f the strategy.

Project Component 2 - US$107.50 million

2. Local Development Service Delivery

The component comprises a non-sectoral conditional grant (termed the Local Development Grant, LDG), distributed on a formula basis between all local authorities in Uganda for investment in local infrastructure in accordance with local needs as these are determined through local planning and budgeting processes. Although all local authorities w i l l be eligible to receive LDG funding, actual access to the grant w i l l be determined by capacity, accountability, and performance conditionalities which are designed to incentivise improvements in sustainable service delivery at the local level. The LDG will thus be closely related to the local capacity building and revenue-enhancement activities which are supported through Components 3 and 4 o f the grant The LDG within the grant will extend over a three year period - 2003104,2004105 and 2005106 - where after it i s expected that w i l l be funded from the GoU budget on a budget-support basis. All tiers o f local government are eligible for accessing these resources, however, access to these funds will be limited to only those LGs which have met a set o f minimum institutional, financial and operational requirements. The level o f funding transferred to the LGs w i l l increase gradually during the l ife o f the Project along with a gradual swapping o f sector grants and bilateral district support programs into LGDP modality.

Design of the Component and Activities:

2.1 i s based on the principles that (i) the aggregate annual amount should fall within the relevant Medium-Term Economic Framework (MTEF) ceiling, and (ii) individual local governments should receive a constant real per capita amount, taking the amounts received under LGDP I as a point o f departure. Nominal allocations to local authorities w i l l thus increase in l ine with inflation and population growth. In the long term, the per capita amount should also rise in proportion to the assimilation o f sector conditional grants within the LDG mechanism, but as it this i s unlikely to occur over before FY 05-06, increases o f this land will not be a feature o f LGDP 11.

Size of the LDG. The size o f the LDG has been determined in accordance with sustainability and

2.2 maintained in LGDP 11. This means that the urban authorities will receive a higher per capita LDG than the rural authorities, initially at the existing LDG level, indexed by the inflation rate - i.e. US$2.0 per capita. The rural LGs start at 1 .O US$ from FY 2003104. The town councils will be treated as urban authorities.

Allocation Formula o f the LDG. The existing urban and rural division o f funds in the LGDP I i s

2.3 Horizontal Division of LDG fmds. LGDP I1 recognizes the need to make a sustainable, fair, transparent, poverty sensitive and simple formula for the horizontal division o f funds. As all grants - unconditional, conditional (sector and recurrent) and equalization grants - will be reviewed during project

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implementation as part o f the FDS implementation arrangements, and as these grants need to be managed holistically due to clear inter-linkages. LGDP I1 w i l l keep the existing allocation formula as per LGDP I for the f i rs t FY 2003/04. The formula will then be adjusted to the decisions made by the GOU as part o f the FDS review and reform work. The LGDP - I1 formula will initially be based on the following allocation criteria weights:

0

0

0

Rural authorities (districts and sub-counties): Weight: 85 % Population and 15 % Land area Indicative planning figures for parishes: Weight: 100 YO Population Urban authorities: Weight: 100 % population

2.4 funds, which is:

Vertical Division. The LGDP 11 will maintain the existing LGDP I vertical division o f

Rural Areas: 35 % to the districts 65 % to the sub-counties 30 % to the parishes as indicative planning figures out o f the 65 % sub-county share

Urban areas: 50 % to the City or Municipal Council 50 % to the Division councils 30 % to the parishes as indicative planning figures out o f the 50 % division share

2.5 the minimum conl t ions for triggering o f the funds. These conditions are contained in the LGDP I1 (updated) Assessment Manual and the LGs are assessed on yearly basis in AugusUSeptember. The actual coverage o f LGs will then depend on their compliance with the minimum conditions.

Coverage and eligibility. LGDP 11 eligible LGs are al l LGs in Uganda, which have complied to

2.6 Co-financing requirements. The reasons behind the co-funding requirement in LGDP I are wel l documented in the Mid-term Review o f the LGDP I and other preparatory documents for the LGDP 11. The level o f LG co-funding requirements for the LDG part o f LGDP I1 will be kept at the present 10 %. LGs w i l l be permitted to fund their co-financing obligations from own revenue sources. The coming changes o f the co-finance requirements within the FDS framework w i l l have an impact on the overall intergovernmental fiscal transfer system, and LGDP I1 will be flexible and if necessary, adjusted to these changes.

2.7 Investment Menu. The investment menu for the subprojects i s defined as the Second Schedule o f the Local Government Act, 1997. As part o f the performance assessment system, LGs will have an incentive to use minimum 85 % o f the LDG on the PEAP areas. LGs are allowed to spend maximum 5 YO o f the LDG on retooling, 5 YO on investment servicing costs and 5 % on monitoring costs, linked to the specific projects. Value for money project appraisals may be part o f the monitoring costs. The present LGDP I “negative l i s t ” (e.g. vehicles and other transport means) i s maintained.

2.8 quarterly reporting on costs and outputs (the present LGDP-formats).

Releases o f LDG. The release o f funds to LGs wil l be made in quarterly installments against

2.9 Assessment System. The assessment system comprises (i) the Assessment Process, the key elements o f which are l is ted below, and (ii) the Assessment Manual. A new manual (a redesigned version o f the manual used for LGDP I) i s being produced as part o f the PIP. The National Assessment should be

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made in Augusb'September to be completed in September each year. As part o f the performance evaluation system, incentives and penalties would be applied wherein those LGs that perform adequately would be rewarded with access to 20% additional funds and those who do not perform wel l would have their allocation reduced by 20%. There will be a yearly Performance Quality Assurance o f the assessment system.

Project Component 3 - US$15.00 million

3. Local Government Capacity Building

This component wi l l enhance the capacity o f LGs to fulfill their mandates and to develop and test a system for sustained capacity building and training o f LGs to meet the capacity building needs o f individuals as well as organizations. This component i s closely related to Component 1 sub-components on a National Strategic Framework for Capacity Building and Support to the LG HRD function, which ensures coordination, Quality Assurance, training materials and demand driven support to the LGs, especially concerning the design and utilization o f the grants. An assessment o f the capacity building and training activities within LGDP I, has revealed a need for increased quality as well as a need for a more coordinated effort. Thus, though much capacity building takes place at LG level (funded by a number o f sources and agencies), it i s to a large extent uncoordinated, often overlapping and with different (sometimes conflicting) approaches, content and methodologies. There i s a need for establishing a national framework and system, which can provide the point o f departure for a high quality national system, where the LGs themselves are empowered to define needs, procure and carry out training.

3.1 activities and are divided with 35% to Districts/MCs and 65% to lower LGs. The CBG under LGDP-I1 w i l l be structured differently, aiming at increasing the quality o f training and to help establish a national system o f standardized training modules recognized by all stakeholders. Thus, in LGDP I1 much o f the CBG provided to LGs would have to be used within a menu o f specific courses. The course menu i s developed based on capacity needs assessments carried out by LGs. The development o f standardized training courses and the elaboration o f a short-list o f qualified national training providers w i l l be coordinated by the LG Capacity Building Unit and the specific Technical Working Group on Standardized Training. The short-list o f qualified training providers will be updated semi-annually. Among the providers on the shortlist, LGs will be able to purchase training courses according to their Capacity Building Plan. The grant will be restricted to non-sectoral, generic training and sk i l ls development. Horizontally, the grant w i l l be allocated according to the formula for the Local Development Grant (according to population 85% and geographical size 15%). Vertically, the grant will be divided on the different types o f courses identified in the menu. Minimum 25% o f the grant, however, ought to be spent on Basic Skills Development for Sub-county Staff and Councilors. Likewise, maximum 20% can be spent on higher Career and Skills Development courses. In addition, 15% during the f irst year (increasing to 30% the third year) can be used for discretionary activities outside the menu. The full grant will be transferred to Districts and Municipality Councils, which will provide for training activities at lower levels according to the three-year capacity building plan and the CBG-requirements.

Capacity Building Grant (CBG). The CBG under LGDP I provided funds for discretionary

Project Component 4 - US$11.90 million

4. Local Government Revenue Enhancement

This component i s to enhance the capacity o f local governments to administer their own sources o f revenue in order to achieve and sustain acceptable levels o f service delivery. The Mid-Term Review o f

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LGDP I indicated that the primary challenge confronting the Project lay in the area o f sustainability. This challenge has become increasingly acute because o f a deterioration o f “own source” revenue mobilization by local authorities, the consequence o f which has been to diminish the resources available to these authorities to fund (i) rising recurrent costs associated with the maintenance and operation o f the increasing stock o f local infrastructure funded through LGDP and other development grants, and (ii) their counterpart funding obligations. I t i s fundamental to the sustainability goal o f LGDP 11 that the Project support efforts to enhance the local revenue performance o f local authorities. These activities will be undertaken in close association with a number o f other activities underway to address local revenue enhancement in Uganda, and w i l l be coordinated through the CCLRE. The following activities under this component are:

4.1 Strengthening Local Revenue Policies and Legislation. One o f the factors responsible for the poor revenue performance in Uganda i s weaknesses in the overall policy and legal environment relating to local revenues. This i s especially evident with regard to three important revenue sources - Graduated Tax, Property Tax and the taxation o f business and traders through a variety o f local levies and duties. This sub-component w i l l provide support to GoU, specifically MoLG, to improve the legal and policy environment around these revenue sources. In order to achieve this goal, the following activities w i l l be undertaken: (i) a comprehensive review o f GT policies and legislation will be undertaken and, on this basis, proposals w i l l be formulated for improving the policy and law relating to this system specifically as regards tax base coverage, assessment procedures, administration and enforcement. A study w i l l also be undertaken in order to assess and propose concrete options for replacing the GT with a more appropriate tax instrument at some future point; (ii) technical work in the area o f Property Tax to inform the new Property Tax Legislation, i.e. the Local Governments (Rating) Bill and related Regulations; (iii) Business levies and fees. A thorough review o f the current policies and legislation dealing with the licensing and regulation o f businesses and traders and the possible development o f a rationalized system o f LG business taxation (in which the fiscal and regulatory aspects are clearly separated and which could replace a system o f multiple licenses and duties and arbitrary tariffs) i s required. As lessons could be learnt from recent changes to the system o f business licensing in Kenya and studies in Malawi, the policies and practices in these countries (and possibly elsewhere) will be included in the review.

4.2 and educate political leaders and senior officials at both central and local government level on the important role o f and need for local taxation to achieve more accountable and sustainable local government. The key function o f such education i s to enable central govemment politicians and government officials to provide local leaders the political and institutional support to collect their own sources o f revenue. At the local level, local politicians and LG officials need to be able to grasp the importance o f local taxes as a means to provide sustainable or improved levels o f service delivery and to be able to explain the reciprocal needs and responsibilities o f the council and the community to the latter. To ensure that all LGs benefit from this training, training sessions for LG w i l l have to be presented at appropriate regional locations.

Training of Politicians and Officials. The sub-component would provide support to sensitize

4.3 Strengthening Local Revenue Systems. A third area o f activity i s to support nationwide efforts in the area o f local revenue administration. In early 2003, a comprehensive study which aims to identify Local Revenue Enhancement (LRE) “best practices” in all Uganda and to develop a set o f manuals focusing on improvements to local revenue administration for implementation within local authorities will be carried out under District Development Program II. The manuals will then be piloted in 6 Districts.

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4.4 specific local governments to improve their property tax administrations systems. Support will be provided to (i) the three Integrated Financial Management System (IFMS) pilot municipal and/or town councils outside o f Kampala (i.e. Bushenyi TC, Jinja M C and Lira MC), and (ii) eight town councils (one per DDP II region - the specific councils will be selected by MoLG) where it i s not currently levied. Activities will focus on two main areas: (i) property data collection and assessment; (ii) developing a comprehensive property tax administration system; and (iii) training o f the LGs when the proposed Local Government Property Rates Bill i s enacted.

Extension o f Property Tax System. This subcomponent w i l l focus on intensive support to

4.5 Monitoring Local Government Revenues. This subcomponent will serve as an indicator o f the success o f the various initiatives and activities undertaken under the other subcomponents will be the monitoring o f revenue performance of all higher LGs. Activities will include: (i) technical assistance for the finalization and adjustment o f the Local Government Financial Information and Analysis System (LGFIAS); (ii) training of LG officials on the collection and reporting o f data pertaining to LG revenues and expenditures for all 74 HLGs; and (iii) verification and analysis o f data collected.

Project Component 5 - US$6.80 million

5. Support to Project Management and Coordination

This component will provide support to the Program Coordination Unit (PCU) in overall coordination, implementation, monitoring and evaluation as well as to enable the PCU to provide mentoring and backstopping functions in key central support activities such as the National Assessment System, Planning and Budgeting at the LG level and the review and control o f the transfer system. The three main activities envisaged under this component are:

(i) Support to Project Management; (ii) Monitoring and Evaluation; and (iii) Project Audit

5.1 Support to Project Management. LGDP II wi l l provide financing towards office and administrative expenses for the PCU in the MoLG. The project will also provide technical assistance to augment the MoLG’s capacity for mentoring and backup support to LGs in the areas o f preparation o f books o f accounts for audits o f L C II Is, mentoring in preparation for annual assessment, support in contract management, and workshops and seminars.

5.2 Monitoring and Evaluation. LGDP I1 will provide resources to support the Project M&E including monitoring o f K P I s and impact assessment; studies to track transfers from central government to local governments, consulting services for review o f documents for Mid-Term Review o f the project, and workshop for final evaluation o f the Project.

5.3 Project Audit. LGDP II will provide resources for annual audits o f the accounts o f the Project.

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Annex 3: Estimated Project Costs UGANDA Second Local Government Development Project

Local US $million

17.60 107.50 15.00 3.30 5.70

149.10 0.00 1.10

Project Cost By Component Support for the Decentralization Process Local Development Grants Capacity Building Grants Local Government Revenue Enhancement Support to Project Implementation Total Baseline Cost

Physical Contingencies Price Contingencies

Foreign Total US $million US $million

5.30 22.90 0.00 107.50 0.00 15.00 8.10 1 1.40 0.70 6.40

14.10 163.20 0.00 0.00 0.70 1.80

1 Total Project Costs

Total Financing Required Interest during construction

150.20 14.80 165.00 0.00 0.00

150.20 14.80 165.00

I Identifiable taxes and duties are 0 (USSm) and the total project cost, net o f taxes, is 165 (USSm). Therefore, thc projcct cost sharing ratio i s 30.3% o f

total project cost net o f taxes.

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Annex 4 Economic Justification Summary UGANDA: Second Local Government Development Project

1. first, the discretionaly development budget support to Local Governments (LGs) under Local Government Development Program I (LGDP I); and second, the specific and conditional grants to local governments primarily supported by other donors. The discretionary development budget support has l i t t le conditionality with respect to sector allocation at the local level, leaving these allocation decisions to be made according to local priorities through a transparent and participatory decision-making processes. The LGDP framework provides an emphasis on downward accountability to local communities. In contrast, sector speciJic and conditional grants to local governments primarily promote accountability upward to the sector ministry or special purpose fund providing the conditional grant.

There are two main modes o f financing for local governments development programs in Uganda:

2. demand-driven discretionary investment allocation, planning, implementation and maintenance o f investments in support o f the decentralization process. As such, the composition o f the LGDP investments required cannot be determined a priori. The justification o f LGDP I1 rests on demonstrating the following two hypotheses: (i) that the LGDP processes that are in place are functional and sustainable; and, (ii) that the LGDP priority investments identified, selected and implemented following the LGDP processes do achieve the desired output/impact.

As designed, LGDP I1 involves further testing and replicating a system o f participatory,

3. confirmed that the LGDP processes tested under tranche I & I1 o f LGDP I are functional. Furthermore, these processes are likely to form the framework for an economically, financially and socially viable demand-driven decentralized approach for the provision o f infrastructure and service delivery by local governments. However, the MTR also highlighted the need for enhancing the revenue base o f the LGs to ensure the sustainability o f the investment made.

The f i rs t o f these hypotheses was validated during the MTR. The results o f the assessment

4. The viability o f LGDP II depends on further demonstrating that the second hypothesis i s also true. This hypothesis assumes that the decentralized decision-making framework for local investment interventions put in place under LGDP leads to the identification, selection and prioritization o f economically and socially viable investment interventions by local governments.

5. Under tranche I and I1 o f LGDP I a total o f 1,896 and 2,849 subprojects respectively, financed investments in water supply, footpaths, roads, drainage, sanitation, solid waste, street lighting, abattoir, schools, clinics, etc. The total costs for these respective tranches were Ush. 10.6 bi l l ion and Ush. 18.8 billion. The quality o f the respective tranches was assessed to be 86% and 88% satisfactory.

6. Since it i s difficult to ascertain a priori the economic feasibility o f the LGDP I1 investment, the justification o f LGDP I1 would be based on the data collected on tranche I and tranche I1 under LGDP I. To this end, the following assessments were undertaken under LGDP I for the education and road sectors (where substantial investments have gone and the program) as a whole from the social and economic benefit perspectives:

(i) cost-effectiveness o f the education sector investments- 23.6% to 24% o f total investment; (ii) cost-effectiveness o f the road sector investments - 32.6% to 38.9% o f total investment; (iii) cost-benefit analysis for a typical water subproject investment - 7.8% to 11.4% o f total investment (iv) overall social benefits - 100% o f the LGDP I investments; and

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(v) overall economic benefits - 100% o f the LGDP I investments.

Cost-effectiveness o f education sector investments

7. Governments represented 23.6% and 24 % o f tranche I & 11 o f the LGDP I investments respectively. A comparative analysis o f the costs o f standard desks and standard classrooms procured under LGDP and non-LGDP approaches (discretionary & conditional) show significant differences in unit costs. In fact, based on the sample subprojects financed using the two approaches in the same locality, it was found that the LGDP approach was more cost-effective than the non-LGDP approach. Quantitatively, on average, under the LGDP approach the cost o f a standard classroom (8 m x 6 m) was Ush.3,920,775 compared to USh.6,206,522 under the non-LGDP approach. Similarly, the cost o f a standard desk (3-seater-twin desks) was Ush.46,7 14 under LGDP approach compared to Ush.58,4 10 under non-LGDP approach, or 80% o f the later approach.

The investments in the education sector (classrooms, desks, etc.) identified by participating Local

Cost-effectiveness of road sector investments

8. represented 32.6 YO and 38.9% o f tranche I & I1 o f the LGDP I investments respectively. The proposed upgrading o f roads consisted o f a large number o f short road sections with different design standards, averaging in most communities 0.5 to 2 km in length per roadfootpath section. Most o f these roads are characterized by poor surface conditions. Since the tertiary roads are predominantly on-site and local service roads, and not major collectors or trunk, data on traffic i s not available. Moreover, car ownership i s low in these communities as income levels are low. Public transport i s used for home to work/ marketlcenter o f services trips only where roads are passable. As traffic i s generally low, the main benefit o f upgrading o f these roadslfootpaths and associated drains i s to improve access for public transport, to serve as emergency roads or improve access. Therefore, undertaking a traditional cost-benefit analysis was not considered as a good indicator o f the investment benefits.

The investments in roads (tertiary) and footpaths identified by participating Local Governments

9. cost-effectiveness index. The index i s based on the assumption that only people within a limited walking distance from the footpathlroad are likely to benefit from such an investment. This index i s therefore highly dependent on the density o f the population o f the community. The values o f the cost-effectiveness index range around Ush.752 per person for a footpath to Ush. 967 per person for a road (less than a dollar per person). The results indicate that for a given technical standards selected, the higher the density o f people along the roadfootpath, the more cost-effective the investment. The LGDP processes appear to prioritize subprojects which tend to serve a large number o f people per unit o f investment and are therefore cost-effective.

An approach to measure the efficiency o f resource allocations in roadslfootpaths i s to use a

Cost-benefit o f a typical water subproject

10. 344 subprojects under tranche 11. Water sector represented about 11.4% and 7.8% o f the Development Grants expenditure under tranche I and I1 respectively. A total o f 409 and 196 standpipes have been completed under tranche I and I1 o f LGDP I. A cost-benefit analysis was undertaken for a typical technical choice (stand-pipe) investment made by the LGs, usually at parish levels.

Under LGDP I, LGs identified and financed - 253 water sector subprojects under tranche I and

1 1. The benefits are based on willingness to pay, and timelcost savings. Prior to the supply o f water through standpipes, household members who fetch water from spring often wait one to two hours to purchase from vendors who deliver water to households with 20-liter can. In addition, the availability o f

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piped water reduces the incidence o f water borne diseases and this benefit i s not quantified in the analysis. A typical standpipe investment costs about Ush.4 million. On the average, daily consumption per average household o f 6 members i s 60 l i ters (about 10 liters per household member). A standpipe i s likely to serve about 100 households. Maintenance and operation per year would cost about 15% o f the total investment cost. The asset l i f e o f the investment i s assumed to be 20 years. The investment yields an ERR o f 17% and a N P V o f Ush 1.8 million. A sensitivity analysis, wi th the capital cost increased by 15% and no change in the O&M, yields an ERR o f 12% and N P V o f Ush.O.56 million, indicating a robust result.

Social benefits of the LGDP I1

12. which include infrastructure and services such as water, drainage, solid waste management, sanitation, abattoir, market, clinic, etc. It i s difficult and time consuming to quantify individually the benefit o f such projects. However, it i s not difficult in the aggregate to demonstrate that improvements in the physical environment and in the delivery o f services have positive benefits on the health and productivity o f the community.

The infrastructure interventions financed are small and are basically communityhocial projects

13. diarrhea, fever/convulsion, pneumonia, malaria, etc. Most o f the illnesses in these communities are infectious diseases that are exacerbated by the deteriorating physical living conditions in the LGs. The incidence o f such diseases i s higher in poorer communities. As a result, household members suffered loss o f working days and school days due to illnesses. Uganda has an average per capita income o f US$260 per year or USS1560 per household per year or US$6 per working day. A saving o f two working days income per household due to improved environmental conditions attributable to this project could result in savings o f US$12.0 per year per household. A further saving in medical expenses o f 1 % o f average household income would result in US15.60 per household. The total annual savings per household per year would amount to US$27.20. The maximum investment per household over the three-year period i s USS36.00. With an economic l i fe o f 10 years, the benefit to cost ratio would be 9.2. Even assuming a aggregate service l i f e o f 5 years, the benefit-cost ratio would be 4.6.

The health statistics collected at district levels indicate that the community suffered from

Economic Viability of the LGDP I1

14. waste, street lighting, abattoir, schools and clinics- in the participating LGs would also lead to an appreciation in the property value in the areas o f interventions. An informal survey among representatives o f the participating districts indicated that similar rooms located in better serviced locations would have higher rental values o f 10% and 20%. Given the large number o f owner occupied homes with permanent structures in the urban areas, significant benefit can accrue to the owners from an appreciation o f the value o f their properties. As many factors affect property value, a single indicator would not capture all o f the benefits. Nevertheless, differential rent i s a good proxy o f benefit arising from appreciation o f property value due to improved physical environment or the addition basic services in proximity. As an indication, a 10% increase in a rental value o f a room that rents for US$lO.OO per month would result in saving o f US$ l dollars per month.

The provision o f basic infrastructure- water supply, footpaths, roads, drainage, sanitation, solid

15. In summary, the analyses undertaken above indicate that the proposed LGDP 11 investments are likely to be viable. The feasibility measures indicate that the Project (i) i s cost-effective; (ii) has high economic rate o f return; and (iii) high benefit-cost ratios associated social and economic benefits. In the aggregate, the results o f the analyses confirm that the LGDP investment framework would most likely lead to selecting and financing viable social priority investment interventions by local governments.

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16. for effective prioritizing and resource allocation o f the Local Development Grant o f LGDP 11.

Overall, the LGDP framework that i s in place i s indeed functional and provides sound processes

Risks

17. The main lesson learned from the implementation experience o f tranche I & I1 o f LGDP I i s that the design i s basically sound and i t s key components merit continued support under a follow-on project. However, the MTR also concluded that the Government's decentralization policy could be undermined if the performance o f the local governments in mobilizing own-source revenue i s not improved in a sustainable manner. This risk i s being mitigated through addition o f Local Government Revenue Enhancement measures. The size o f the investments i s small relative to the GDP and represent less than 0.5% o f the GDP, and thus the impact on the Government's finances i s relatively small. The risk o f not getting the required counterpart financing from the Government i s also relatively small.

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Annex 5: Financial Summary UGANDA: Second Local Government Development Project

Years Ending

IMPLEMENTATION PERIOD J I Year1 I year2 I Year3 1 Year4 I Year5 I Year6 I Year 7

Total Financing Required Project Costs Investment Costs 46.0 52.7 53.7 12.6 0.0 0.0 0.0 Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 46.0 52.7 53.7 12.6 0.0 0.0 0.0 Interest during 0.0 0.0 0.0 0.0 0.0 0.0 0.0

construction Total Financing 46.0 52.7 53.7 12.6 0.0 0.0 0.0 I Financing

IBRDllDA 34.7 39.5 40.2 10.6 0.0 0.0 0.0 Government 4.3 4.7 4.6 1.2 0.0 0.0 0.0

Central 1.1 1.5 1.3 1.2 0.0 0.0 0.0 Provincial 3.2 3.2 3.3 0.0 0.0 0.0 0.0

Co-financiers 7.0 8.5 8.9 0.8 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 46.0 52.7 53.7 12.6 0.0 0.0 0.0

Main assumptions:

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Annex 6(A): Procurement Arrangements UGANDA Second Local Government Development Project

Procurement

General

1. Public procurement procedures in Uganda are undergoing reform. In November 2002, new procurement legislation based on the UNCITRAL model was passed by Parliament and was subsequently signed into law by the President o f the Republic o f Uganda on December 19,2002, resulting in “The Public Procurement and Disposal of Public Assets Act, 2003 ”. The Bank contributed substantially to the development o f the new legislation. The supporting regulations have been drafted and are under review by the Bank and other donors. The Minister o f Finance will appoint the commencement day o f the Act by Statutory Instrument once the regulations are finalized.

2. The new Act applies to all public procurement and disposal activities undertaken by public institutions, including parastatal organizations and defense procurement. I t specifies Accounting Officers, Contract Committees or Tender Boards (in case o f Local Governments), Procurement and Disposal Units, and User Departments for procuring entities each with a different responsibility. Until the new law i s operational, CG and LG procurements will continue to be carried out under different legal frameworks.

3. At the CG level, “The Public Finance (Procurement) Regulations, 2000 ” abolished the then Central Tender Board (CTB) and created a procurement regulatory body, the Reformed Central Tender Board (RCTB). In place o f the CTB, contract committees were set up in al l procuring entities to award contracts while procurement units are being built up to prepare, issue and evaluate tenders as the technical units on procurement. The procuring entities without adequate capacity are required to employ procurement agents to support their procurement uni ts.

4. At the LG level, “Local Government Act, 1997” and the “Local Government Financial and Accounting Regulations, 1998 ”are the legal instruments for controlling procurement in public entities. Under this law, each district has set up a District Local Government Tender Board (DLGTB) while each municipal council has set up an Urban Tender Board to award contracts. These Tender Boards appointed by the councils from the citizenry are supported by a Secretary to the Board nominated by the Chief Administrative Officers and by Town Clerks from among their staff and appointed by the Councils for the districts and municipal councils respectively. The Technical Officers o f the districts or urban councils thus serve as part o f the ‘Procurement Units’ (in the CG level arrangement) together with the Tender Board Secretaries. A draft o f “The Draft Local Governments (Tender) Regulations, 2001 (under sub-section (I) of section I76 of Local Government Act, 1997) ” i s also widely used by the Tender Boards to guide procurement. At the sub-counties, there i s currently no clear legal structure for procurement activities and the practice i s for the DLGTB to set thresholds for procurement within the sub-county where the sub-county Technical Committee processes the tenders and the sub-county Investment Committee awards the contracts. All the contracts awarded by sub-counties are then reviewed on a quarterly basis by the DLGTB.

5. Implementation o f the new law includes the harmonization o f the procurement regulations and practices at both the CG and LG levels. The Bank intends to provide assistance in implementing the new procurement legislation and regulations through various interventions among which i s supporting the ro l l out o f the harmonization under Component 1 o f LGDP 11.

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6. All procurement o f goods and services under components 1,4, and 5 w i l l be in accordance with “Guidelines: Procurement under IBRD Loans and IDA Credits, January 1995, revised August 1996, September 1997, and January 1999”. All procurement o f consultant services under components 1,4, and 5 would be done in accordance with “Guidelines: Selection and Employment of Consultants by World Bank Borrowers, January 1997, revised in September 1997, January 1999, and May 2002”. Procurements under components 2 and 3 at the LG level utilizing the LDG and CBG funds w i l l be guided by national procedures acceptable to the PPDA and provided they are consistent with the IDA guidelines both prior to and after harmonization o f the procurement regulations and practices.

Procurement Capacity

7. A Country Procurement Assessment Report (CPAR) completed in February 2001 identified the lack o f adequate procurement capacity as the single most important issue in public sector procurement in Uganda. This has been confirmed in another study carried out in 70 procuring entities at CG and LG levels. One o f the interim solutions that i s suggested in the CPAR i s the employment o f consultants to assist weak procurement units.

8. will depend on the LG prioritized sub-projects and i s not known ‘a priori’. Whereas the type o f activities to be financed under the project have been defined, the specific procurements (goods, works and services) to support these activities have yet to be defined precisely. This i s particularly true for activities under Component 2 (about 70% o f the Project) where actual access to the LDG funding by a district will be determined by capacity, accountability, and performance conditionalities and to be utilized for investment in local infrastructure in accordance with local needs as these are determined through local planning and budgeting processes.

The exact mix o f works, goods and services to be procured under Components 2 and 3 o f LGDP I1

9. the PCU) at the CG level and within the structures o f the LGs. A Procurement Capacity Assessment was carried out and concluded that the Overall Procurement Risk i s Average at the CG level and High at the LG level. In conjunction with this assessment, the Bank has recommended, and it has been agreed that (i) the M o L G should retain the Procurement Specialist currently contracted in the P M U for LGDP I to support the ministry’s Procurement Unit where another Procurement Specialist o f equivalent or higher qualifications should be recruited before effectiveness o f the project; (ii) the P O M detailing the procurement procedures to be used under the program should be availed to all staff who will deal with procurement for the program to enable them carry out their procurement responsibilities in an efficient manner; (iii) the Procuring Entities would use IDA’s Standard Bidding Documents and Standard Form of Evaluation for ICB and NCB (with modifications) procurement; (iv) the Procuring Entities would use IDA’s Standard Request for Proposals and Standard Form of Evaluation for the selection o f Consultants; and (v) when the new Public Procurement and Disposal o f Assets Authority issues acceptable Bidding Documents, Request for Proposals or Evaluation Forms these may be used for NCB procurement at the CG level and for procurement and selection o f consultants at the LG level.

Procurement in th i s project will be mainstreamed within the structure o f the M o L G (supported by

10. To ensure that there i s continued capacity building in the area o f procurement, the Procurement Specialists at the M o L G as well as the Secretaries to the Tender Boards and other procurement staff w i l l receive further training in procurement. In particular, the staff involved with procurement at the C G level will receive training in IDA procurement procedures to enhance their skills.

1 1. As part o f the efforts to harmonize procurement practices at the LG with those at the CG, M o L G has initiated plans to establish Procurement Units at each Higher Local Government (HLG) i.e. the 56

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districts and 18 municipalities. The Procurement Units under the Public Procurement and Disposal o f Public Assets Act (PPDPAA), 2003 act as Secretariats o f the Tender Boards o f the LGs thereby replacing the current Secretaries to Tender Boards. To support this effort therefore, under component 1 o f LGDP 11, each o f the heads o f the Procurement Units and their assistant, the district or municipal engineer, and the director o f health services for each o f the 74 HLG will be assisted to undertake a basic procurement course. Subsequently, these four staff wi l l form the core o f key procurement staff and will be assisted to attend issues-based and specialized procurement training twice per year as a follow up. The four key procurement staff in the HLGs w i l l also be equipped with presentation materials and sk i l l s for use in sensitizing the members o f their Tender Boards and Evaluation Committees on an on-going basis.

Procurement Planning and Monitoring

12. The M o L G has prepared a procurement plan for components 1,4 and 5 to cover the entire period o f LGDP Il and detailed procurement plans for the f i rs t Project year. The f irst year procurement plan includes relevant information on al l goods, and consulting services expected to be procured, the procurement unit responsible and their estimated cost; type o f contract; procurement/selection method as well as timing in the procurement process. The procurement plan w i l l be updated on an annual basis in conjunction with preparation o f the Annual Work Project and Budget. The procurement plans at the LG level w i l l be prepared as part o f their local planning and budgeting process against which they w i l l access both the LDG and the CBG funds for sub-projects.

13. A General Procurement Notice (GPN) i s mandatory and must be published in the United Nations Development Business (UNDB) and in national newspaper as provided under the Guidelines, immediately after negotiations. The GPN would be updated on a yearly basis and would show all outstanding International Competitive Bidding (ICB) for goods contacts and all International Consulting Services. Specific Procurement Notices for goods to be procured under ICB and Expressions o f Interest for consultant services estimated to cost the equivalent o f US$200,000 and above will also be published in the UNDB. Details o f project costs by procurement arrangements are presented in Table A.

14. Monitoring and evaluation o f procurement performance at all levels (national, HLGs and LLGs) w i l l be carried out through prior reviews for procurements above the prior review thresholds and through annual ex-post procurement audits and regular ad hoc reviews for all procurements not subject to prior reviews. Independent Procurement Reviews o f the Project w i l l also be conducted every two years.

15. Such audits would:

(a)

(b)

(c)

(d) (e)

verify that the procurement and contracting procedures and processes followed for the projects were in accordance with the Development Financing Agreement (DFA); verify technical compliance, physical completion and price competitiveness o f each contract in the selected representative sample; review and comment on contract administration and management issues as dealt with by participating LGs; review capacity o f participating LGs in handling procurement efficiently; and identify improvements in the procurement process in the light o f any identified deficiencies.

16. Monitoring o f procurements shall start with setting up procurement indicators at the MoLG, district and LLG levels in consultation with the Procurement Specialist and Tender Board secretaries or heads o f Procurement Units wherever these have been established and recruitments done. The team entrusted with monitoring shall use the established indicators to assess whether the quality o f the goods, works and services procured matches the funds spent. The new Procurement Specialist will head the Procurement

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Unit at the M o L G and will be responsible for monitoring procurement activities in collaboration with the existing Procurement Specialist at P M U and the Tender Board Secretaries (TBS) or new heads o f Procurement Units. The TBS w i l l monitor and coordinate procurement activities in collaboration with sub-county authorities. These w i l l be achieved through, M o L G setting prior review thresholds for the HLG procurements, and carrying out post procurement reviews on a satisfactory sample o f contracts not subject to their prior review on an arrangement similar to that o f the Bank Procurement Guidelines, and special field visits to the districts and sub-counties to assess procurement procedures followed for a sample o f contracts at least once every quarter. The independent procurement reviews once every two years by M o L G will be done in consultation with the Public Procurement and Disposal o f Assets Authority (PDPAA) by hiring consultants to conduct the review o f a satisfactory sample o f both prior and post review contracts in all the 74 HLGs. The consultant’s report will be shared with IDA.

17. The procurement monitoring arrangements stipulated here to be conducted by M o L G will done in parallel to and complement those o f IDA under the Procurement Guidelines.

Procurement Implementation Arrangements

18. Procurement will be carried out using M o L G structures created under the new procurement law. The PCU will be responsible for the day to day procurement carried out by the Procurement Specialist availed by the ministry specifically to deal with procurement activities related to this project. The Procurement Specialist will be responsible for among other things: (i) preparation o f the GPN and i t s annual updates; (ii) preparation o f SPNs; (iii) draft bidding documents and RFPs; (iv) draft contract documents; and (v) contract administration and management. In recruiting or employing consultants, the department or unit in need o f the consultant w i l l be responsible for drafting TORS and will coordinate with the Procurement Specialist for further processing. A Procurement Evaluation Committee w i l l be constituted on an ad hoc basis to evaluate bids and proposals. The Procurement Specialist i s already Secretary to the Contracts Committee, and so he w i l l continue to be responsible for quality assurance o f all procurement documents prior to presentation to the Contracts Committee for approval or contract award. At the LG level, the existing structures will be used in a similar manner. However, there, the Heads o f Departments o f the LGs w i l l each be responsible for drafting bidding documents and RFPs as well as for contract administration and management for procurements falling within their departments. The TBSs will be responsible for quality assurance of all procurement documents prior to presentation to their Tender Boards for approval or contract award.

19. The PIP has been prepared in which details o f procurement procedures including standard forms to be used, are outlined. The PIP i s a living document that will be updated as new developments in the procurement reforms will be incorporated subject to agreement between GoU and IDA.

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A summary o f proposed procurement arrangements are presented in Table A. Procurement methods (Table A)

Total

Table A Project Costs by Procurement Arrangements (US$ million equivalent)

0.70 89.60 39.30 35.40 165.00 (0.70) (89.10) (35.20) (0.00) (125.00)

’Figures in parenthesis are the amounts to be financed by the IDA CrediVGrant. All costs include contingencies. ’ Includes goods to be procured through national shopping, consulting services, services of contracted staff of the PCU, training and technical assistance services. Components 1,4, and 5

20. Consultancy Services and Audits. The value o f IDA-supported consulting assignments in components 1,4, and 5 will be USS26.2 million. This w i l l mainly be used for consultancy assignments for supporting: (a) overall decentralization process in the areas o f Financial Decentralization Strategy (FDS) i.e. in participatory planning and budgeting, operationalization o f urban planning guidelines, and procurement, establishment o f institutional structures surrounding decentralization through LG Assessment, Institutional Assessment o f MoLG, institutional arrangements for future decentralization support and resolution o f cross sectoral issues; (b) LG Revenue Enhancement in areas o f investment costs, establishment o f a Help Desk, Property Data and Assessment and implementation o f Property Tax Administration; (c) Program Implementation in Mid Term Review, Final Evaluation, Transfers Tracking Study, Annual Project Audits and Audit support to LCIII; (d) Procurement Capacity Building at LG level through training and independent reviews; and Audits. Consultants w i l l be hired in accordance with the Guidelines for Selection and Employment of Consultants by World Bank Borrowers (Januaiy 1997; Revised September 1997, January 1999 andMay 2002). Consultant selection for the assignments will be addressed through competition among qualified short-listed f i r m s or individuals in which the selection w i l l be based on Quality-and-Cost-Based Selection (QCBS) by evaluating the quality o f the proposal before comparing the cost o f the services to be provided. For contracts o f a routine nature estimated to cost less than US$200,000 and where well established practices and standards exist such as financial audits, Least-Cost Selection (LCS) method may be used. Consulting service contracts estimated to cost less than US$ 100,000 for f i rms may be awarded through the Consultants’ Qualifications (CQ) selection

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method. In addition selection shall also be done based on other methods as provided for in the guidelines. To ensure that priority i s given to the identification o f suitable and qualified national consultants, shortlists for contracts estimated under USS200,OOO may comprise entirely o f national consulting f i rms if a sufficient number o f qualified (at least three) are available at competitive costs. However, if foreign f i r m s have expressed interest, they shall not be excluded from consideration. In exceptional cases, and when it i s beneficial to the Client and the project, consultancy contracts may be awarded on the basis o f single source selection in accordance with the provisions o f paragraphs 3.8 to 3.1 1 o f the Guidelines.

2 1. Goods and Equipment. Procurement o f goods and equipment will be carried out in accordance with Guidelines for Procurement under IBRD Loans and IDA Credits (Junualy 1996, August 1996, September 1997, Junualy 1999). Contracts for the procurement o f goods and equipment with an estimated value o f US$500,000 or more will be awarded on the basis o f ICB. Contracts with an estimated value o f US$30,000 or more and not exceeding USS500,OOO may be awarded on the basis o f NCB. Contracts with an estimated value less than US$30,000 may be awarded on the basis o f Shopping.

22. The General Procurement Notice w i l l be published in the Development Business Forum at least 60 days prior to the issue o f bid documents. Specific Procurement Notices will be issued before shortlists with respect to consulting contracts in accordance with the guidelines. The Procurement Strategy and Implementation Schedules for consultancies, goods, services and works are contained in the PIP.

23. Training and Workshops. Training, workshops, and study tours w i l l be carried out on the basis o f approved annual programs that would identify the general framework o f training activities for the year, including the nature o f traininglstudy tourslworkshops, the number o f trainees, and cost estimates. Selection o f training institutions for workshopsftraining should be based on a competitive process using the Quality based selection (QBS) method.

Components 2 and 3

24. The procedures for procurements o f sub-projects under Component 2 will follow the current practices at the LG level until harmonization o f the regulations and practices with those at the CG level. To ensure monitoring and back-up particularly where the estimated contract values are considered large, the MoLG will set acceptable Prior Review Thresholds (PRTs) above which bidding documents drafted at the HLG and the evaluation reports and award decisions o f the HLG Tender Boards will be reviewed before issuance and contract award respectively. These reviews shall be conducted expeditiously in order not to interrupt implementation plans and M o L G will make adequate arrangements to ensure that responses to review requests are delivered in a period not exceeding 12 working days. LLGs w i l l have inputs into the procurement o f training under component 3, to the extent that they will select the appropriate training according to identified needs. For both HLGs and LLGs, the courses are to be vetted and providers prequalified by the M o L G and the LGs w i l l directly contract from the menu o f providers for a selection from the menu o f courses.

25. The Procurement Guidelines and Arrangements, Section 5 o f the PIP details out the procedures and approval responsibilities as well as the monitoring mechanisms for procurement at the LG level. The procurements at the LG and LLG levels are o f small value and falling below prior review thresholds for both selection o f consultants and procurement o f works, goods and equipment. However the allocation procedures o f the LDG wi l l ensure that there i s adequate capacity to carry out any procurements o f significant value at the LG level before the allocatiodtransfer i s made. The Procurement Specialist at the MoLG shall constantly review procurement capacity for this purpose.

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26. Selection of consultants at the LG level w i l l be needed for consulting assignments to plan, design and supervise construction or installation works as well as document Operation and Maintenance requirements on infrastructure sub- projects according to the local needs o f the LGs utilizing the LDG funds. Consultants will be hired in accordance with simplified guidelines which are consistent with those o f IDA.

27. Training and Workshops activities utilizing the CBG fund will comprise hiring consultants for developing training materials and conducting training, support for training activities through selecting from among the menu o f courses and l is t o f certified service providers under the scheme developed during the preparation o f this project. The training will cover career and s k i l l s development courses as well as basic s k i l l s development courses for both staff and councilors o f the HLGs and LLGs. The procurement o f these activities will follow simplified guidelines for use by the HLGs and LLGs but which are consistent with those o f IDA.

28. Works, Goods and Equipment procurement at the HLG and LLG levels may follow the national procedures acceptable to the PPDA as these procurements are expected to be o f small values. However, contracts for the procurement o f works with an estimated cost o f (i) USS100,OOO or more for Kampala City Council (KCC); and (ii) US$50,000 or more for all other eligible Local Governments, and contracts for the procurement o f goods and equipment with an estimated cost o f US$30,000 or more, are to be awarded on the basis o f NCB. Contracts for small works valued at (i) less than USS100,OOO for KCC; and (ii) less than US$50,000 for all other eligible Local Governments, may be procured under lump-sum, fixed price contracts awarded on the basis o f quotations obtained from three qualified domestic contractors in line with national procurement procedures establised by the PPDA. The procedure in use currently consists o f the following: (1) advertising for prequalification o f contractors and service providers in the national newspapers as well as the local office notice boards and radio; evaluating and categorizing qualified f i rms. This i s done in advance o f the start o f a new Financial Year. The advert i s for a minimum o f days; (2) preparing bidding documents and notifying qualified f i rms o f the opportunity to bid through direct letters o f invitation, and local office notice boards. Allowing at least 30 days for bid preparation and opening bids in public thereafter; (3) constituting a Technical Evaluation Committee to evaluate and compare bids and presentation o f the Bid Evaluation Report with Recommendations to the Tender Board for contract award by the Secretary to the Tender Board; (4) publication o f the award results on local office Notice Boards stating the firm awarded as well as the contract value; (5) the Secretary to the Tender Board processing any clarifications and complaints and issuing responses o f the Tender Board to complainants; (6) carrying out the contract administration and management by the relevant Head o f Department and (7) review o f the procurement performance by the Finance Committee o f Council. Procurements at the sub-county level below a set threshold are in general local shopping carried out within and in the neighborhood o f the sub-county for items that cannot be consolidated and procured through a more competitive process at the district.

29. As much as possible, contracts for the procurement o f works, goods and equipment w i l l be packaged into sizeable contracts to be awarded on the basis o f NCB. Shopping whether at the district or sub-county level for very small value items and in cases o f emergency will require sending a written invitation to bid to a minimum o f three bidders, the quotations opened and evaluated at the same time, and the lowest evaluated bidder i s awarded the contract on the basis o f a set criteria. Direct Contracting w i l l only be used when a competitive method i s not practicable to the HLG or LLG in which case the Secretary to the Tender Board or the sub-county chief w i l l be available to support the identification and selection o f a contractor/supplier/consultant familiar to the HLG or LLG, negotiations o f a price with the firm or individual and award based on the agreed price.

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Prior Review

Expenditure Category

30. Procurements at the LG level are expected to be o f small values and w i l l be financed through sub-projects under the LDG and CBG schemes. Approved Procurement Plans w i l l be a condition for the allocation o f the grants, and an arrangement o f PRTs acceptable to IDA will be made between MoLG and the LGs so that the MoLG can provide the procurement monitoring and back-up support mentioned earlier.

Contract Value Procurement Contracts Subject Remarks Threshold Method to (US$) Prior Review

Table B: Prior Review Thresholds

all other eligible LGs) Less than US$lOO,OOO (for KCC) Less than USS50.000

Shopping Ex-Post Ex-Post review by MoLG

ShODDina Ex-Post Ex-Post review bv MoLG

2. Goods

* . - (for all other eligible LGs) US$500,000 and over ICB All contracts Shopping will be Less than US$500,000 NCB Ex-Post by IDA at permitted for very small

Less than US$30,000

CG level value items which cannot All by MoLG at LG be packaged to attract

competition. I eve I Shopping Ex-Post by IDA at

CG level

at LG level Ex-Post by MoLG

L

3. Services Firms US$350,000 and over QCBS All LCS to be used for

Less than US$350,000 QCBS Ex-Post contracts of a routine Less than US$ 100,000 CQ Ex-Post nature where well

established practices anc standards exist such as financial audits. All singli .source selection for contracts over US$5,000

Individuals US$lOO,OOO and over IC All

Firms/lndividuals Over US$5000 Single Source All Less than US$ 100,000 IC Ex-Post

Less than US$5000 Single Source Ex-Post

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4. Training, Workshops

Total Value of Contracts subiect to Drior review

will subject to IDA review US$50,000 and over QBS All Less than US$50,000 QBS Annual plans to be

US$12.7 million reviewed by IDA

3 1. For sub projects at LG level, procurement o f works for all contracts valued at US$50,000 or more w i l l be under N C B and require prior review by MoLG. For Kampala City Council (KCC), the threshold for prior review by MoLG for works contracts i s US$lOO,OOO. Works contracts valued at less than US$50,000 may be procured using shopping procedures with Ex-post review by MoLG. For procurement o f goods and equipment valued at US$30,000 or more, under subprojects at the LG level, NCB procedures apply with prior review by MoLG; while goods and equipment valued at less than USS30,OOO may be procured under shopping procedures with ex-post review by MoLG. For procurement o f consulting services valued at US$lO,OOO equivalent or more under the sub projects at the LG level, M o L G w i l l undertake prior review o f various stages o f the selection process. Consultancy services contracts valued at less than USS10,OOO w i l l be subject to ex-post review by MoLG. The details o f the prior and ex-post procurement review procedures to be conducted by M o L G are contained in the PIP.

32. For procurement o f goods, al l contracts valued at US$500,000 or more w i l l require prior review by IDA. IDA w i l l also review the selection process for the hiring o f consultants by the Borrower as follows. For those consultancy contracts to be awarded to f i rms, contracts worth US$350,000 and above w i l l be subject to IDA prior review; for individual consultants the prior review threshold wi l l be US$lOO,OOO. The exception to IDA prior review will not apply to single-source contracts estimated to cost more than $3000, or assignments o f a critical nature as determined by IDA or to amendments o f contracts raising the contract value above the prior review thresholds.

Frequency o f procurement supervision missions proposed

33. Once every 6 months (includes special procurement supervision for post-review/audits). The overall procurement risk assessment i s rated Average at the CG level and i s rated High at the LG and LLG levels. A t the CG level it i s average risk at MoLG, given previous experience but High for the LG and LLGs where capacity i s s t i l l largely inadequate and the system i s yet to be brought into the reform process through rationalization o f regulations and practices. Bank prior review procedures cover most o f the procurement actions under the project.

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Annex 6(B): Financial Management and Disbursement Arrangements UGANDA: Second Local Government Development Project

Financial Management

1. Summary of the Financial Management Assessment

Country Issues

1.1 team and issued i t s report in January 200 1. The report summarizes the fiduciary r isks within the country’s financial management environment, assesses government efforts to address identified weaknesses and proposes ways in which to reduce the identified risks. Aspects o f local government financial management are also addressed and weaknesses in capacity are highlighted in the report. A CFAA update w i l l be carried out in FY04.

A Country Financial Accountability Assessment for Uganda was carried out by a World Bank led

Summary Risk Analysis

1.2 The objectives o f the project’s financial management system are: to ensure that funds are used only for their intended purposes in an efficient and economical way while implementing agreed activities; to enable the preparation o f accurate and timely financial reports; to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably to implementing agencies; to enable project management to monitor the efficient implementation o f the project; and to safeguard the project assets and resources.

1.3 Furthermore, the following are necessary features o f a strong financial management system:

(i)

(ii)

(iii)

the Project Coordination Unit should have an adequate number and mix o f skilled and experienced staff; the internal control system should ensure the conduct o f an orderly and efficient payment and procurement process, and proper recording and safeguarding o f assets and resources; the accounting system should support the project’s requests for funding and meet i t s reporting obligations to fund providers including Government o f Uganda, IDA, other donors, and local communities; the system should be capable of providing financial data to measure performance when linked to the output o f the project; and an independent, qualified auditor should be appointed to review the Project’s financial statements and internal controls.

(iv)

(v)

1.4 The table below identifies the key r isks that management may face in achieving these objectives and provides a basis for determining how management should address these risks.

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I R& Funds, especially LG grants, may not be used in an efficient and economical way and exclusively for purposes intended and such funds may not be properly accounted for.

2

3

LG capacity may not be sufficient to implement all the control procedures as intended (accounting, internal audit and inspection)

LGs received transfers late due to delays in releasing funds from donors; and delays in releasing funds from the MOFPED

sufficient given the declining levels o f locally generated revenues

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6

Inadequacy o f mechanisms used to identify community needs may leave communities out o f many decision-making processes, with District Development Plans not fully reflecting communitv asoirations. OAG may lack capacity to audit expenditures incurred by local governments.

audit functions may not be sufficiently carried out due to I capacity shortfalls

Ratinc: M

S

M

S

M

S

S

Mitization : Accountability for grants will be done in accordance with LG statutory regulations and guidelines issued and widely circulated by the MOLG.

0 L G accounting capacity will be a prerequisite for the disbursement o f grants, as assessed through Financial Performance Assessment.

0 Communities will be involved in monitoring o f expenditures and review o f periodic reports

0 Funds will be made available for monitoring and - evaluating the implementation o f project activities.

0 M O L G to provide for high quality technical - - - support to LGs with the provision o f closer backstopping and follow-up

0 Capacity Building grants to be provided under Component 3

0 Capacity o f LGs will have to be assessed as satisfactory before they receive grants.

0 M O L G to ensure the recommendations o f the FPAs carried out

0 The release o f donor funds will follow an agreed schedule as documented in a Memorandum o f Understanding.

0 Project funds will be disbursed using prioritization mechanisms similar to PAF

0 Funds to be released in accordance with agreed schedules to which GoU w i l l be committed.

0 Component 4 o f LGDP I1 to address tasks to be done at central and local levels in order to reverse decline in local revenue mobilization by LGs.

planning approaches will support the LGs in planning and budgeting o f investment funds and address inclusion o f community plans in consolidated DDPs

0 New planning guidelines and participatory

Support to be given through the project for private f i rms to audit subcounty financial statements

0 M O L G to provide appropriate staff resources 0 PCU to complement Internal Audit capacity

at local governments Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible Risk)

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DESCRIPTION OF FINANCIAL MANAGEMENT ARRANGEMENTS

Financial Management in Local Governments

1.5 Section 87 o f the Act sets out the requirement for Local Governments to maintain proper books o f accounts and to produce statements o f final accounts within four months o f the end o f the financial year. The Act also mentions that these accounts shall be audited by the Auditor General or someone appointed by him or her. The Auditor General reports to the Parliament, Line Ministers, the Minister o f Finance, the Local Government to which the audit relates, the Local Government Public Accounts Committee, the Local Government Finance Commission, the Inspector General o f Government and the Resident District Commissioner.

1.6 The FPA report issued in June 2002 states that the financial management capacity o f LGs has improved tremendously. The FPA process has acted as an incentive for LGs to seek improvements in their systems, particularly through the recruitment o f key qualified staff in the key departments o f Finance, Planning and Internal Audit. This i s in addition to other processes that require LG accountability in their provision o f services. The improvement i s indicated by the number o f Local Governments that have prepared and submitted for audit their financial statements for the year ended 30 June 200 1 compared to the number for the period ended 2000. Other government and donor supported initiatives such as the EFMP 11, the Local Government Training Program and DANIDA support for the preparation o f final accounts also contributed to this trend.

1.7 The successful implementation o f the project w i l l require financial management mechanisms that hold local governments accountable for project transactions. The basis for these accountability mechanisms i s laid down in the Local Governments Financial and Accounting Regulations, 1998 (LGFAR). These shall be followed when Local Governments account for funds under Components 2 and 3 o f the project.

1.8 A Fiscal Decentralization Strategy (FDS) was developed by GoU after a study on fiscal decentralization in 200 1. The study reviewed the intergovernmental fiscal transfer systems, reporting and accountability procedures. In June 2002, the Cabinet approved the piloting o f the strategy in 15 LGs and appropriate support will be provided under the LGDP 11. A consultancy has been commissioned to review local government financial accountability, to devise ways and means to further improve the financial management environment within local governments and to design financial performance accounting and reporting procedures. Through detailed case studies, the consultancy will seek to further enhance GoU’s understanding o f the processes and institutional arrangements that promote or inhibit improved financial management and accountability at the local government level. The outputs o f the consultancy w i l l be: a set o f Guidelines for FDS financial management and reporting accountability; a manual on financial and performance management benchmarking; and a framework for improving LG financial and performance management.

1.9 In addition to those described above and in the following sections o f this report, other aspects o f LG financial management are as follows:

(i) Accounting and bookkeeping: The Local Government Financial and Accounting Regulations state that each local government council shall maintain the following books o f accounts: Cash book; Journal; General Ledger and subsidiary ledgers; Abstracts; Asset registers; and a Vote Book. Subsidiary ledgers wi l l be maintained for LGDP I1 transactions. These and other rules are set out in the Local Government Financial and Accounting Regulations.

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(ii) Public Accounts Committees: The PAC for each HLG examines reports o f the Auditor General, Chief Internal Auditor and any other reports o f commissions o f inquiry. The PAC prepares a report and submits it to the Council and to the Minister o f Local Government who lays the report before Parliament. It i s the responsibility o f the Chairperson o f the Council and the Chief Administrative Officer or Town Clerk to implement the recommendations o f the PAC. The Parliamentarv Local Government Accounts Committee: The Local Government Accounts Committee was created by the Parliament in July 2001. The committee examines the reports o f the Auditor General on Local Government accounts. The Committee also considers the Auditor General’s report in relation to the Local Government Public Accounts Committee reports laid before Parliament by the Minister o f Local Government. The Committee’s report i s presented to Parliament for debate twice a year. The creation o f the committee has strengthened the evaluation process o f the audit reports.

(iii)

Staffing Arrangements

1.10 The PCU i s headed by the Project Coordinator who reports to the Permanent Secretary in the MOLG. The following are members o f staff in the accounting department in the PCU:

1.1 1 The Program Accountant (PA)who i s responsible for the overall management o f the unit heads the LGDP Finance and Accounts section. He/she reports to the Program CoordinatodManager and i s assisted by the Assistant Program Accountant and an Accounts Assistant. The Program Accountant’s functions include: overall supervision o f Finance and Accounts Unit; planning and allocation o f work amongst staft signing checks as one o f the principal signatories; serving on the procurement committee to evaluate procurement proposals and bids received; maintaining close contact wi th bankers, donors, Ministry o f Finance Treasury Office, the Auditor General and External Auditors; introducing and monitoring the implementation o f various financial management procedures outlined in the FMM; taking a lead role in budget preparation and budgetary control; liaising with the World Bank Supervision Missions on all matters pertaining to Grant utilization, financial covenants and audit compliance; and supervising the payment o f foreign and local contractors.

1.12 The Assistant Program Accountant (APA) reports directly to the PA. The APA will be fully involved in organizing the output from the Finance Unit. Some o f the major functions will include: administration o f the IDA funds, which will entail the preparation o f withdrawal applications (WA) for reimbursement o f Special Account and for direct disbursement and Special Commitment where applicable, in addition to the preparation o f letters o f credit; supervision o f the preparation o f local payments to contractors; participation in the annual budgeting exercise and coordination o f the flow o f information from al l the units o f the Core Team; maintenance o f accounting information and records; supervision o f the Accounts Assistant on a regular basis and keeping a check on the data output to ensure timely preparation of periodic reports.

1.13 preparation o f local and foreign payments to the contractors and suppliers; posting the Cashbooks; reconciliation o f statements for all bank accounts; follow up all tax related issues on the Project; and assistance in other accounting duties as assigned by the P A and APA.

The Accounts Assistant reports to the Assistant Program Accountant. The duties include:

1.14 For LGs, Article 188 o f the Constitution stipulates that the Chief Administrative Officer (CAO) shall be the Chief Accounting Officer for the district. The Finance Department o f each LG i s headed by a Chief Finance Officer (CFO). The CFO reports to the CAO for all financial transactions and accounts in the LG, including those financed under the project. A sub-accountant in each sub-county i s

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responsible for managing the financial transactions o f a sub-county. In an effort to equip LG accounts and audit staff with up-to-date ski l ls in accounting and financial management, many have been enrolled for a course sponsored by the MOFPED which will enable them to obtain professional or technical accounting qualifications.

Planning and Budgeting

1.15 A project budget has been drawn up and i s included in the PAD and the PIP. Project annual budgets will be drawn from the PIP and disbursement schedule. The annual budget will be prepared based on the policy guidelines issued by MOFPED Treasury on the fiscal policy o f the government. The budget format w i l l be based on the Project categories and sub-categories.

1.16 As mentioned above, six monthly forecasts will be made at the beginning o f every quarter which w i l l form the basis o f disbursements for funds for Components 1,4 and 5.

1.17 laid down in the LGFAR. National planning guidelines issued by the Decentralization Secretariat wi l l support the LGs in planning and budgeting for investment funds and address inclusion o f community plans in consolidated District Development Plans (DDPs). Districts and sub-counties must have a 3-year rolling development plan in place, and expenditure under LGDP Il has to be in line with council-approved annual plans. The disbursement o f grants to LGs w i l l be based on their workplans.

Planning and budgeting for project funded expenditure in LGs w i l l be done within the framework

Accounting Systems and Procedures

Financial Management Manual (FMM)

1.18 The accounting systems, policies and procedures employed by the PCU in accounting and managing for LGDP funds are documented in the project’s FMM. The FMM will be used by: IDA and other donors to assess the acceptability o f the project accounting, reporting and control systems; staff as a reference manual; and by the auditors to assess project accounting systems and controls and in designing specific project audit procedures.

1.19 Specific procedures are documented for each significant accounting function. They are written to depict document and transaction flows, the appropriate filing o f project documents, management approvals and organizational duties and responsibilities. The accounting system consists o f the methods and records established to identify, assemble analyze, classify, record and report the transactions o f a project, and to maintain accountability for the related assets and liabilities. The following aspects are covered in the FMM: Flow o f Funds; Financial and Accounting Policies for the Project; Accounting System (including centers for maintenance o f accounting records, Chart o f Accounts, formats o f books and records, accounting and financial procedures); Authorization procedures for transactions; Budgeting System; Financial Forecasting System; Procurement And Contract Administration Monitoring System; Financial Reporting (including formats o f reports, linkages with Chart o f Accounts and procedures for reviewing financial information); Procedures undertaken by M o L G during the Financial Performance Assessments; Auditing Arrangements; and Human Resource Aspects. In addition, the FMM documents the arrangements that have been made for recording project impacts, outcomes, outputs, and inputs that are required to assess progress toward the achievement o f project objectives. I t also documents the procedures undertaken for the replenishment o f the Special Account.

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Accounting system

1.20 To maintain the efficiency, accuracy and timeliness o f financial reporting and to facilitate management analysis o f the financial information, the PCU has completed the installation o f a software based accounting system and staff were fully trained in i t s operation. The system, based on Sunsystems software, has two modules: the Ledger Accounting and Vision Executive modules.

1.21 The Ledger Accounting module incorporates the general ledger, budgets, cashbook and bank reconciliation functions. The major functions performed within this module include journal processing, budgeting, bank reconciliation, financial reporting and control. The module also enables the importing of budgets created using the Excel spreadsheet software. The Vision Executive module enables the project to automatically generate the FMRs that are required to be submitted to IDA on a quarterly basis, in addition to statutory reports. Other reports may also be configured by project staff following the training they received. The software also includes controls preventing the posting o f transactions to wrong periods and limiting access only to authorized personnel.

1.22 The FMM wi l l be updated to include a detailed description o f the accounting system and procedures. The accounting records will be kept up-to-date and the financial statements summarizing these will be presented for audit from time to time. A monthly Trial Balance wil l be drawn to ensure the arithmetical accuracy o f the postings and balances with books o f account. A bank reconciliation report will be prepared for the individual bank accounts and the balances reconciled with the Statement o f Accounts received from the bank. W h i l e monthly and quarterly accounts and reports will be compiled on cash basis, the semi-annual and annual accounts will take into account accrued expenditure. The annual accounts w i l l also include a schedule o f commitments made.

Project Chart of Accounts

1.23 A Chart o f Accounts already exists for LGDP I that allows project costs to be directly related to specific work activities and outputs o f the project. I t w i l l be amended to enable data to be captured and classified by budget heads, project components, expenditure categories, and disbursement categories.

1.24 Each accounting transaction bears an account code indicating the category under which it i s financed, the component or activity under which it i s classified and the type o f transaction. These codes are listed in the Chart o f Accounts. The overall form o f account codes is: A-BBB-CCCC where: A represents the Financing Category reflected in the Development Financing Agreement; BBB represents the component/activity(and Sub-component or sub-activity where applicable), as reflected in the PIP; CCCC reflects the transaction type, i.e. whether i t i s an asset, liability, expense, or income, and the transaction description. The structure o f accounting codes w i l l thus enable the reporting o f the project transactions to be analyzed between Financing categories and between Project components.

Financial Reporting

1.25 Formats o f the various periodic financial reports to be generated from the financial management system will be developed. There will be clear linkages between the information in these reports and the Chart o f Accounts. The financial reports will be designed to provide quality and timely information to project management, implementing agencies, and various stakeholders on project performance.

1.26 These reports include financial statements (e.g. sources and application of funds; expenditure

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classified by project components, disbursement categories, expenditure types and implementing agencies, and comparison with budgets; short-term forecasts o f expenditure; unit costs for key items and comparison with budgets; etc.). The reports w i l l closely follow sample formats that are indicated in the Guidelines for Borrowers on Financial Monitoring Reports.

1.27 the Special Account for components 1,4 and 5 are indicated in section 3.2 below.

Reports produced by the PCU on a quarterly basis to support requests for IDA’S replenishment o f

1.28 Uses o f Funds showing funds from IDA, other donors and GoU separately, a summary o f expenditures analyzed under the main headings and by main category o f expenditures (consistent with the Chart o f Accounts), both for the current fiscal year and accumulated to date; Notes in respect o f significant accounting policies and accounting standards adopted by management when preparing the accounts and any supplementary information or explanations that may be deemed appropriate by management in order to enhance the presentation o f a “true andfair view”; Special Account Statement showing deposits and replenishments received, payments substantiated by withdrawal applications, interest that may be earned on the account and the balance at the end o f the fiscal year; a Reconciliation between the amounts shown as “Received by the Project from IDA” and that shown as having been “Disbursed” by them; an Implementation Report, which would be a narrative summary o f the implementation progress for the project; and a Summary of Withdrawals using FMRs, listing individual withdrawal applications by reference number, date and amount. Indicative formats o f these statements will be developed in accordance with IDA requirements prior to project implementation.

Annual Financial Statements and Annexes for the project will include: a Statement o f Sources and

1.29 For LGs, the LGFAR require every local government to produce statements o f final accounts within four months from the end o f each financial year and provides formats and schedules to guide the preparation o f these accounts. LG expenditures financed using grants provided under components 2 and 3 wi l l be reflected in these financial statements. The Chief Administrative Officer i s required to submit the accounts to the Auditor General. The Local Governments Act further requires that in addition to normal Government Accounting requirements, separate reports shall be made and submitted to donors to account for donor funds in accordance with the relevant agreements. For each quarter, consolidated quarterly financial reports will be prepared by each HLG. These will consolidate the accounts for the LLGs within their area o f jurisdiction and their submission to the M O L G w i l l be a prerequisite for the release o f quarterly disbursements to the LGs.

2. Audit Arrangements

Internal Auditing

2.1 The project i s subject to statutory internal audit regulations through which the internal audit function i s provided by the MoFPED (Treasury Department). However, the performance o f this function i s currently only limited to the pre-audit inspection o f the project’s transactions due to the availability o f appropriate staff resources. N o internal audit reviews are undertaken to ensure, for instance, that the management complies with internal controls. In addition to the pre-audit checks currently conducted by the M O L G Internal Auditor, inspectors from the Ministry o f Finance, Planning and Economic Development conduct reviews aimed at ensuring that expenditures are made in accordance with Government regulations.

2.2 For LGs, the establishment o f an Internal Audit Department i s provided for in the Local Government Act and the responsibilities are set out in S 91. The Chief Internal Auditor o f a local government reports directly to the local council on whether the systems and operations o f the local

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administration are efficient, effective, economical, free from fraud and other malpractices, and whether they are in accordance with the LGFAR. His duties and functions include general audits, value for money reviews and special investigations when called upon and where the Auditor General i s unable to do so. The Internal Audit Manual issued in January 2000 includes guidance on the objectives and procedures o f internal audit engagements in local governments. Appropriate reliance shall be placed on these arrangements with respect to grants disbursed under Components 2 and 3.

2.3 I t i s expected that with new Government Financial Regulations to be issued under the forthcoming Public Finance and Accountability Act, the MOFPED will be charged with ensuring that the internal audit function in each Government Ministry i s appropriate to the needs o f that Ministry. They may issue instructions to other Ministr ies in the discharge o f this responsibility and to ensure that the status and powers o f the internal audit function in each conforms to internationally accepted standards. The Permanent Secretary in the MoLG will be required to establish and maintain an effective internal audit function which shall be responsible to him or her for the appraisal o f the soundness and application o f accounting, financial and operational controls and the review o f operations or programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned. Other duties o f internal audit function include the review and reporting on: proper control over all financial resources o f the unit; conformity with financial and operational procedures laid down in any legislation and good accounting practice; and the reliability and integrity o f financial and operating data.

2.4 To expand the currently limited scope o f i t s internal audit function, the M o L G should therefore prepare a document setting out the needs o f the Ministry in terms o f the expected duties, including those related to the project, and the staffing resources required for those duties. The frequency and extent o f internal audit reviews and testing o f the internal controls should be consistent with the nature, complexity, and r isk o f LGDP I1 activities. These requirements will be agreed between MoFPED and MoLG, after which the necessary staffing resources will be committed to fulfilling the agreed Terms o f Reference. These should ensure that the internal audit arrangements at the PCU contain provisions to complement district internal audit capacity where necessary. The preparation o f the Internal Audit requirements by the M o L G and the agreement on these between the MoFPED and M O L G in line with the forthcoming Public Financial and Accountability Regulations would be finalized within 6 months o f CreditIGrant Effectiveness.

External Auditing

2.5 be subcontracted to a firm o f private auditors, wi th the final report being issued by the Auditor General based on the tests carried out by the subcontracted firm. Where the audit i s subcontracted, the selected external auditor w i l l be acceptable to IDA and w i l l conduct a year-end audit based on TOR cleared IDA. The audited financial statements together with the auditor’s report and management letter covering identified internal control and accounting system weaknesses wil l be submitted to IDA within six months after the end o f each financial year. A single audit opinion will be required on the project financial statements. Any firm o f auditors subcontracted to carry out the audit w i l l meet the IDA’S requirements in terms o f independence, qualifications and experience.

The Auditor General i s constitutionally mandated to audit all government projects. The audit may

2.6 Local Governments are also bound by law to prepare financial statements and have them audited by the Auditor General. Grants disbursed to LGs under components 2 and 3 w i l l be reflected in the financial statements o f the relevant LG and these w i l l be subjected to audit in accordance with the governing law.

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2.7 The scope o f the project audit w i l l entail a review o f the project funds, expenditures under components 1,4 and 5, and a review o f the procedures through which grants provided under components 2 and 3 are disbursed to the local governments. The expenditure by the LGs financed through the grants i s audited as part o f the normal statutory audit o f the financial statements o f the local governments and appropriate assurance will be obtained from these for the purposes o f the project.

Issue Updating the Financial Management Manual Internal Audit Arrangements

Audit o f LLGs

2.8 Although the requirement for the Auditor General to audit the financial statements o f Local Governments including LLGs i s stipulated in the Constitution, the Office o f Auditor General has in the past suffered significant capacity weaknesses that have prevented this constitutional requirement and mandate to be fulfilled, particularly in the case o f LLGs. The project will therefore provide support to the OAG over a period o f three years to enable the audits o f the financial statements o f LLGs to commence. The Office o f the Auditor General will prepare an audit approach by 1 April 2003. The implementation o f the approach, through which the requirement to audit LLGs wil l be satisfied, w i l l commence by April 1,2004 and a consolidated summary o f audit findings will be prepared by the OAG by April 1,2005.

Remedial Action Recommended The FMM wi l l be updated to reflect the computerization o f the PCU’s accounting system.

The M o L G should agree with the MoFPED on the Internal Audit requirements for the Ministry, including arrangements for the project, and should allocate appropriate staff resources to perform the related duties. An audit approach document will be developed by the Office o f the Auditor General by the first year release and the OAG w i l l begin implementing it by 1 April 2004. Under the PRSC, the OAG will prepare a consolidated

Audit Committees

2.9 Under the forthcoming Government Financial Regulations, the M o L G w i l l be required to establish and maintain an audit committee whose key role shall be to assist the Ministry in carrying out i t s oversight responsibilities relating to financial practices, internal controls, corporate governance issues, compliance with laws, regulations, and ethics. The committee w i l l take special interest in al l audit matters involving the internal audit function and the Auditor General.

Reporting

Financial Management Action Plan

summary o f audit findings by 1 Apii l2005. Formats o f Financial Monitoring Reports (FMRS) should Credit/Grant

Arrangements Project Chart o f

Due Date

be determined and agreed with IDA.. The Project Chart o f Accounts should be updated for

Effectiveness December 3 1,2003

Credit/Grant Effectiveness

Accounts Audit o f project

Within six months o f Cred it/Grant Effectiveness

transactions to be undertaken under the project. Terms o f Reference for the audit o f the financial Credit/Grant

First year release

financial- statements

statements o f the project wi l l be updated and agreed with IDA. These will spell out the scope and coverage o f the audit, which exclude examination o f LLG grant-financed exDenditures.

Effectiveness

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Conclusion o f the Assessment

Expenditure Category

1. Goods

2. Consultant Services

2.10 The financial management arrangements for the project satisfy the Bank’s minimum requirements under OP/BP10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status o f the project required by IDA. Satisfactory steps have also been taken to mitigate r isks arising from weaknesses in the local government financial management arrangements and these continue to yield satisfactory improvements in the local government accountability environment. Actions intended to further strengthen the project’s financial management system are outlined in the Financial Management Action Plan above.

Amount in Amount in US$ Financing Percentage US$ million million

Credit Grant 1 .o 19.0 90%

100% of foreign expenditures and 90% of local expenditures

Supervision Plan

3. Training and

2.11 include that o f ensuring that strong financial management systems are maintained for the project throughout i t s life. A review w i l l be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The Project Status Report (PSR) will include a financial management rating for the component which will be arrived at by the Country Office financial management specialist after an appropriate review.

A supervision mission w i l l be conducted at least every six months. The mission’s objectives will

4.0 90%

3. Disbursement Arrangements

- Workshops

5. Grants for 4. Operating Costs

Subprojects under Part B of the Project

Subprojects under Part C of the Project

6. Grants for

7. Unallocated Total

3.1 Table C shows the allocation o f the proceeds o f the credit and grant. The proceeds o f the IDA gradcredit will be disbursed over four years from FY2004 through FY2007. The annual estimated disbursements are indicated in a table on the page one o f this document. The expected Project Completion Date i s December 3 1, 2006. The Closing Date would be June 30,2007.

3.0 90% 100% of the amounts disbursed

75.0

100% of the amounts disbursed 11.8

11.2 50.0 75.0

Allocation of credit proceeds (Table C)

3.2 The IDA Credit w i l l be disbursed to finance activities under categories 1’2, 3,4 and 6. Disbursements to meet eligible expenditures under the project will be based on the submission o f acceptable quarterly Financial Monitoring Reports (FMRs). The quarterly FMRs will include financial

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report, physical progress report, procurement report, special account activity statement, summary statement o f special account expenditure for contracts subject to prior review, and summary statement o f special account expenditures not subject to prior review. These reports and statements will be accompanied by the Special Account bank statements. The FMRs w i l l be submitted within 45 days o f the end o f each reporting period and cash requests w i l l be the total cash forecast for the ensuing six months period less the closing balance in the Special Account after necessary adjustments. Disbursements to meet eligible expenditures under category 6 will be subject to the fulfillment o f the conditions set out in Section G.

IDA Grant

3.3 The proceeds o f the Grant will be disbursed to finance eligible expenditures under category 5. The requirements for the disbursements under this category, including those relating to submission o f annual work plans, cash flow forecasts and adequate accountability, and satisfaction o f access criteria as assessed through the FPA are set out in Section G.

3.4 will be done by the PCU.

Bank accounts

For FMR purposes, consolidation o f the returns o f expenditures incurred by the participating LGs,

Account

1 Special Account

2 Project Account

3.5

(0

(ii)

3.6

Signatories (MoLG)

Permanent Secretary MoLG; Program Coordinator; Program Accountant. Permanent Secretary MoLG; Program Coordinator; Program Accountant.

The following bank accounts will be maintained for the purposes o f implementing the project:

Special Account : In order to ensure timely release o f funds to finance eligible expenditures under the project, the Government w i l l open and maintain two separate Special Accounts denominated in US dollars in a commercial bank acceptable to the Association. Special Account A in the amount o f US$460,000 w i l l finance activities under categories 1-4. Special Account B in the amount o f US$680,000 will finance activities under categories 5 & 6. During negotiations, agreements were reached regarding the arrangements for establishing and operating the Special Accounts. PCU Proiect Account: In order to ensure timely provision o f counterpart funds, the Government w i l l open and maintain a project account in Uganda shillings in a commercial bank acceptable to the Association. An initial advance o f US$250,000 equivalent, will be deposited in the account, and not later than December 3 1,2003, deposit into such account, the Uganda Shillings equivalent o f US$250,000. The Project Account would be replenished quarterly to meet the Government’s share o f eligible expenditures under the project for the ensuing quarter.

In addition, LGs shall establish a separate bank account for the project in which will be deposited funds from the Government’s Consolidated Fund to be used exclusively f o r project activities in - accordance with Local Government regulations. A valid participating agreement will be a requirement for both initial and subsequent disbursements to a district.

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Funds Flow

Disbursement of IDA Funds to the PCU

3.7 Disbursement o f IDA Funds to the PCU for activities under components 1,4 and 5 o f the project will be done based on Financial Monitoring Reports (FMRs) that integrate project accounting, procurement, contract management, disbursement and audit with physical progress o f project implementation.

3.8 The FMRs will include information under three main categories: a project financial statement which includes a summary o f sources and uses o f funds, an updated six-month forecast, Special Account activity and reconciliation statements; a statement o f eligible expenditures by disbursement category; a project progress report explaining variances between actual physical and financial progress versus forecasts; and a procurement management report showing procurement status and contract commitments.

3.9 An advance will be made into the Special Account at the inception o f the project. The advance w i l l be meant to cover project expenditures for six months as indicated in the initial six-month cashflow forecast. After every subsequent quarter, the project will submit FMRs which include a cashflow forecast for the following 6 month period of. The cash request at the reporting date will be the amount required for the forecast period as shown in the approved FMRs less the balance in the Special Account at the end o f the quarter. Subsequent disbursements o f the IDA funds w i l l be made in respect o f this request.

Joint Donor Financing and Disbursement using quarterly releases (Components 2 and 3)

3.10 IDA funds to finance grants to LGs under components 2 and 3 o f the project wi l l be disbursed on a quarterly basis. These components will be cofinanced by other donors. Two options may be utilized to effect the joint donor financing arrangement and to channel funding to the Consolidated Fund:

Option A: Under this option, donors may transfer their funds directly into the Consolidated Fund. Option B: Donors may set up Trust Fund Agreements with the World Bank under which the World

Bank will undertake to manage their funds.

3.1 1 The proportion o f expenditures to be financed by each donor wi l l be determined prior to Effectiveness. Annual requirements for LGs will be indicated before the beginning o f each year, and donors w i l l therefore have knowledge o f the amounts that they w i l l disburse. Based on the satisfaction o f certain criteria, disbursements w i l l be made on a quarterly basis beginning o f each fiscal year.

3.12 Understanding that w i l l be signed by al l the donors and the GoU.

The conditions under which the financing will be made w i l l be documented in a Memorandum o f

Disbursement of funds from the Consolidated Fund to Local Governments

3.13 The allocation o f grants between HLGs and LLGs w i l l follow criteria that are laid down in the Local Governments Act. Activities to be financed using the Development and Capacity Building Grants w i l l be indicated in the annual plans drawn up in accordance with the Local Government Act and LG Financial and Accounting Regulations. The consolidated work plans for each district will indicate the plans for the district and LLGs within i t s area o f jurisdiction. These wil l be submitted to the M O L G for approval.

3.14 Once these work plans (and other relevant documentation e.g. accountability for grants previously

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disbursed) are reviewed and approved by the PCU, a request w i l l be sent to the Treasury Department for funds to be released. The Treasury Department will then arrange a transfer o f funds by issuing a check or bank draft on the Consolidated Fund in favor o f the LG.

3.15 will then be transferred into the HLG LGDP I1 bank account, and from there to the LLG LGDP I1 bank account via the LLG General Fund account.

Each district w i l l deposit the funds it receives in the General Fund Account o f the HLG. The funds

3.16 Funds will be released following Poverty Action Fund (PAF) modalities. The MOFPED w i l l make a quarterly commitment, and release the f i rs t month’s funds at the beginning o f each quarter. The second release w i l l cover the funds for the remaining two months and will be made conditional upon the receipt by the M O L G o f the necessary accountability for the releases made in the previous quarter. The Office o f the Auditor General will provide a warrant for the release o f funds in accordance with Statutory provisions.

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LGDP I1 FUNDS FLOW MECHANISM

Notes to the Funds Flow Mechanism Flows o f funds from all donors for components 2 and 3 w i l l be govemed by a Memorandum o f Understanding signed by all donor partners and the Govemment o f Uganda. The funds wi l l be released quarterly based on the satisfaction o f criteria described in Section G o f the PAD. I D A wi l l disburse i ts funding for components 2 and 3 into a US$ denominated Special Account (SA). Releases wi l l be made from the SA into the GoU Consolidated Fund on a quarterly basis. Approval o f releases will be based on the satisfaction o f certain criteria, a financial performance assessment carried out by the MOLG and submission o f acceptable documentation for previous releases IDA funding for components 1,4 and 5 wil l be disbursed into a US$ denominated Special Account managed by the PCU. The funds w i l l be disbursed by I D A on the basis o f quarterly Financial Monitoring Reports (FMRs) to a US$ denominated Special Account maintained in a commercial bank and managed by the PCU. Other Donors will release their funds directly into the Consolidated Fund.

4a - As a variation, some donors may entrust their funds to IDA to manage on their behalf under a Co-financing Trust Fund Agreement. These would then be transferred in the same manner as IDA’S own funds.

GoU wi l l designate an amount in the Consolidated Fund as counterpart funds for the project for component 3. GoU wi l l also provide counterpart funding for components 1,4 and 5. T h i s will be deposited a Project Account denominated in

Uganda Shillings, maintained in a commercial bank and managed by the PCU. Releases from the Consolidated Fund wi l l follow requests from the MOLG to the MOFPED and w i l l be made on a quarterly basis. Approval o f releases by the MOLG wi l l be based on the satisfaction o f certain criteria, a financial performance assessment carried out by the MOLG and submission o f acceptable documentation for previous releases. The Govemment Grants Account i s managed by the district and i s a holding account for collection o f all govemment grants to a district. Funds are transferred from this account to the District General Fund and further to the District LGDP I1 Accounts (one each for component 2 and component 3). Funds destined for sub-counties are transferred to the Sub-county General Fund Account before their final destination, the Sub-county LGDP I1 Accounts.

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Counterpart Funds

3.17 For component 3, GoU w i l l release i t s counterpart funds in accordance with the timetable agreed upon in the Memorandum o f Understanding with participating donors. Normal procedures will be employed within the Government’s Commitment Control System to release funds for the other components (quarterly commitment, monthly release). Contributions from LGs and communities will be determined and agreed.

Assessment o f Financial Performance o f LGs

3.18 The M o L G will perform a Financial Performance Assessment (FPA) o f LGs in August/September each year. A satisfactory FPA for each year w i l l be a prerequisite for qualification o f LGs to receive grants in the period following the one in which the FPA i s carried out. The assessment w i l l involve: (i) determination o f whether there i s continuing sufficient accounting capacity in the local governments; (ii) verification o f expenditures using relevant supporting documentation; (iii) physical inspection o f investments;(iv) a review o f the status o f audits o f local govemments in the project; (v) a review o f cashflow forecasts; (vi) a review o f reports o f transfers o f funds from the Government’s Consolidated Fund to the Local Governments; and (vii) compliance by local governments with project objectives. The procedures undertaken during such assessments are documented in a FPA Procedures Manual.

Suspension of disbursements

3.19 IDA wil l have the right, as reflected in the Development Financing Agreement, to suspend disbursement o f funds if reporting requirements are not complied with.

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Annex 7: Project Processing Schedule UGANDA Second Local Government Development Project

Project Schedule Planned Time taken to prepare the project (months) 7 First Bank mission (identification) 0611 012002 Appraisal mission departure 02/24/2003

Actual 7 061 1012002 0313 112003

I Negotiations I 04/07/2003 I 041 10/2003 I IPlanned Date of Effectiveness I 0813 112003 I I Prepared by: Ministry o f Local Government - Program Management Unit (PMU)

Preparation assistance: Project design, the Project Implementation Plan and i t s annexes were jointly done by the PMU, consultants, bilateral donors and the Bank-financed LGDP I

Bank staff who worked on the Droiect included: I Name Lance Morrell Roland White Solomon Alemu Rowena Martinez James Karuiru Joseph Kizito Richard Olowo Mary Bitekerezo Sudharshan Canagarajah Ephrem Asebe Modupe Adebowale Edith Mwenda Perla San Juan Jesper Steffensen Douglas Grube R i e l Franzen

Speciality Team Leader Urban Financial Specialist Engineer Operations Officer Engineer Financial Management Specialist Procurement Specialist Social Development Specialist Country Economist Consultant Economist Senior Finance Officer, LOAG2 Lawyer. LEGAF Program Assistant ConsultantIPIP ConsultantICapacity Building Specialist ConsultantIRevenue Specialist

Quality assurance team: James Hicks, Adrian Fozzard, Dana Weist

- 6 9 -

Annex 8: Documents in the Project File* UGANDA: Second Local Government Development Project

A. Project Implementation Plan

Operational Manual

B. Bank Staff Assessments

Report on the Assessment o f Financial Management Arrangements Report on the Assessment o f Procurement Management Environmental and Social Management Framework (ESMF) Report Resettlement Policy Framework

C. Other

Letter o f Sector Policy

*Including electronic files Memorandum o f Understanding between the GOU and donors

- 70 -

Annex 9: Statement of Loans and Credits UGANDA: Second Local Government Development Project

15-Jan-2003

PO65437 PO73671 PO75932

PO02952 PO65436 PO69996 PO70222 PO02984 PO74078 PO50439 PO73089 PO70627 PO72482 PO44695

PO02992 PO44679 PO02970 PO59127 PO59223 PO49543 PO40551 PO57007 PO46870 PO46836 PO02957

~ ~~

Difference between expected and actual

disbursements' Original Amount in US$ Millions Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd

2003 PAMSU 0.00 27.00 0.00 0.00 29.30 4.65 0.00

2003 UG-PRSC II 2003 PAMSU-GEF 2003 Northern Uganda Social Action Fund 2002 2ND PHASE OF THE RD. DEVELOPMENT PROG

2002 UG: Energy for Rural Transformation 2002 UG EnergyiRurTrans 2002 UG FOURTH POWER PROJECT 2002 Makerere Pilot Decentrl Service Delivery 2001 PRIVATIZATION a UTILITY SECTOR REFORM 2001 EMCBPll 2001 Regional Trade Fac.. Uganda

2001 HIV/AIDS Control Project 2001 National Agric. Advisory Services Proj.

2000 LOCAL GOV DEVE.PROGRAM 2000 Second Economic and Fin. Mgmt. Project 1999 ROADS DEVT PROGRAM 1999 AGRIC.RES a TRNG. II 1999 NAKIVUBO CHANNEL REH 1998 ROAD SECT/INST.SUPP 1998 NUTRIT.CHILD DEV 1998 EL NlNO EMERG RD REP 1997 LAKE VICTORIA ENV. 1997 Lake Victoria Env.

1994 SMALLTOWNS WATER

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00

150.00 0.00

100.00 64.52 49.15 0.00

62.00 5.00

48.50 22.00 20.00 47.50 45.00 80.90 34.04 90.98 26.00 22.40 30.00 34.00 27.60 9.80

12.10 42.30

0.00 8.00 0.00

0.00 0.00

12.12 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

9.80 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.12 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

16.98 0.00 0.00 0.00

158.70 8.66

105.62

65.32 50.43 12.06 57.50

4.29 37.65

0.00 0.00 1.15 0.00

6.45 0.00 10.49 0.00 2.35 0.00 0.79 0.00 4.04 0.00

0.11 0.00 26.37 0.00

18.70 8.55 0.00

15.09 2.35 0.00 42.94 20.97 0.00

46.65 0.77 0.00

22.68 -54.04 0.00 24.37 20.20 0.00 64.61 35.22 12.15 16.58 7.45 0.00 9.44 10.06 0.00

18.08 19.35 6.22 3.62 0.41 0.00 5.70 24.08 1.51 1.05 2.02 0.00 5.07 1.22 0.00

1.35 0.00 0.47

Total: 0.00 1050.79 29.92 17.10 824.61 156.37 19.88

-71 -

UGANDA STATEMENT OF IFC's

Held and Disbursed Portfolio Jun 30 - 2002

In Mill ions U S Dollars

Committed Disbursed IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1996 AEF Agro Mgmt 1992 AEF Clovergem 1997 AEF Conrad Plaza .. .

1998 1999 200 1

1997 2000 2000 2002 1998 1995 1993 1994 1998 1994100 0184192 1993 1996 1998 1983

AEF Exec. Invmnt AEF Gomba AEF Kabojja AEF Kiwa I1 AEF Ladoto AEF LongFreight AEF Makss AEF Mosa Court AEF Rainbow AEF Rwenzori AEF Skyblue AEF White N i le CelTel Uganda DFCU Jubilee Kasese Cobalt Tilda Rice Uganda Sugar

Total Portfolio:

0.60 0.40 0.00 0.00 0.55 0.84 0.00 0.00 0.00 0.84 0.88 0.00 0.00 0.00 0.88 0.79 0.00 0.00 0.00 0.79 1.40 0.00 0.00 0.00 1.40 0.33 0.00 0.00 0.00 0.33 0.07 0.00 0.00 0.00 0.07 0.80 0.00 0.00 0.00 0.80 0.80 0.00 0.00 0.00 0.00 1.35 0.00 0.00 0.00 0.00 0.40 0.00 0.00 0.00 0.40 0.79 0.00 0.00 0.00 0.79 0.17 0.00 0.00 0.00 0.17 0.51 0.00 0.00 0.00 0.51 0.22 0.00 0.00 0.00 0.22 2.50 0.70 0.00 0.00 2.50 0.00 0.60 0.00 0.00 0.00 0.00 0.10 0.00 0.00 0.00 8.00 3.60 0.00 0.00 8.00 1.43 0.00 0.00 0.00 1.43 4.02 0.00 0.00 0.00 4.02

0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.70 0.60 0.10 3.60 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

25.90 5.40 0.00 0.00 23.70 5.40 0.00

Aoorovals Pending Commitment

FY Approval Company Loan Equity Quasi Partic 2002 Bujagali 70.00 0.00 0.00 40.00

Total Pending Commitment: 70.00 0.00 0.00 40.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

- 72 -

Annex 10: Country at a Glance UGANDA Second Local Government Development Project

POVERTY and SOCIAL

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1995-01 Population (%) Labor force (%)

Most recent estimate (latest year available, 1995-01) Poverty (% of population below national poverty line) Urban population (% oftotalpopulation) Life expectancy at birth (years) Infant mortality (per 7,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (“A ofpopulation) Illiteracy (% ofpopulation age 75+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981

GDP (US$ billions) Gross domestic investmenVGDP Exports of goods and services/GDP Gross domestic savings/GDP Gross national savings/GDP

Current account balance/GDP Interest paymentdGDP Total debVGDP Total debt service/exports Present value of debVGDP Present value of debtlexports

1981-91 1991-01 (average annual growth) GDP 4.5 7.1 GDP Der caoita 1.6 3.9

Uganda

22.8 260 6.0

2.9 2.7

35 13 42 88 38 52 38

128 132 124

I991

3.3 15.2 7.5 0.7 1.4

-13.5 1.6

78.0 94.3 39.0

641.1

2000

5.0 2.2 4.1

Sub- Saharan

Africa

674 470 317

2.5 2.6

32 47 91

55 37 78 85 72

2000

5.9 19.9 11.1 6.7

11.7

-12.3 0.8

61.3 10.4 16.8

142.1

2001

5.6 2.9

Low- income

2,511 430

1,069

1.9 2.3

31 59 76

76 37 96

103 88

2001

5.7 20.4 11.1 5.9

12.7

-14.5 0.4

55.0 10.5 20.4

171.4

2001-05

6.5 4.0

Development diamond’

Life expectancy

-

GNI Gross per ~ primary capita nrollment

Access to improved water source

Uganda Low-income group

-

Economic ratios’

Trade

Economic ratios’

Trade

T

Investment Domestic savings

Indebtedness

-Uganda - Low-income group

Expois of goods and services 1 6 173 9 0 7 5 STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption 905 81 0 81 7 General government consumption 8 8 120 125 Imports of goods and services 21 9 240 257

1981 1991 2000 2004 Growth of investment and GDP ( O h )

Manufacturing

1981-91 1991-01 2ooo 2o01 Growth of exports and imports (%) (average annual growth) Agriculture 3 5 3 9 5 6 4 6 Industry 7 0 120 3 1 6 5 40

Manufacturing 5 5 136 3 5 8 8 Services 4 5 7 8 6 5 7 2

Private consumption 4 2 6 5 3 9 4 5 General qovernment consumption 2 2 6 0 5 0 123 -20- Gross domestic investment Imports of goods and services

9.7 9.3 -2.1 4.4 - Exports -.0-lmports 4.5 10.9 -6.6 1.1 I

Note: 2001 data are preliminary estimates. *The diamonds show four key indicators in the muntry (in bold) compared with its income-group average. If data are missing. the diamond will be incomplete.

- 73 -

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, inc/udes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ mi//ions) Total exports (fob)

Coffee cotton Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ mi//ions) Conversion rate (DEC, /oca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ mi//ionsj Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1981

1981

1981

1981

0 119

0 0

0

17 0 0 0 0 0

1991

24.5 26.0

7.5 0.0

-7.6

1991

175 127

8

545

83

56 87 64

1991

199 671

-472

-58 81

-449

412 37

50 550.9

1991

2,592 18

957

191 8 9

262 203 -18

1 0

277 169

7 162

9 152

2000

6.3 4.4

11.4 0.4

-12.9

2000

454 187 23

1,513

143

58 104 56

2000

651 1,410 -759

-60 95

-724

710 15

719 1,511.4

2000

3,602 0

2,098

68 0

31

312 151

2 194

0

107 139 16

123 15

108

2001

4.6 6.3

10.9 -0.6 -9.3

2001

442 110 14

1,501

170

51 4 02 50

2001

630 1,454 -825

-119 124

-819

860 -41

739 1,762.9

2001

3,107 0

2,101

71 0

37

405 151 11

169 0

575 151 22

129 15

114

5

0 96 97 98 99 00 01

I -5 - -GDP deflator -0 -CPI

I 1 Export and import levels (US$ mill.)

20w -

I I 95 96 97 96 99 00 01

6 Exports Imports

~

Current account balance to GDP (%)

-15 -

-20 -

Composition of 2001 debt (US$ mill.)

F 29 E: 179

A - IBRD E - Bilateral B - IDA D - Other multilateral F - Private C - IMF G . Short-term

- 74 -

Annex 11 : Letter of Sector Policy

UGANDA: Second Local Government Development Project

- 75 -

Telephoner: Minister: Kampala 243054 8 232370 Oftice: Kampala 23410019 (10 liner)

Fax: Kampala 230163 Telex: 61170 Teleggrams: "FINSEC"

In any correspondence on PD.103/140/01 THE REPUBLIC OF UGANOA

Ministry of Finance, Planning and Economic Development P.O. Box 8147, Kampala. Uganda

March 17.2003

The Country Director, Uganda Eastern Africa Oepartment The World Bank 1818 H Street N. W. Washington 0. C. 20433 U. S. A.

RE: LETTER O f SECTOR POLICY ON FISCAL DEVOLUTION AND LOCAL GOVERNMENTS' CAPACITY BUILDING.

1. I am writing on behalf of the Govemment of the Republic of Uganda to request US$125m for implementation of key priority activities under the second phase of Local Government Development Programme (LGDPII). This letter outlines our policy on the devolution of development funds to Local Governments (CGs) and the strategy for building the capacities of LGs for improved service delivery, accountability and transparency to the population. The letter also describes the ongoing initiatives, major policy reforms, and the actions that Government will undenake to implement these measures through the proposed LGDP II.

Background

2. Uganda's strategy for economic transformation is spelt out in the Poverty Eradication Action Plan (PEAP), a medium-term development plan that guides Govemment Policy and provides a framework for detailed sector and Local Govemment plans. The PEAP was first introduced in 1997 after 18 months of consultation with stakeholders. It was revised in eariy 2000 and a summary of the revised PEAP was presented as Uganda's Poverty Reduction Strategy Paper (PRSP) to the Boards of the World Bank and the International Monitory Fund (IMF) in May 2000. The PRSP focuses on four key pillars: d ) creating an enabling environment for economic growth and structural transformation; 2) ensuring good govemance and security, including improvement in public service delivery and decentraiisation; 3) increasing the ability of the poor to raise their incomes: and 4) improving the quality of life of the poor.

1

3. Decentralisation policy is a cornerstone of Government‘s strategy for economic transformation. The policy focuses on the devolution of power and functions within the planning, management and delivery of basic services by Local Governments. The policy, which was announced in 1992, is enshrined in the Constitution and has a detailed legal framework for its implementation provided for in the Local Governments Act of 1997. This policy was further elaborated on in the “Letter of Sector Policy on Fiscal Devolution, Control and Management of Public’ Expenditure” of October 1999 which was a joint letter for both the EFMP II and LGDP I projects.

4. It is important to note that LGs play key roles in the implementation of the Government’s PEAP/PRSP, in such areas as primary education, primary health care, water and sanitation, feeder roads and agricultural extension. These sectors are key to improving the living conditions of our population. Thus, the evolving relationships between Central and LGs, is crucial to the success of Government’s strategy. These relationships include, inter alia, fiscal and institutional capacity dime.nsions. Also of vital concern for the strategy is downward accountability at the local level, based on transparent and highly participatory decision making and monitoring of implementation of programmes.

-

5. The LGDP implementation will further enhance the efforts of the GoU in the implementation of the decentralization policy where there is a need to address the apparent tension between the requirement to achieve national sectoral targets and the drive towards identifying local priorities. This apparent tension can be resolved by ensuring that local prioritisation is recognized through the consultative process. Local prioritisation can then be integrated into national targets and the activities can be properly sequenced to facilitate both ownership at local level and achievable targets at the national level. It is important to acknowledge that an effective two- way dialogue must continue to be developed between local communities, local governments and central government. This will enable communities to develop their own projects and to participate fully in the relevant activities. While the country, as a whole will be better placed to define and achieve its objectives and to measure progress, the Local Government Development programmes are playing a prominent role in these crucial developments.

6. The on-going Local Government Development Programme (LGDPI), became effective in October 2000 and is scheduled to be completed in June 2004. This Programme supports the dovernment’s PRSP. The LGDPI was designed as a pilot project with the objective to:

(a) test the feasibility of implementing Constitutional and legal mandates with respect to the decentralised services and devolution of development budget;

(b) build the capacity of the Ministry of Local Government, the Local Government Finance Commission (LGFC) and a sub-set of local

2

. ..

i .. .

? .

governments in a bid to achieve improved service delivery, accountability and transparency;

(c) private sectors participation, communities and stakeholders; and

introduce and test alternative service delivery mechanisms through

(d) monitor and evaluate project implementation for documenting experiences and good practices for formulating appropriate strategy for scaling country wide.

7. The basic feature of the LGDP is its unique link between the decentralisation of development budget, capacity building support and a clearly defined performance assessment system with strong in-build incentives for Local Governments (LGs). In order to enhance the

- performance of LGs in implementing their Constitutional and legal mandates for decentralised service provision one of the main pillars of the LGDP I is the incentive system. The incentive system rewards good LGs performance and sanctions poor performance. Poor performing LGs are supported through the capacity building grant to improve their performance, Finally, LGDP is based on the principles of participatory planning, involvement of all levels of LGs in the decision-making and service provision, as well as the creation of ownership and sustainability of the investments.

8. The Mid-Term Review of the LGDP-I was conducted in February 2002. The review concluded that the Programme was on’course and achieving its objectives. The, programme provided funds for service provision in key PEAP areas and valuable experiences in the field of fiscal decentralisation. The review recommended the LGDP I model, to become the national system for transfers of development grants to LGs over the medium term. The Review also highlighted a number of ,areas that need further refinement, especially in order to make the programme more sustainable in respect of service provision, good governance and promoting the efficiency in the .utilisation of the capacity building grant.

9. In a related development, Government undertook a study on fiscal decentralisation in 2001, which reviewed the inter-governmental fiscal transfer systems, reporting and accountability procedures. The findings of the study formed the basis for the development of its Fiscal Decentralisation Strategy (FDS), which was approved by Government in June 2002. Through the FDS, the Government has made a strategic choice to mainstream the LGDP modalities and guide the development component of the inter-governmental fiscal transfers. The flexibility under FDS, enables greater local governments’ autonomy in the decentralisation of public service delivery and downward accountability.

10. The LGDP-II will directly support the Government’s Fiscal Decentralisation Strategic choice and incorporate the lessons learned under LGDPI with a view to improving delivery of basic services and engendering economic growth and poverty reduction in line with the Government’s PEAPlPRSC

3

,.. . . , . . . .. - . . . . . . . . . , , .

and decentralisation policy. The Programme will also incorporate lessons learned from bilateral donor programmes, implemented since the start of the LGDP I in October 2000. The Programme will support the FDS and serve as “bridge” operation in preparation for broader support to Government’s decentralisation policy through a future budget support to decentralisation.

11. Donors are increasingly supportive of the LGDP modality and are demonstrating willingness to foster efforts to establish a predictable, transparent and sustainable intergovernmental fiscal transfer system and a LGs capacity building strategy that is consistent with:

(a) the overall policy framework as set out by Central Government;

- (b) the legal mandates for Local Governments’ service delivery;

(c) a significant local revenue base that is effectively mobilised; and

(d) an overall hard budget constraint on fiscal transfers that is consistent with sound macro fundamentals.

12. I now wish to outline the guiding principles of the policy framework in which the full decentralization of the development resources and capacity building for LGs will occur. I also give details about the expected contribution of the LGDP II to the realization of this policy framework.

Govern men t’s Fisca I Policy

13. The Government’s fiscal policy continues to be guided by three main objectives namely: a) maintaining macroeconomic stability by matching public expenditure with available resources; b) allocating additional resources to PEAP areas for poverty reduction; and c) reducing dependence on external resources through increasing the revenue base in a sustainable manner without causing distortions in taxes. These objectives are intended to gradually reduce the overall fiscal deficit in relation to Gross Domestic Product (GDP), which is consistent with the objective of Pillar 1 of the PEAP, namely Economic Growth and Structural Transformation. Government will therefore continue to place emphasis on efficiency in the use of its resources with emphasis on Good Governance as a pre-requisite for effective poverty reduction efforts.

Decentralisation Principles and Objectives

14. The Ugandan decentralisation policy is based on the principles of: devolution of powers, functions and service to all levels of Local Government; enhancing good governance and democratic participation to enrich the decision making process; provision of suitable structures throughout government; and recognition of a hard budget constraint. These principles have been provided for in the 1995 Constitution and further elaborated in the Local Governments Act, 1997. The key to these

4

principles is the autonomy in service delivery which has been devolved to LGs while the centre retains the responsibility for national policy formulation, setting standards, supervision, offering technical advice and guidance, providing support supervision and determining the national medium term budget and expenditure frameworks. These principles have changed the relationship between central and local government and between the different levels within local government.

Fiscal Decentralisation.

15. The objective of Fiscal Decentralisation Strategy (FDS) is to streamline the resource transfer modalities to LGs without constraining the effective service delivery functions that were devolved to- them under the LGs Act 1997. The Constitution provides for three types of grants to be transferred

- to LGs namely: Unconditional Grant, Conditional Grant and Equalisation Grant. This is in addition to powers devolved to LGs to levy, charge, collect and appropriate fees and taxes in accordance wifh the law. The drafting of the LGs (rating) Bill, 2003, which is soon to become law, is a demonstration of Government’s commitment to improve revenue performance in LGs. This further strengthens the provisions in the Constitution and the LGs Act 1997 and underscore Government’s commitment to the implementation of FDS.

On going initiatives linked to LGDP II

16. There are a number of donor-funded initiatives linked to the proposed LGDP II. Brief overviews of those initiatives are given here below.

a) Decentralisation Support Programme (DSP) by DflD

17. The DSP aims at strengthening key Central Government institutions (Ministry of Local Government -MoLG, Local Government Finance Commission -LGFC, and Uganda Local Authorities Association -ULAA) with the objective of enhancing their capacity, efficiency and effectiveness

. to implement the Government’s decentralisation policy. The DSP is designed to implement and reinforce the objectives, instruments and modalities of LGDP I and is managed through the same institutional arrangements. Co-ordination and synergy between DSP and LGDP I have been handled through the utilisation of the same implementation institutions such as the Programme Steering Committee (PSC), Programme Technical Committee (PTC), Programme Management Unit (PMU) as well as streamlining systems for financial accounting, reporting and disbursement. The DSP support to MoLG and LGFC has been articulated through a four year LGDP I (Component I) whose implementation is due to come to an end in 2004. DflD is in broad agreement with the design of LGDP I1 and has indicated that DSP will be extended to address the gaps in capacity within the MoLG after its current phase. Government recognises that most of the DflD’s support is provided in form of general budget support and therefore requests DflD to continue with this instrument. The DflD will therefore not co-fund LGDP II but shall provide parallel funding to complement LGDP II through the DSP.

5

b)

18.

19.

Support to Local Development and Decentralisation by DANIDA

Under its phase I, DANIDA supported the Decentralisation Secretariat as well as establishing the legislative framework for decentralisation. Under phase 11, it supported the development of the wider institutional framework with support to MoLG, LGFC, ULAA, Urban Authorities Association of Uganda (UAAU) and the office of the Auditor General. The current phase 111, Support to Local Development and Decentralisation, is focused on capacity building for improved governance and further strengthening of the institutional framework. Given the need for synergy, DANIDA support to capacity building will be an integral part of the LGDP 11.

To this effect DANIDA has pledged to finance Component 3 of LGDP ll - LGs Capacity Building. Out of the proposed three sub-components of Capacity Building under LGDP 11, DANIDA has pledged to fully finance the following two sub-components: a) The National LG Capacity Building Strategy and the M & E, and b) Strengthening the Human Resource Development (HRD) functions in LGs. DANIDA shall also contribute funding to the LGDP II basket as co-financier fqr sub-component three for the LGs capacity building grant. The implementation of the start up activities is already well underway, and DANIDA has provided technical assistance to work with the MoLG beginning October 2002.

-

c) Strengthening Decentralisation in Uganda (SDU) by USAID

20. The goal of the SDU is to ,build capacity in order to foster democratic principles in Uganda through the process of establishing productive partnerships between LGs and civil society. The SDU is a pilot project covering only six Districts: Luwero, Apac, Tororo, Mbarara, Kabale and Nakasongola. The project’s focus is on capacity building of elected and appointed officials together with representatives of civil society. It intends to achieve a more transparent, effective and accountable LGs system. The project components and capacity building effort focus on financial management and budgeting, governance and the operations of civil society with gender mainstreaming. Given technical difficulties, USAID cannot provide basket funding to LGDP II. The SDU is, however, complementing LGDP activities by providing technical assistance within the six supported LGs, in an event of failure to access the Locql Development Grants, by assisting them to develop requisite capacity to access the grant in the following financial year.

d) Direct District Support Programmes (DDSP) by Netherlands, Ireland Aid, Austria and Belgium.

21. There are a number of Districts that presently benefit from direct bilateral District Support Programmes that often include technical assistance, project financing, and or capacity building. It is important to note that most of the donors in this group have indicated willingness to mainstream their District programmes into the LGDP II. These include the Royal Netherlands Embassy (RNE), Irish Aid, and Austria. While Belgium will continue to

6

provide direct support to specific areas, it has indicated willingness to co- ordinate closely with the capacity building activities under LGDP 1 1 . Several of the donors such as the RNE, DANIDA, and Ireland Aid who are expected to join the LGDP II, will continue to provide technical assistance to a number of Districts, hence supplementing the more generic capacity building support to be provided under LGDP 11.

e)

22.

The Micro Projects Programme (MPP) by the European Union

Under the 6th, 7th, and 8'h MPP 20 Districts were supported with the objective of enabling them improve access and use of social infrastructure. A capacity building component was provided to address specific gaps related to the establishment, operations and maintenance of social infrastructure created. The programme review held in March 2002 - recommended that the programme should orient itself to more generic capacity issues and to involve LGs more increasingly in procurement of the service providers so as to build their capacities as opposed to the centralistic approach, which was hitherto being used by the programme. The EU has fielded a mission in November 2002 to formulate the gth MPP taking into consideration Government policy on decentralisation, fiscal decentralisation and the on-going design of LGDP II. The final decision regarding this EU support shall be clarified after final decision has been made between EU, MoFPED, and MoLG after the three institutions have studied the recommendations of the formulation t,eam.

fl Capacity Building Programme for Decentralisation by Makerere University.

23. Makerere University initiated research to assess the changing needs in Districts given the new mandate of service delivery as defined in the decentralisation policy. The research findings clearly indicated that for the Local Governments' to perform their new roles and responsibilities for effective and efficient service delivery they require specific skills which are not wholly provided within existing University curricula and outreach activities. In response to these findings, Makerere University through a joint committee comprising representatives of Government and the University developed a proposal to align training of students with current realities. Rockfeller Foundation and the World Bank have agreed to finance the initiative. The programme is now underway on a pilot basis in 5 Districts and is being managed by the University. The programme will support LGDP I1 by having a strong supply of training providers for capacity building under component 3.

g) Second District Development Programme (DDP Ir) by UNCDF.

24. The DDP II is a follow-up to DDP I, which was a precursor to LGDP I. The project (DDPII) is being executed by the MoLG and co-financed by a number of donors including UNCDF, DANIDA, DFID and Japan Trust Fund. While the outcomes of DDPl guided the design/formulation principles for LGDPI, the DDPII focuses on specific issues that emerged and are not

7

addressed under LGDPII. The project is being piloted in eight Districts. The programme focus is participatory planning and budgeting, gender mainstreaming as well as strengthening LGs’ administration of justice. The programme has a strong link with LGDP II through its components, and also focuses on Local Revenue Enhancement, which is linked to Component 4 of LGDP II. The end target is to mainstream the findings of LGDPll and DDPII into a harmonised decentralisation framework.

h) Second Economic and Financial Management Project (EFMP 11) by World Bank.

25. The EFMP II was designed to improve the effectiveness of the public expenditure management processes through central and local governments with specific focus on strengthening efficiency and effectiveness of the Central and LGs planning, budgeting and financial management processes. The EFMP II places particular emphasis on a) developing the human resource capacities in the areas of planning, budgeting, accounting and auditing; b) implementing an appropriate legal and regulatory framework and institutionalising computerised financial management systems as a basis of improving fiscal and financial reporting. While there exists training under EFMP II, the training covers professional development aspects as well as specific financial management system skills. It will therefore be complemented by the training under LGDP II, which shall be based on specific capacity needs demanded by local governments. The training under LGDP II is also intended to provide opportunities to local governments to develop generic skills training.

i) Financial Accountability Programme (FAP) by DflD.

26. The objective of FAP is to improve accountability and transparency in the financial management process and to reduce and eventually the opportunities for corruption in the use of public funds both in central and local governments. The FAP has provided an opportunity to review and revise the financial legislation’ and is also providing support to clarifying the audit and inspection functions; increasing the awareness and involvement of the public and civil society in the management of public finances. Although the programme addresses mainly the central Government level, it’s work particularly in relation to the financial legislation and the internal audit function, have significant relevance to financial management improvements under local governments.

A Major Policy Reforms

27. There are number of policy reforms, which are currently being implemented by Government in order to improve the efficiency and effectiveness of LGs in the areas of improved service delivery. The highlights of the reforms are presented here below:

’ The Public Finance and Accountability Bill is due for enactment by Parliament

8

./.___ ... ,.._. .

0 28.

29.

ii)

30.

Restructuring of Local Governments

Whereas Central Government Ministries were restructured in 1998 to bring their structures and mandates in line with the Constitution and the decentralisation policy in the LGs Act, LGs were last restructured in 1994. The current LGs structures are therefore unaffordable and are not quite relevant to the roles and setvice delivery responsibilities assigned to them under schedule I1 of the LGs Act. The Ministry of Public Service (MOPS) in collaboration with MoLG is in the process of concluding a study of restructuring LGs. The recommended model structures under the study will streamline LGs operations to be consistent with the mandates assigned to LGs under the LGs Act.

The bloated, unaffordable local Government structures which differ from one Local Government to another has been one,of the root causes of the non-payment of persons employed by LGs leading to the accumulation of salary arrears, in some LGs, over the years. The results of the local Government restructuring process therefore will provide a minimum and affordable structure to local governments at the same time effectively deliver the decentralised functions as spelt out under schedule I1 of the LGs Act. Once the funding modality for the structure is adopted, the budgeting for staff salary will be based on the LGs approved structures. As Government clears the backlog of the arrears, this arrangement will, no doubt, curtail the increasing trend in creation of salary arrears.

Fiscal Decenfralisation Strategy (FDS)

This strategy aims at streamlining the modalities of the intergovernmental fiscal transfer systems (guidelines, reporting systems, planning, budgeting, allocation formulae, monitoring requirements, etc) and enhancing the LGs autonomy to make decisions according to local priorities and thereby deepen the decentralisation process. The strategy is designed to ensure the realisation of local autonomy while at the same time focusing on national service delivery targets and accountability. Two committees, with representatives drawn from Central and LGs, are responsible for the implementation of the FDS; i.e the LGs Budget Committee (LGBC) and the LG Releases and Operations Committee (LGROC). The initial preparatory activities of the strategy are supported by a joint donor basket fund. Effective from FY 2003/4, the transfer of resources based on the FDS modality will be piloted in twelve (12) districts and three (3) municipalities. This piloting should lead to the merger of the sector development grants with the non-sector development grants (LGDP 11) by FY2005/6. The LGDP 11 will supplement and support FDS initiatives through Component I which contains a number of follow up and support activities on planning, budgeting, and monitoring and evaluation (M & E). In addition, the Local Development Grant under component II of LGDP I1 is the basis for streamlining the development transfer system. The LGDP II implementation schedule has been carefully designed to fit into the plan for the rollout of the FDS to ensure synergies between the two initiatives.

9

iii)

31.

iv)

32.

Integrated Financial Management System (IFMS)

Effective from FY 2003104, the Government, through EFMP II will, introduce a computerised System as a basis for improving fiscal and financial management and reporting. The implementation will in the first year (2003/04), be piloted in 4 local governments and 6 ministries. This will be extended to at least 6 additional districts in the second year. The scope of implementation will be extended to cover a fully-fledged revenue system for Kampala City Council in the second year. The implementation of the IFMS is supported by the introduction in the FY2003/04, of a new standard and uniform financial Chart of Accounts based on internationally acceptable standards and practices. This is expected to enhance the standardization of norms for financial classification, tracking and reporting throughout all levels of government. The new systems will make it possible for LGs to significantly upgrade the capacity for managing accounts to produce final account timely. This reform will involve significant activity at LGs and will necessitate close co-ordination between LGDP II and EFMP II management. Significant capacity building will be undertaken at LGs to enable the financial management cadre to use the system. The Royal Netherlands Embassy (RNE) has fully provided the hitherto budget shortfall which, was required under EFMP II to execute the training in LGs.

Public Expenditure Management Commift ee (PEMCOM)

The PEMCOM was formed to coordinate and ,harmonise Government's activities pertaining to public expenditure and financial management reforms. The PEMCOM provides a mechanism for government to plan and monitor the public expenditure reform initiatives and provide informed input to the Poverty Reduction Support Credit (PRSC) Matrix and other instruments supporting the Poverty Eradication Action Plan (PEAP) implementation as they relate to PEM reform. The LGDP II together with other financial management related initiatives fall within the PEMCOM coordination mechanisms. Membership to the PEMCOM includes the MoFPED (Chair), MoLG and sector ministries. The PEMCOM meets quarterly.

Gaps and proposals under LGDP II

33. Under LGDP I, a number of initiatives were started. These include the development of mentoring guides for LGs; the development of LGs M & E manual; LGs Inspection Manual; and a Communication Information System (ICT) for LGs. Also started under LGDP 1 is the, review and publication of the LGs Tender Board Rules and Regulations, and the review of the Harmonised Participatory Planning Guide (HPPG) for lower LGs. These initiatives shall be consolidated under LGDP II. ,While significant progress has been made in the implementation of the decentralisation policy, fiscal decentralisation, and improving the capacities of LGs, there are still gaps, which shall require further attention. The gaps are outlined below:

10

I

- , ..- _. . ., . .. .. . .

0 34.

ii)

35.

36.

37.

Gaps related to Decentralisation Policy

There is need to identify areas where sector policies, laws and regulations are inconsistent and/or not supportive to the overall framework of decentralization. This is a major component under FDS. Three major issues need to be addressed, while other related issues may be included under these reviews. The first is the relationship ' between LGs' administration and deconcentrated central Government Technical Support Unit (TSU), mainly in the sectors of water, roads and health. Second is the review of the LGs legal framework, especially the link between the LGs Act and other related Acts, in order to identify contradictions and find solutions e.g the Leadership Code, the Public Finance and Accountability Bill etc. Third is institutional reforms to make sure that they are compatible with the decentralisation policy and principles, for example'water supply in Kampala City is managed by a Board which has no relationship with the City Council. Studies shall be commissioned under LGDP II to review these relationships with the view to harmonising them,

Gaps Related to Fiscal Decen tralisa ti0 n and Accountability.

Districts' budgets have continued to be unrealistic because they are based on unrealistic revenue and expenditure projections. Districts Development Plans are still problem-based and not vision-based and as such most of the development plans are not aligned to the available resources and appropriate strategies for exploiting the development opportunities existing within the districts. There is therefore need to change the planning methodology at LGs. Under LGDP II, the District Planning Guide shall be reviewed to bring it in line with visionary planning taking into consideration crossing cutting issues such as environment, gender, poverty analysis and the livelihood of the communities within the district.

The major challenge confronting LGs is the increasingly deteriorating local revenue which has diminished the resources available to fund (a) growing recurrent costs associated with the operation and maintenance of the increasing capital stock of local infrastructure funded over the years; and (b) their counter-part obligations. It is therefore critically important that for sustainability, the LGDP II should support efforts'to enhance LGs revenue performances. Accordingly, component 4 of the proposed LGDP II shall look at practical ways and means as to how best local revenues in LGs could be enhanced during the project time including policy review for local revenue.

The largest proportion (75%) of the grants from Central Government to LGs constitutes conditional grants. This does not only undermine LGs autonomy in decision making to local problems but also the problems of multiplicity of reporting, accounting and monitoring formats. The multiplicity of conditional grants management systems has, inter lia, contributed to some of the inefficiencies in LGs. In addition there is need to review the allocation formulae for the sharing of the grants amongst LGs to ensure equity and

11

38.

iiij

39.

40.

fairness. The FDS has begun to address some of these concerns and will be complemented by LGDP 11.

The Office of the Auditor General (OAG) has the Constitutional mandate to audit the accounts of all public bodies. This means the OAG has to audit not only the accounts of districts and Municipal LGs in addition to central Government Ministries/Departments but also the accounts of all the Lower Local Governments (LLGs). The capacity within the OAG in terms of staff, skills and facilities is not adequate to carry out the full audit of LLGs in a timely manner. As a stopgap measure, LGDP II shall assist the OAG by providing financial resources for the procurement of private audit firms who shall audit LLGs’ accounts during the first 2 years of the programme. By FY2005/6 Government would have put in place a more sustainable strategy for auditing of LLGs’ accounts. This strategy shall be implemented in tandem, in the short and medium term, with the Public Expenditure Review (PER), which would include, amongst other things, improvement of the quality of financial management (budgeting and accounting) in LGs.

Gaps related to Administrative Framework.

Government is in the process of completing the study for restructuring of LGs to make them commensurate to the roles and responsibilities assigned to LGs under the 1997 LGs Act. A local Government is expected to “buy” into a model structure, which is suitable to its respective site. The operationalisation of structures coupled with the lessons yet to be attained under the existing pilot decentralisation of the payroll, will set a clear direction for an efficient decentralisation of the payroll management to LGs.

There are a number of monitoring and evaluation (M&E) initiatives, which are currently on going. There is no link betwe.en the various systems, leading to overlaps, conflicting coding systems and great transaction costs for LGs. There is therefore a clear need for closer co-operation and co- ordination. Under the proposed LGDP II, the LGs M & E system developed under LGDP I, which focuses on the establishment of computerised M & E system, will strive to bring these initiatives into harmony.

Govern men t Strategy

41. While Government will maintain the transfer of resources to LGs in form of conditional, unconditional and equalisation grant; the strategy to address the constraints to fiscal devolution is to design a Decentralisation Support arrangement as one of the major components of donor support to GoU, During the implementation of LGDP II necessary steps will be taken to address relevant issues to ensure a sm,ooth transition of the Decentralisation issues to a budget support modality.

12

Local Government Development Programme II (LGDP 11)

42. The proposed LGDP II will be implemented over a four-year period 2003- 2007. The LGDP-II will address four mutually strengthening areas: support to decentralisation process: Local Dvelopment Grant; Local Government Capacity Building; and LGs Revenue Enhancement. The issues to be addressed by LGDP It are summarised below.

Support for the Decentralisation Process

43. The objective of the Support for the Decentralization Process is to provide better co-ordination by strengthening the role of MoLG in co-ordinating the decentralisation of related activities. The LGDP I1 compliments the initiatives under Support to the Decentralisation process (SDP) financed by

- DflD, which focus on the capacity building needs for staff under the MoLG. The support to decentralisation under LGDP I1 will, infer alia, support the FDS Implementation process; and design tools to support the Decentralisation of the Development Budget.

44. Under LGDP I, a number of Manuals and Guides were commissioned. These include the Harmonised Participatory Planning Guide (HPPG); the Urban Planning and Management Guide; LGs Communication Strategy; and LGs M & E system. Under LGDP 11, support shall be extended for the implementation of the FDS and providing administrative tools for improved service delivery. The support will built on the initiatives started under LGDP I by (a) operationalising the Harmonised Participatory Planning Guide (HPPG); (b) operationalising the Urban Planning Guidelines; (c) supporting the dissemination and roll out of the Communication Strategy; (d) supporting the review and revision of the District Planning Guidelines; (e) supporting the roll out of the M & E system; and (9 supporting the review and harmonisation of the LGs procurement Rules and Regulation with the Public Procurement Bill.

Local Development Grants

45. The objective of the Local Development Grant (LDG) is to increase non- sectoral development grants transferred to local governments in a timely and transparent manner within the planning and budgeting process. The LDG will be distributed on a formula basis between all LGs in Uganda for investment in local infrastructure in accordlance with local needs determined through local planning and budgeting processes. Although all LGs will be eligible to receive LDG funding, the extent to which a local Government will access the grant is determined by its respective capacity to meet the co-funding requirement, accountability, and performance conditionalities, which are designed to incentivise improvements in sustainable service delivery at the local level. It,should be noted that the LGDPI experience reveals that most local governments encountered constraints in satisfying the 10% counterpart funding requirements. For effective performance of this major component under the LGDPll

13

. ., -. _. . . . .

programme, it is imperative that efforts are made to enhance local governments’ capacity in local revenue mobilisation.

LGs Capacity Building Grants

46. The objective of the Capacity Building Grants is to enhance the capacity of LGs to fulfil their service delivery mandates. The grants will provide resources to enable LGs to strengthen staff capacities and lay a foundation for continued improvement and strengthening. The goal is to ensure that all LGs staff and politicians have the basic skills and knowledge required to perform their functions and to contribute to the overall effective operation of the government. The grants will be utilised by LGs in a demand driven manner according to own priorities and combined with central quality assurance and co-ordinationlsuppott. The grants are closely related to the

~ MoLG role in providing the National Strategic ‘Framework for Capacity Building in LGs and the Support to the Human Resource Function in LGs, which ensure efficient co-ordination and utilisation of the grants. In addition, the LGs performance assessment contains the incentive criteria for efficient use of the funds.

Local Government Revenue Enhancement

47.

i )

48,

ii)

49.

iii)

50.

There is need to enhance the capacity of LGs to administer their own sources of revenue in order to achieve and sustain acceptable levels of service delivery and ensure that operational and maintenance costs of the investments are properly addressed. Under the proposed LGDP II the following activities will be undertaken in close association with a number of other activities underway under the DDP I1 to address local revenue enhancement in Uganda, and will be co-ordinated through the Co- ordinating Committee on Local Revenue Enhancqment (CCLRE).

Strengthening Local Revenue Policies and Legislation

The MoLG will be assisted through LGDP II to review existing policies and regulations on LGs revenue mobilisation so that they reflect international best practice.

Training of Politicians and Officials

Negative statements made by some politicians regarding certain LGs taxes have contributed to the LGs revenue decline. Efforts shall be made under LGDP II to create a more favourable local environment to enhance local revenue by training those responsible for making and commenting on policy and those responsible for implementing LGs fiscal legislation at both Central Government and LGs levels.

Strengthening Local Revenue Systems

Under the DDP II, Government has commissioned a study for documenting existing local revenue enhancement best practices in use by LGs and

14

provide alternative revenue sources to complement graduated tax. LGDP II will support this initiative and roll-out the best practises country wide to all LGs.

iv) Extension of Property Tax System

51. Government is in the process of revising the Local Governments (Rating) Decree 1979, which currently provides a framework for Property Tax. The Local Government Rating Bill has been passed by Cabinet and will soon be tabled in Parliament for debate and enactment, ,Over the implementation period, the LGDP II will implement the provision of the proposed law, when it comes into force, by strengthening the property tax in three towns where property tax is in a state of disrepair and pilot the extension of lessons learnt to eight regional towns and disseminates the results to other LGs.

Government shall monitor the success of the various initiatives and activities undertaken to improve revenue performance of all higher LGs. This will be done by finalising and adjusting the Local Government Financial Information Analysis System (LGFIAS) - a LG revenue and expenditure monitoring system; piloting of redesigned data collection forms: and the preparation of appropriate training mhterials, training of data collectors and supervisors for all 74 Higher Local Governments (HLGs), and collection and verification of budgets and accounts supplied by visiting every HLG. Through proper monitoring weak LGs can be identified and assisted through the Best Practice Help Desk which shall be established within the MoLG:

v)

52.

- Monitoring of LGs Revenue

Audit of Lower Local Governments (LLGs) Accounts

53. The LGDP II will provide funds for audits of the irccounts of all the LC Ills for the first two years of the program as a stopgap measure. This is a continuation of the work being done under LGDPI, For a sustainable solution, the Office of the Auditor (OAG) will develop a suitable strategy as to how the office will handle the audits of LLGs accounts over the medium and long term.

Implementation and Co-ordination mechanism

54. The Programme will be executed through the structures of the Government of Uganda. The institutional set up of the Programme will be closely linked and aligned to that under the FDS and Public Expenditure Management Committee (PEMCOM). Furthermore, close linkages will be established between the different Committees under the FDS and LGDP I1 namely the Policy Steering Committee (PSC) - concerned with policy issues, the Project Technical Committee (PTC) - concerned with technical implementation issues, and the MoLG/PCU as the overall executing /co- ordinating agency. As a measure to minimise duplication, the Programme co-ordination will keep track of the interventions under the newly established LGs Budget Committee with respect to the LDG, and the LGs

15

Revenue Enhancement Committee with respect to the support to LGs revenue enhancement activities.

Roles and Responsibilities of Participating Institutions

55. Consistent with the Constitution and the Local Governments Act, 1997, the participating central government institutions will maintain their roles in as far as mentoring local governments, monitoring and evaluation of LGs performances to ensure compliance with national policies, regulations, standards, procedures as well as adherence to guidelines. The specific institutional responsibilities are:

Roles and Responsibilities of MoLG

56, - The MoLG will be the executing Ministry for LGDP-I1 and the institution responsible for implementing activities related to support to overall decentralisation process and LGs revenue enhancement. MoLG will also be responsible for effecting (through MoFPED) and publishing the transfers to LGs to ensure transparency and accountability. The MoLG will also, where necessary, offer training and technical advice, do compliance verification, and mentor to enhance and improve on LGs performances. Areas which require compliance supervision of LGs by MoLG are in tenderingkontracting; recruitment; schemes of service; design specifications; statutory requirements (such as final accounts, balanced budget, development plans); sharing of revenue between LGs and preparation of quarterly reports.

Roles and Responsibilities of Ministry of Finance, Planning and Economic Development (MoFPED)

57. The MoFPED’s mandate is to manage and control public finances in a prudent and sustainable manner and ensure efficiency and effectiveness of all public spending. In regard to LGDP 11, MoFPED responsibilities will focus on enabling the transfer of the grant funds in a timely and expeditious manner to LGs based on the advice of the MoLG/PCU. The Permanent Secretary/ Secretary to the Treasury (PS/ST), who is a member of the Programme Steering Committee, will play a crucial co-ordinating role with MoLG in ensuring the linkage and synergy between the implementation of the Fiscal Decentralisation Strategy (FDS); the Integrated Financial Management Services (IFMS) under the EFMP 11; and LGDP II.

Roles and Responsibilities of Ministry of Public Service (MoPS)

58. The main roles arid responsibilities of MoPS in regard to LGDP-I1 is to ensure that LGs have a clear understanding of the proposed minimum staffing structures and issues concerning the administrative capacity in LGs as outlined in the final report on restructuring of LGs. The MoPS will also be required to co-ordinate closely with the proposed Capacity Building Unit in MoLG in regard to issues related to human resource development in LGs.

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., ...- . . , -_ - ...

Roles and Responsibilities of Line Ministries

59. For an effective decentralisation process, it is imperative that cross sector issues are identified comprehensively and resolved. The involvement of the various line Ministries with sectoral mandates (especially Health, Education, Roads and Water) in LGDP-II is therefore crucial to minimise areas of duplication which negatively impact on programme implementation at LGs level. Under LGDP II, provision has been made for the establishment of a forum and a process where stakeholders will discuss sectoral issues in the realm of decentralisation. This decentralisation forum will establish critical linkages with the various sector reviews. This forum will therefore play a major role in the development of the Strategic Decentralisation Framework. Lastly, line Ministries are expected to co- ordinate, integrate and provide the necessary interface between their

. respective activities related to Monitoring and Evaluation of both at the centre and LGs level.

Roles and Responsibilities of LGFC

60. The LGFC will play an important role in the Programme, especially as a chair of the LGs Budget Committee LGBC) and the LGs Revenue Enhancement Committee (LGREC), which have close links to the LDG and the LGs revenue enhancement activities under LGDP II. All tax enhancement activities under LGDP II will be ,closely co-ordinated with other ongoing activities under programmes such as the DDP-II. The LGFC will be a member of the Programme Technical Committee (PTC) under LGDP II.

Programme Financing and Design Issues

61.

62.

63.

In order to encourage co-ordination, LGDP II shall be a multi-donor-funded programme. It is Governments policy to encourage donors to move away from individual project financing to a general budget support. The LGDP II will provide a facility to allow a general budget support through the creation of a Decentralisation budget support as major component of the PRSC Policy matrix. This will provide an interface where donors would be expected to provide their support to LGs under the Government's general budget support.

Government recognises that there are a number of constraints to the implementation of the decentralisation policy, fiscal decentralisation, and building the capacities of LGs for improved service delivery. The LGDPII and the recently adopted FDS therefore are conceived as a bridge operation for broader support to Government's decentralisation policy.

The design of the LGDP-II is based on eight basic principles; that is LGDP II will: (a) Support the Government's decentralisation policy and co-ordination

of various initiatives, including supporting the FDS implementation,

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, . . . ,. . .... . . -. - .. . . , . . - . , , ,

64.

ensure that investments are financially viable and that the recurrent costs are adequately addressed in the planning, budgeting and budget execution procedures;

provide enhanced discretionary power for LGs to plan, budget and allocate resources according to local priorities with incentives to address national targets, and strong downwards and up-wards accountability ;

build incentives for LGs to improve administrative performance, ensure sustainable development in own revenue sources and address the key basic service delivery areas;

ensure ownership and participation and involvement of all levels of LGs,

improve LGs administrative capacity by a demand-driven approach, combined with improved overall national co-ordination and Quality Assurance (QA);

provide support to more future viable LGs,by focusing on supporting own revenue sources (legal framework, administration and learning); and finally

improve on the relationship between central and LGs by supporting the MoLG, which is directly in charge of decentralisation.

LGDP-II is therefore carefully designed to complement and support other ongoing initiatives, especially the FDS, the DflD Decentralisation Support Programme and direct District support programmes by bilateral donors to specific districts (Danida, USAID, Ireland, Austria, Belgium etc.). The design of LGDP II has also taken into consideration the existence of parallel programmes, which most have agreed to adjust to the LGDP-II framework. Such programmes include the support to MoLG (DflD's DSP) and the SDU by USAID.

Conclusion

65. 1 would wish to take this opportunity to reiterate Government's commitment to the continued development and implementation of the decentralisation policy, fiscal decentralisation and the building of LGs capacities for efficient, effective and improved service delivery to the people of Uganda. The Government is commitment to streamlining the decentralisation of LGs development budget with special focus on shifting resources from projectlprogramme support to decentralised budget support. The LGDPll is expected to work out the operational modalities attached to this policy change. This policy shift and commitment, would not only ensure sustainability and consistency within the national Mid Term Expenditure Framework (MTEF) but will also allow a regular and systematic review of decentralisation and LGs as a sector.

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66. On behalf of the Government of the Republic of Uganda, I wish to thank IDA and the Donor Decentralisation Sub-group in Uganda for the assistance already provided through the first Local Government Development Programme (LGDP I), the financial support for the technical studies for the formulation of LGDP II, and the support provided during the design of the programme. 1 trust that this request for additional assistance through the proposed LGDP I\ will receive your favourable consideration and support.

Yours sincerely,

MINISTER OF

c.c: ,, , ,

The Hon. Minister of Local Government, Ministry of Local Government. The Permanent Secretary, Ministry of Local Government. The Permanent Secretary/Secretary to the Treasury.

Additional Annex 12 Monitoring and Evaluation - Supervision Arrangements UGANDA Second Local Government Development Project

Performance monitoring i s the unique feature in the design o f LGDP. Under LGDP I1 performance monitoring processes and tools will be strengthened to take into account new policy and Project direction. Performance monitoring will be done through a multi-pronged approach to suit the variety o f programme components:

(i) The annual Local Government Assessment (LGA) for minimum governance criteria and performance measures which i s a bridge process to a more comprehensive compliance inspection. The LGA provides the basis for a Local Government Annual Financial Assessment. The Financial Assessment Report acts as a trigger for annual releases. The quality o f the LGA will be verified through an independent assessment o f the LGA process.

(ii) Thematic reviews to determine performance o f key issue areas;

(iii) Regular monitoring and evaluation through routine checks and on-spot monitoring using Local Government Information, Communication System (LOGICS) developed under the LGDP I M&E and Inspection o f Local Governments;

(iv) Quarterly Project Reviews that build on the existing Project Technical Committee meetings;

(v) Periodic (quarterly and annual) monitoring o f the Key Performance indicators (KPIs);

(vi) Monitoring o f revenue enhancement activities and LGs co-financing efforts using the Local Government Financial Analysis and Information System (LGFAIS) and the co-financing monitoring charts (CMC) introduced under LGDP I respectively;

(vii) Output/Impact assessment and technical audits;

(viii)Quarterly programme reviews; and

(ix) Midterm reviews.

The assessment o f Minimum Conditions and Performance Measures wil l continue to be a central pillar o f the LGDP I1 Monitoring and Evaluation mechanism. The objectives o f the Local Government Assessment are to: (i) verify compliance o f the Local Governments to the provisions o f the laws and national guidelines especially the Local Government Act 1997, Finance and Accounting Regulations 1998 and Tendering and Procurement Rules and Regulations 2000; (ii) determine the LGs that have the capacity to manage discretionary development funds and therefore eligible to access the Local Development Grant (LDG) under LGDP II; (iii) provide incentives/disincentives for LG performance through rewarding good and sanctioning poor performance by Local Governments; and (iv) assist the Local Governments to identify functional capacity gaps and needs. The assessment i s a major input in the development o f an appropriate capacity building plan.

The assessment o f Minimum Conditions and Performance Measures will be done in two phases: first, the internal assessment by the District/Municipality o f their Sub-counties/Division and Town Councils to identify those, which have met the Minimum Conditions and Performance Measures and

- 9s -

those, which have not. The Internal Assessment w i l l be conducted during June-July, at least one month before the national assessment. Second, the National Assessment Team (NAT) will assess the Districts and Municipalities during July - August o f every year. A 40 percent sample o f Sub-countiesIDivisions and Town Councils will be assessed to validate the findings o f the internal District/Municipal assessment.

To guide the assessment process, the Assessment Manual for Local Governments detailing the assessment process, procedures, information sources, and checklists has been upgraded to capture new directions such as revenue generation and capacity building. Reporting and feedback from the assessment will be emphasized both at the Local Government and national levels. The internal assessment team w i l l prepare a report on the assessment using an agreed format. The use o f a standardized format will help determine qualification and allow comparison o f the internal and national assessment results. The report w i l l be a critical monitoring tool and reference for the Project at that level.

The National Assessment team will produce 2 reports, a synthesis report capturing key processes, finding and recommendations and a Local Government report detailing the performance under the respective indicators. The objectivity and credibility o f the assessment process will be determined through an external quality control and vetting mechanism. The findings o f the national assessment w i l l define LG performance; help identify good practice and lessons, which w i l l inform subsequent M o L G support.

The Minimum Conditions and Performance Measures are derived from the GoU laws and guidelines, including among others, The Local Governments Act 1997 (and Amendments 2000), Finance and Accounting Regulations 1998, Local Government Tendering and Procurement Regulations 2000, and the National Gender Policy 1997. Therefore, the assessment under LGDP I1 i s an interim sub-set o f the M o L G routine compliance inspection and monitoring activities.

Thematic reviews to determine performance of key issue areas: The annual Monitoring and Evaluation reviews will progressively examine thematic issues and provide an in-depth analysis o f the performance o f key indicators. Under LGDP 1, thematic reviews were instrumental in flagging key operational and policy concerns. This review, which i s usually carried out mid each FY, shall continue.

Regular monitoring and evaluation through routine checks and on-spot monitoring: The MoLG i s in the process o f implementing the Local Government Information, Communication System (LOGICS). The system will provide a one-stop centre for multi-sectoral Local Government monitoring and evaluation instruments and inspection reports.

Quarterly Project Reviews: The quarterly rotational Project Technical Committee (PTC) meetings w i l l provide the much-needed project reviews and short intervals. The PTCs will continue to be rotational on a regional basis and have an in-built field-monitoring component, which offers on spot assessment on work in progress. The involvement o f Civ i l Society Organisations (CSOs) in the PTCs has proven to be o f added value to the entire project management process.

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Revenue Monitoring and Co-Financing: The monitoring o f revenue enhancement activities and co-financing wil l be done through the LGFAIS. The CMCs introduced under LGDP I wil l continue to be used to periodically monitor the Local Government co-financing efforts and status.

August-September

October

NovembedDecember

January-June

Local Government Annual Financial Assessment: The Local Government Annual Financial Assessment done in conjunction with the annual National Assessment w i l l provide a comprehensive analysis o f financial and procurement prudence in the Local Governments. The Financial Assessment Report will be a trigger for 2nd and 3rd Year releases.

0 National AssessmentfReporting 0 LG commence planning and budgeting (BFP) process 0 Finalisation o f National Assessment Reports

LG Finalise Final Accounts 0 MoLG/MoFPED issue Indicative Planning Figures to LGs

LG submit BFPs to MoFPED 0 Local Governments finalise and approve Three Year

Development and Capacity Building plans. 0 PCU Finalises Annual Procurement Plan (in Mav)

OutpuUImpact Assessment: Each year the PCU will undertake an output/impact assessment to determine investment levels and impact. MoLG/PCU will jointly conduct the assessment with the Local Governments using existing instruments (forms). The output and impact reports will be generated progressively.

Quarterly Programme Reviews: Quarterly Project Reviews shall be done through the Financial Management Report (FMR), which comprises Financial, Procurement and Physical progress reports. The quarterly FMRs shall be used as triggers for quarterly disbursements.

The Mid Term Review: The mid-term review to be conducted 18 months after Project take o f f w i l l examine progress and performance and will be informed among others by a trachng study and other sub-processes.

The Annual Planning Cycle

0 M o L G convenes Annual Decentralisation Forum 0 Local Governments c a m out Internal Assessment 1

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MAP SECTION