Ministry of Capacity Building Address: P.O. Box 1082 Addis Ababa, Ethiopia Contact Person: Ato Tefera Waluwa Tel: Fax:

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Ethiopia-Capacity Building for Decentralized Service Delivery Africa Regional Office Civil Service Reform; Decentralization; Urban Management ETPE50938 GOVERNMENT OF ETHIOPIA Ministry of Capacity Building Address: P.O. Box 1082 Addis Ababa, Ethiopia Contact Person: Ato Tefera Waluwa Tel: Fax: Ministry of Finance Address: P.O. Box 1905 Addis Ababa, Ethiopia Contact Person: Tel: Fax: Ministry of Federal Affairs Address: P.O. Box 5608 Addis Ababa, Ethiopia Contact Person: Tel: Fax: mofa@telecom.net.et Date PID Prepared April 18, 2002 Auth Appr/Negs Date March 20, 2002 Bank Approval Date June 18, 2002 F Report No. PID Country and Sector Background 2.1 Ethiopia's public sector reform and capacity building agenda, 1994-PresentDuring the 1990s, the Ethiopian state underwent a period of unprecedented institutional change and restructuring, with potentially far-reaching implications for the ways in the Government can help promote poverty reduction and growth. Most notably, the adoption of the 1994 Constitution resulted in the creation of a federal state system, centered around ethnically-based regions, within which the woreda constitutes the basic unit of decentralized, democratic government. According to the Constitution, regional authorities not only enjoy vast powers in various aspects of public management (especially, fiscal management), but also shoulder significant new responsibilities in terms of service delivery and

2 governance. Even as it established this radically new political and state system, the Government was cognizant of the need for nascent regional and local institutions to be adequately equipped with the necessary institutional, organization, and human resource endowments to fulfill their new mandates. This section discusses Ethiopia's emerging public sector reform and capacity building agenda including the evolution and efficacy of the Government strategy since 1994.First generation capacity building focused on core technocratic systems: In the mid-1990s, the regionalization process took place within a public sector context widely acknowledged as being institutionally weak and capacity-poor. A range of constraints in core public management systems were identified at the federal and regional levels including a weak legislative framework to guide civil service management; the absence of a medium-term planning and budgeting framework; ineffective control systems on financial and personnel management; inadequate wage incentives and inappropriate grading systems; poor capacity for strategic and cabinet-level decision-making; and insufficient focus on modern managerial approaches to service delivery. In recognition of these myriad problems, the Government embarked on a comprehensive--and admittedly complex--civil Service Reform Program (CSRP) in 1996.Indicative of Ethiopia's "first generation" capacity building efforts, the CSRP sought to build a fair, transparent, efficient, effective, and ethical civil service primarily by focusing on strengthening core technocratic systems within the public sector. The Program was built on five pillars: (i) Expenditure Control and Management, (ii) Human Resource Management, (iii) Service Delivery and Quality of Service, (iv) Top Management Systems, and (v) Ethics. Successful reforms (for example, of pay and personnel systems, or government accounting) at the federal level were intended to provide a template or prototype for regional authorities. Second generation efforts aim to deepen democratic decentralization: As the Government attempted to implement the CSRP at the federal level, it became apparent that Ethiopia's historic governance challenge was more complicated that previously envisaged. The country was seeking to embed a radically new brand of ethnically-based federalism across a vast, diverse society, while simultaneously delivering a broader menu of basic services to a predominantly rural populace, historically disempowered under successive monarchical and dirigiste governments.recent diagnostic work suggests that the regional governments have responded to this challenge largely by using existing systems of administrative hierarchy to undertake development planning, allocate public resources, and implement service delivery programs. As a result, local governments, and specifically woredas, have generally emerged as deconcentrated units in program implementation rather genuine, democratically elected executives in their own right. In addition to generating various operational efficiencies, this form of administrative deconcentration has hindered the development of democratic and accountable local governments, capable of delivering services in a demand-responsive and sustainable manner. In addition, opportunities for involving communities, particularly women, more systematically in all aspects of service delivery (for example, parental management of schools) have been under-exploited.in ongoing discussions with the Bank and other donors, the Government has acknowledged the importance of strengthening woreda and municipal governments by rationalizing administrative structures in regional bureaus and zonal sections; enabling local governments to take allocative and operational decisions in a financially sustainable manner; and empowering local communities to hold woreda and municipal authorities accountable for - 2 -

3 service delivery. Such efforts to generate bottom-up pressures from and skill in local governments constitute the largely unfinished agenda of "second generation" capacity building, which is critical to deepening democratic decentralization.public sector capacity building requires a strategic framework: In 2001, the Government translated its Capacity Building Strategy and Program Framework into a comprehensive National Capacity Building Program (NCBP) for improving institutional and human capacity across 14 sectors (for example, civil service reform, justice reform, cooperative, private sector, textiles and garment, banking sector, urban development and higher education). In responding to the Government's request of funding for the NCBP, the Bank has suggested that capacity building proposals for civil service reform, urban management, and district-level decentralization could be usefully grouped together as part of a coordinated effort to improve public sector capacity. It has also noted that, in the public sector, the likely impact of capacity building efforts is maximized when guided by a strategic framework for structural and institutional reform. Most recently, the Government and the Bank have discussed options for more systematically linking the largely unfinished agenda of "first generation" technocratic reforms to "second generation" efforts to deepen democratic decentralization (see below).2.2 Institutional development impact and lessons learnedthe results of first generation efforts, comprised primarily of the CSRP and its various sub-components, were mixed. The Program did support the development of new legislation (for example, a financial management proclamation, a civil service law, a code of ethics, and a service delivery policy) as well as procedures and manuals for budgeting, procurement, and some aspects of personnel management. Training in aspects of budget management such as accounting, procurement, PIP preparation also progressed. Diagnostic work in these areas also continued.while commendable, these initiatives have had only modest impact in relieving the institutional and capacity constraints within the Ethiopian civil service. In addition, there is little evidence of sustained improvement in output performance at the federal or regional levels. Rather, core functions such as medium-term planning, accounting and auditing, personnel management remain weak. Attempts to develop an affordable, medium-term public sector pay policy were delayed, and civil servants--particularly at the lower levels--still receive extremely low salaries. Critical to performance improvement, the planned role restructuring across line agencies were not implemented in part because the necessary reviews of strategic role, legislative mandates, organizational structures, and staffing requirements were compartmentalized into different components of the CSRP. These were neither integrated into a single process change model nor implemented by federal line agencies.admittedly, the limited impact of the CSRP was due in part to the implementation delay experienced during the war with the Eritrea and continual demands on the time of the senior GOE officials. However, several reviews of the Program have also identified lessons related to design and management that can inform "second generation" reform efforts. Four lessons, in particular, are relevant to future attempts by the GOE and its development partners to improve frontline, service delivery performance in priority sectors, critical to poverty reduction.first, the design and sequencing of CSRP activities were heavily focused on the federal level of government. First generation reforms were intended to prototype technocratic reforms at the federal level for later adoption by the regions. However, implementation lags suggest that - 3 -

4 much-needed reforms at the regional level will be delayed even further. The opportunity costs in terms of foregone improvements in institutional and service delivery performance at the regional level are considerable. There is therefore need to identify alternative modalities for supporting certain institutional reforms and capacity building activities that can produce short-term results, even as the prototyping of core technocratic reforms in federal government proceeds.second, the strengthening of core budgeting and administrative systems, as supported under the CSRP, did not automatically lead to improvements in frontline performance. For instance, the Service Delivery Component of the Program, which helped develop a policy paper on good management and service delivery processes, was not adequately linked to the role restructuring, pay, and budgeting reforms that are necessary to produce tangible improvements in output performance. Nor was it clear how the policy would benefit sub-national government, where the primary constraints on service delivery performance (for example, in infrastructure, health, and education) resulted from incorporating woredas as deconcentrated units of regional bureaus. Since the basic units of local government--woredas and municipalities--bear the ultimate responsibility for service delivery, the success of "top-down" technocratic reforms in Ethiopia will likely require stronger links to "bottom-up" efforts to empower and enable local authorities.third, ongoing work by the Ministry of Works and Urban Development (MWUD) to strengthen local governments have revealed the potential across regions for more concerted "bottom-up" efforts to restructure and empower municipalities and woredas. Specifically, MWUD has helped certain regions in their efforts to reform the legal and accountability framework within which municipalities operate, and its work has highlighted the need for restructuring of municipal finances and streamlining of institutional arrangements that affect service delivery operations. As the GOE moves to correct the "top-down" bias of first generation reforms, local governments in rural and urban areas are poised to gain from far-reaching restructuring and empowerment activities, and in the process, provide demand-side pressures on regions to focus more deliberately on frontline performance.fourth and finally, the comprehensive scope of the CSRP and the NCBP seek to address capacity building programs in a holistic manner. However, the CSRP experience suggests that large scale, projectized approaches to public sector capacity building can tax the country's limited implementation capacity. In addition, mutually-reinforcing activities that should have been implemented in parallel (for example, role restructuring and job re-grading) often followed different implementation plans. The experience suggests that the design of public sector capacity building efforts should follow a clear notion of the critical path for reform, as well as a sequencing strategy that is fitted to the existing constraints on implementation capacity.these lessons have informed the key issues to be addressed in a proposed program of Bank support for the GOE's public sector capacity building efforts. The strategic choices that shaped the design of the proposed package of lending and AAA activities (including the CBDSD Project)--to be developed over the FY02-03 period--are discussed in the following section. 2. Objectives The proposed Capacity Building for Decentralized Service Delivery (CBDSD) Project aims to enhance decentralized service delivery performance by initiating long-term public sector capacity building at the federal, regional, and local levels. Building public sector capacity through - 4 -

5 institutional reforms, systems development, and training would promote effective policy formulation and implementation, particularly in key sectors such as infrastructure, health, and education.the proposed project, envisaged as a first phase of long-term Bank lending and non-lending support, seeks to enhance service delivery performance through a coordinated program of: (i) federal civil service reforms, (ii) regional capacity building, and (iii) local government restructuring and empowerment. Over the life of the proposed project, key reform and capacity building activities will be piloted in selected federal, regional and local government entities. 3. Rationale for Bank's Involvement The Bank will add value to the design of the CBDSD Project by leveraging its international experience with public sector capacity building, and drawing on existing and planned AAA on civil service reform, decentralization, service delivery processes and the status of local governments in Ethiopia. Specifically, the Bank's contribution to the knowledge on public sector and governance institutions in Ethiopia includes its 1999 regionalization study, a 2000 review of the CSRP, the 2000 PER, the 2001 rapid assessment of municipal decentralization, and the 2001 woreda study with related background analyses. Over the next twelve months, the Bank aims to carry out an addition review of regional public management systems and their impact on prospects for democratic decentralization and service delivery performance. In addition, the Bank's contribution to the formulation and design of the CBDSD project is based on lessons from its past involvement with public sector reform issues in Ethiopia and projects currently under implementation including the Ethiopia Social Rehabilitation and Development Fund (ESRDF) and the Emergency Recovery Program.The Bank team has also assisted GOE in preparing a proposal to the Italian Government for creation of a US$ 3 million trust fund which is likely to be executed by the Bank on behalf of the Ethiopian government. Finally, project funds are meant to fill a "financing gap" - although the project currently provides for full financing for all components, the corresponding IDA funds could be cancelled or reallocated if additional donor grant support is obtained during project preparation and/or implementation. 4. Description The proposed CBDSD project is to be designed as the first leg of IDA's integrated response to the client's proposals for assistance in carrying out a long term strategy for public sector capacity building at the federal, regional, and local levels of government. Specifically, the proposed project will support "top-down" technocratic reforms of budgetary and personnel management systems as well as role restructuring at the federal level in preparation for deeper efforts at the regional level. In addition, it will finance "bottom-up" efforts to enable and empower local governments to more effectively exercise autonomy and deliver services in a sustainable manner. It is envisaged that overall CBDSD objective will be achieved through the following three components:1. Reforming federal civil service systems2. Building regional capacity3. Restructuring and empowering local governments.prospects and modalities for continued IDA involvement in leveraging these top-down and bottom-up efforts into a more substantial Regional Public Sector Performance Improvement Program, to be prepared over FY03, will be explored further in the course of the ongoing GOE-Bank dialogue. -5-

6 1. Reforming Federal CS Systems (i) Performance Improvement Program (ii) Human Resource Management (iii) Expenditure Management and Control (iv) Interim IT Support for Civil Service Management 2. Building Regional Capacity 3. Restructuring and Empowering Local Governments (i) Regional policy & analysis (ii) Regional TA for deepening decentralization (2-3 regions) (iii) Local government restructuring & capacity building (4-9 pilots) (iv) Pilot rehabilitation investments 5. Financing Total ( US$m) BORROWER $2.00 IBRD IDA $24.00 Total Project Cost $ Implementation It is envisaged that the primary Project Unit for CBDSD be situated in MEDAC to support preparation and implementation. Individual component coordinators for the CBDSD Project will involve technical counterparts currently engaged in the GOE-Bank dialogue and CSRP implementation--namely, project units in the PMO, FCSC, Ministry of Finance, and Ministry of Works and Urban Development. Counterparts and implementation arrangements will be discussed in detail during the next preparation mission and finalized by pre-appraisal. 7. Sustainability The proposed CBDSD will utilize existing project management structures established under the Government's National Capacity Building Program during implementation. It is envisaged that this approach will channel the benefits of Bank assistance--including process change, institutional change, learning, and capacity building--through existing GOE processes and procedures. Moreover, the approach will limit problems of mainstreaming that typically arise near the close of investment projects.more important, CBDSD represents the first leg of IDA support for public sector capacity building. Project benefits and lessons learned are expected to directly inform the design of a more substantial Regional Public Sector Performance Improvement Program, which would inter alia commit the Bank to a longer term program of capacity building support in Ethiopia.Finally, component 2 and 3 would require that beneficiaries make prior commitments to sustained institutional reform and organizational change (for example, by meeting eligibility criteria related to financial or institutional performance or through providing matching funds) in order to maximize the likely impact of capacity building support from the Bank. 8. Lessons learned from past operations in the country/sector The following lessons from the experience with public sector reform and efforts to strengthen local governments in developed and developing - 6 -

7 countries have been identified and incorporated in project design:lessons from the Ethiopian experience:systemic reforms in Ethiopia need to be tailored to the requirements of its federal state system if they are to produce desirable improvements in institutional and service delivery performance within regions.when projectized, ambitious reform programs such as the CSRP can become overly complex and difficult to implement given the limited institutional capacity at the federal and regional levels. Reform programs should be based on a clear notion of key priorities and feasible approach to sequencing.local governments--woredas and municipalities--are capable of exercising greater allocative authority with risks of leakage or inefficiency being substantially lower than those resulting from the existing system of administrative hierarchy within regions.ethiopia's existing system of administrative deconcentration does not adequately exploit the participative capacities of local communities in planning, co-management of facilities, and accountability. If empowered to be more systematically involved in service delivery, communities could improve program implementation, deepen democratic decentralization, and enhance prospects for poverty reduction.general lessons:government ownership and commitment is key to institutional reforms. Public sector training should be conducted on an agency-wide, demand-driven, and cost-recovery basis. Historically, entrepreneurial individuals in the public sector in developing countries have been able to seek out training opportunities. The binding capacity constraint on frontline performance, however, is training that is in line with institutional demands or agency-wide and objectives. In addition, various instruments such as matching grant facilities have been developed to ensure that training is undertaken with some element of cost-recovery.implementation targets should be realistic. Intergovernmental "rules of the game" need to be clear, well understood and agreed by all if they are to be effective.financing should follow function. In the process of decentralization, central governments often assign responsibilities to local governments without assigning the resources required to accomplish the task. To be effective, local governments should have access to and control over the financing required to meet their mandates. Sufficient capacity at central, regional and local levels is necessary for effective decentralization and effective delivery of local services. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues Under component 3, selected local governments will have access to a modest fund available for financing rehabilitation of existing infrastructure. The fund aims at enhancing local capacity through a learning-by-doing approach and testing the potential for creating a larger scale infrastructure investment component in a follow-on operation to be prepared in FY03. Local governments benefiting from this component will be identified during project implementation through a selection process based on capacity and demand related criteria. Specific activities eligible for financing will be selected on a demand-driven basis and will reflect priorities identified by the pilot local governments. At this stage, rehabilitation activities to be financed under the investment capitals sub-component cannot be identified and a predetermined rating of environmental risk cannot, therefore, be provided. However, given that the goal of these pilots is to provide - 7 -

8 on-the-job training in local government with very weak capacity, project screening criteria will ensure that these investments are small and that they do not entail any significant environmental and social issues. Nevertheless, operational manuals and other implementation arrangements will be designed to ensure that environmental considerations and mitigation measures are taken into account in the design and implementation of the pilot rehabilitation schemes. This is close to the approach used in similar IDA-financed operations in Uganda (Local Government Development Program), Zimbabwe (Local Government Capital Development Project) and Mozambique (Municipal Development Project and Decentralized planning and Finance Project). 11. Contact Point: Task Manager Sumila Gulyani The World Bank 1818 H Street, NW Washington D.C Telephone: Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending April 26,