KERALA LOCAL GOVERNMENT SERVICE DELIVERY PROJECT (KLGSDP)

PROGRAMME IMPLEMENTATION MANUAL

Local Self Government Department Government of Kerala India 10th February 2011 1

KERALA LOCAL GOVERNMENT AND SERVICE DELIVERY PROJECT (KLGSDP) Program Implementation Manual (PIM) Table of Contents INTRODUCTION 1. Background 2. Summary of Project Development Objectives 3. Key Project Outcomes 4. Summary of Project Description and Components SECTION 1

: FINANCING AGREEMENT 1.1. Financing Agreement for the project

SECTION 2 : DETAILED PROJECT COMPONENT DESCRIPTION Project Components and Sub-components and Costs (for each Component) 2.1. Component 1: Performance Grants to Gram Panchayats and Municipalities 2.1.1. Objective

13-22

23

23

2.1.2. Establishment of Grant 2.1.3. Allocation formula and funding levels

23

2.1.4. Additionality

24

2.1.5. Use of Grant Funds 2.1.6. Budgeting, Planning and Execution

24

2.1.7. Reporting

25 26 26 26 27 27 27 28 28 28

2.1.8. Phasing in of the Grant 2.1.9. Procedures for allocation of Grant under Phase-1

2.2.

8 10 10 10-12

Grant Access Criteria Grant Allocation Announcement Grant Release and Receipt Grant Cycle 2.1.10. Procedures for allocation of Grant under Phase-2 Access Criteria and Performance Criteria Table 2.2 Mandatory Minimum Conditions and Performance Criteria for accessing Grant in Phase 2 Indicative Grant allocation Announcement Grant Release and Receipt Grant Cycle for Phase 2 2.1.11. Audit Eligibility Criteria for Local Bodies 2.1.12. Disbursement 2.1.13. Sub-project Implementation 2.1.14. Reporting Component 2: Capacity Building For Local Bodies 2.2.1 Objective.

24

25

29 30 30 30 32 33 34 34 2

Sub Components and ActivitiesSystems Improvements 2.2.3 Formal Institutional Training 2.2.4 Mentoring − Subproject Technical Support − LSG Technical Support – KILA − LSG Technical Support - SIRD 2.2.5 Institutional Strengthening of KILA and SIRD 2.2.6 Medium and Long-term Strategic Capacity Development Support Component 3: Enhancing State Monitoring Of The Local Government System − Objective − Sub-components and activities − Database of GPs and Municipalities Information − LSG Service Deliver Survey − Project Evaluations − Decentralization Analysis Cell (DAC) Component 4: Project Management 2.4.1. Objective 2.4.2. Support to Project Management 2.4.3. Financing 2.4.4. Project reporting 2.4.5. Project Information, Education and Communication (i) Overall Project Communication (ii) Citizens Communication (iii) IEC Cell Implementation Arrangements 2.5.1. General 2.5.2. Local Self Government Department 2.5.3. Execution Support Agencies 2.5.4. Project Management Detailed Project Budget 2.6.1. Project Cost by components 2.2.2

2.3.

2.4.

2.5.

2.6.

34 35 36

37 37

38 38 38 38 39 39 40 40 40 40 41

42 42 42 42 43

SECTION 3 : MAJOR LOAN COVENANTS AND TARGET DATES 3.1 Description of Major Loan Covenants & Target Dates

44

SECTION 4 : INSTITUTIONAL AND COORDINATION ARRANGEMENT 4.1. Overall Institutional Arrangements 4.1.1. General 4.1.2. Project Oversight 4.1.3. Project Management 4.1.4. Information Kerala Mission (IKM) 4.1.5. Implementation Support

45 45 45 46 46 3

4.2.

SECTION 5

SECTION 6

SECTION 7

SECTION 8

(i). Kerala Institute of Local Administration (KILA) (ii). Social Institute for rural Development (SIRD) (iii). Gulati Institute of Finance and Taxation (GIFT) Specific Project Management Arrangements 4.2.1. Component 1 4.2.2. Component 2 4.2.3. Component 3

: PROJECT PLANNING AND IMPLEMENTATION 5.1. Project Implementation Period 5.2. Project Implementation Schedule Summary (Schedule showing activity timeline for each component for Phase -1 and Phase-2) : PROCUREMENT ARRANGEMENTS 6.1. Applicable Procedure and Guidelines 6.1.1. General Guidelines 6.1.2. For procurement under Components 2, 3 and 4 6.1.3. Procurement Support to GPs and Municipalities 6.2. Procurement Risk/Mitigation Plan : PROCUREMENT MANUAL 7.1. General 7.1.1. General 7.1.2. Procurement Arrangements for Component 1 7.1.3. Procurement Arrangements for Component 2,3 and 4 7.1.4. Procurement Thresholds for KLGSDP 7.1.5. Procurement Plan and Procurement Arrangements 7.1.6. Selection of Consultants 7.2. Procurement Plan 7.3. Procurement Implementation Arrangements 7.3.1. Procurements by GPs and Municipalities- General 7.3.2. Monitoring and Oversight 7.3.3. Operating Costs :

FINANCIAL MANAGEMENT ARRANGEMENTS 8.1. Financial Management 8.1.1. Financial Assessment 8.1.2. Budget Line Item in GoK Budget and Fund Releases 8.1.3. Fund Flows, Expenditures and Payments: − For Component 1 8.1.4. Fund Flows, Expenditures and Payments: − For Components 2, 3 and 4 8.1.5. Disbursement Arrangements

47 47 48

49 49-62

63 63 63 64

65 66 66 66 67 67 67 67 68 69

70 70 70 72 73 4

8.2. 8.3.

8.4. 8.5. SECTION 9

8.1.6. Eligible Expenditures Internal control Audit Arrangements 8.3.1. Internal Audit Arrangements 8.3.2. Statutory Auditors and External Audit Staffing Allocation of Credit Proceeds

: MONITORING AND REPORTING (Component 3) 9.1. Results Framework 9.2. Consolidated Project Summary Report 9.2.1. Physical Progress Report of GPs and Municipalities 9.2.2. Reporting − Formal Training Report − GPs and Municipalities − External Reporting 9.2.3. PMU to World Bank − Semi Annual Project Progress Report 9.3. Mid-term Review 9.4. Implementation Completion Report

73 74 75 75 76 76

77-83 82 82

82 83 83

SECTION 10 : DESCRIPTIONS OF THE RISKS (INTERNAL AND EXTERNAL AND MITIGATION FRAMEWORK 10.1. Operational Risk Assessment Framework 10.2. Detailed Economic Analysis of the Project

84 87

SECTION 11 : GOVERNANCE AND ACCOUNTABILITY POLICY 11.1. Anti-Corruption Guidelines 11.2. Governance Arrangements 11.3. Governance and Accountability Action Plan (GAAP)

94 99 100

SECTION 12 : ENVIRONMENT AND SOCIAL SAFEGUARDS MANAGEMENT FRAMEWORK (ESMF) 12.1. Introduction 12.2. Need for an ESMF 12.3. Overview of the Environment and Social Assessment Study 12.4. Review of Enactments, Rules and Regulations on Environment 12.5. Summary of the Review 12.6. World Bank’s Environment and Social Safeguards Policies 12.7. Review of Functions of LSGs and the Environment Implications 12.8. Environment and Social Analysis of Development Interventions 12.9. Environment and Social Management Framework

104 105 105 106 108 108 108 109 109 5

Table of Annexures Contents Annexure- I GRANT OPERATIONS MANUAL A. Universe of GPs. B. Block/Performance Grant Size C. Grant Allocation Model

Annexure Page No. 1-24 1 1 2

Allocation formula and funding levels

D. E. F. G. H. I. J.

Use of Performance Grant Negative list of activities that are not funded under the Grant Grant Disbursement Procedures Phase 1 – Basic fiduciary Access Criteria Model Resolution for Participating GPs and Municipalities Performance Assessment Manual Grant Award Allocation Cycle Initial Grant Timelines (Phase1)

3 3 4 5 6 7 8 8

Project Process Timing for Years -1, 2, 3 and 4

K. L.

General Grant Timelines (Phase 2) Table 2 : Project Process Timing Planning and Budgeting Cycle of LSGs in Kerala Steps in the Planning Process 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12.

M. N. O. P.

9 10-13 14

Preparation of Annual Plans Pre-Gram Sabha/Ward Sabha Consultations Conducting Gram Sabhas/Ward Sabhas Development Seminar Reorientation of newly formed LSGs Preparation of Detailed Project Reports (DPRs) Plan Finalization Plan vetting by TAG Approval by DPC Post Approval Steps General Co-ordination Timetable for Finalization of Annual Plans

Procurement System for GPs and Municipalities Accounting System in GPs and Municipalities Audit Arrangements in GPs and Municipalities Reporting Audit Arrangements in GPs and Municipalities

21 22 23 23

Annexure- II : GP ANNUAL PERFORMANCE ASSESSMENT MANUAL 1. Introduction 2. Overview of the Assessment Themes and Criteria Table 3:Mandatory Minimum conditions and Annual Performance Criteria by Key Performance Area 3. The Grant Cycle 4. Overview of the Assessment Process 5. Detailed requirements by Theme Minimum scores required each year Theme 1 : Planning and Budgeting

24-35 24 25 26 27 28 28

6

Contents Theme 2 : Project Execution and Service Delivery Theme 3 : Accounting, Financial Reporting and Audit Theme 4 : Transparency and Accountability 6. The Assessment Report 7. List of GP documents to be consulted during the assessment 8. Retention of supporting evidence collected by the assessment team

Annexure Page No.

34 35 36

Annexure- III : DETAILED COMPONENTWISE ANALYSIS OF BUDGET

37-43

Annexure IV : MOU BETWEEN PMU, LSGD - KILA, SIRD and GIFT

44-52

Annexure- V(A) & (B): TOR FOR INTERNAL & EXTERNAL AUDITORs

53-76

Annexure- VI :

77-86

LIST OF GRAM PANCHAYATS AND MUNICIPALITIES

Annexure- VII : PROCUREMENT PLAN of KLGSDP FOR FIRST 18 MONTHS

87-95

Annexure- VIII : PROCUREMENT MANUAL FOR GOODS AND SERVICE AND CONSOLIDATION OF WORK RULES.

96-120

Annexure- IX : MONITORING & REPORTING FORMATS

121-123

Annexure- X : FORMAT FOR SUBMISSION OF HALF YEARLY REPORT Annexure- XI: FORMAT FOR SUBMISSION OF INTERIM UNAUDITED FINANCIAL MANAGEMENT REPORT (IUFR)

124 125-133

7

INTRODUCTION I.

Background

1.1.

Kerala has a long history of Panchayati Raj (rural local government system). The evolution was by no means uniform across the state since some parts of the State were under princely rule and the rest under the British province of Madras. On July 1949 the Travancore-Cochin State came into being followed by Travancore Cochin Panchayat Act in 1950. Following this, Panchayat Delimitation Committees were formed. Based on their recommendations 542 Panchayats were formed, with their activities confined mostly to public works such as roads and buildings.

1.2.

As recommended by the first Administrative Reforms Committee, the Kerala Panchayat Bill (1958) and the District Council Bill (1959) were placed in the State legislative assembly. But the bills could not be enacted into laws. The Kerala Panchayat Act was finally passed in 1960, incorporating several recommendations of the Balavant Rai Mehta Committee (1957) formed at the national level. Following this, the first Panchayat election was held by the end 1963 and the new Panchayats (922 in number) came into existence on January 1964. However, Kerala could not develop strong local Government systems either in rural or urban areas and instead, the State saw, as in other part of India, the growth of dominant stakeholder departments and parastatals which carved out exclusive turfs in all development sectors increasingly marginalizing the local bodies. A brief attempt at strengthening local governance through powerful District Councils in the early 90s also proved a short lived experiment. However, after the passage of the 73rd and 74th amendment, Kerala has emerged as a pioneer in democratic decentralization of governance in India.

1.3.

Kerala is one of the frontrunners in installing a functional three-tier Panchayati Raj Institutional System (PRIS) for rural local governance in India. The Kerala Panchayat Act provides reasonable space for community participation in decentralized planning and local governance with mandatory and sectoral responsibilities and institutional structures for the local government system in Kerala. Kerala’s democratic decentralization experiment has been unique in its scope, intensity and innovation.

1.4.

The first elections after the 73rd and 74th Constitutional amendments were held in September 1995 and the new local councils came into being on October 2nd, 1995, in 991 Gram Panchayats, 152 Block Panchayats, 14 District Panchayats, 53 municipalities, and 5 municipal corporations1. The Government of Kerala in its State budget presented in 1996, set apart a specific quantum of untied funds to support local plan projects by the local governments. It was decided to allocate at least 30% of the State Plan for the schemes and programs to be formulated and implemented by the elected bodies. The process of decentralization was given further impetus by introducing an innovative experiment called People’s Planning Movement or People’s Campaign for IXth Plan

1

Today in the State there are of 978 Gram Panchayats, 152 Block Panchayats, 14 District Panchayats, 60 Municipalities and 5 Corporations.

8

which was launched on August 17, 1996 to institutionalize decentralization and strengthen Panchayati Raj Institutions. The recommendations of the Committee on Decentralization of Powers (Sen Committee) which had been constituted simultaneously provided the key principles for functional, financial and administrative devolution. 1.5.

Since the launch of the People’s Plan Campaign in 1996, the local governments have been preparing development plans and implementing the projects. They have grown in strength and many of them are now able to come out with innovative development initiatives. In addition, the institutions like the independent State Election Commission, regular State Finance Commissions, and Ombudsman for local governments, Appellate tribunals, Information Kerala Mission for computerization and functioning of Panchayats and District Planning Committees have helped provided continuity, accountability and support to the decentralization initiatives. Through the Kudumbashree Program, women’s self help groups have been organically linked to the local government system and this has paved way for women empowerment and participation of women in local governance.

1.6.

The decentralization process in Kerala has now moved from the campaign phase to institutionalization phase. There is much institutional inertia to overcome operational deficiencies and concrete steps are being made to institutionalize decentralized governance in the State. The initial task of institutional building such as enacting new laws and regulations, redeploying and rechanneling personnel, building up local administrative capacities etc., have been achieved to some extent. However, there are many challenges ahead.

1.7.

First and foremost is the need to establish long term institutionalized systems to improve budgetary, local planning and service delivery by the local bodies. This would ensure linkages in the preparation of comprehensive and integrated district plans and long term plans with the planning and budgeting activities in other tiers of government. These require a robust system (Management Information System) for creating and maintaining a fiscal data base. It also requires procedures for planning, budgeting and accounting which ensure increased accountability of funds and activities taken up by the LSGs. The status of fund flows, monitoring system, avenues for additional resource mobilization and resource requirements of the Gram Panchayats/Municipalities in less developed areas are also to be considered within this framework.

1.8.

There is an increasing need to address the issue of quality of services provided by the institutions transferred to the local governments like the schools, health centers, agricultural offices, veterinary dispensaries, water services and so on. This requires a process of partnership and collaboration between local governments and concerned development departments. There is also the need to build up management mechanisms for administration of these institutions under the local governments. In addition to these, are the challenges towards addressing issues in productive sectors like agriculture, environment and community infrastructure. Maintenance and upkeep of the assets established and related facilities is another challenge faced by the local governments.

9

1.9.

While many efforts have been made to improve the capacities of the local governments including their elected representatives and local functionaries, institutionalization of systems and good practices with modern tools remains a continuous challenge. This has incrementally become difficult due to changeover of elected representatives every five years, the proliferation in the number of subjects the Gram Panchayats/ Municipalities deal with, the number of people to be trained and also the kind of new socio-economic challenges being faced by these LSGs every year.

II.

Summary of Project Development Objectives

2.1.

The Project Development Objective (PDO): The project development objective is to enhance and strengthen the institutional capacity of the local government system in Kerala to deliver services and undertake basic administrative and governance functions more effectively and in a sustainable manner.

2.2.

Project beneficiaries: Direct beneficiaries of the project will be the 978 GPs and 60 Municipalities in the State of Kerala. Investments made by the GPs and Municipalities will indirectly benefit the entire population (29.5m) of the State of Kerala outside the five City Corporation areas.

III.

Key Project Outcomes

Achievement of the PDO will be measured by: (a) 70% GPs and Municipalities will have passed the performance assessments for a well-functioning fiduciary, planning and service delivery systems 2 (total = 1038); (b) A well-established performance-based grant system is increasingly financed by GoK; and (c) The number of direct project beneficiaries of which a certain percentage are female.

IV.

Summary of Project Description and Components

4.1

The project will focus on Gram Panchayats and Municipalities. The long term vision is that the system introduced through this project will become an integral part of the PRI fiscal framework supported by the state budget.

4.2

The project will have four components with an estimated cost of US$260.0 million, of which IDA will finance 100% of US$200.0 million and US$60.0 million is the GoK counterpart contribution to the Project components. A brief description of the project components is described below, while a detailed description of the components is provided in Section 2

2

The quality of GPs’ fiduciary and planning systems will be measured through the Project’s annual performance assessment system, along with separate third party validation. (See Component 1 description). GPs will be assessed according to specific criteria in areas of: (i) planning and budgeting; (ii) project execution and service delivery; (iii) accounting, reporting and audit; and (iv) transparency and accountability. The full performance assessment will occur in the second year.

10

4.3 Component 1: Block Grants (US$238.6 million - IDA and GoK). This component will phase in an annual, performance-based grant to all 978 GPs and 60 Municipalities in Kerala.3 It will provide GPs and Municipalities with additional discretionary funds for expanded local investment in a manner which incentivizes the strengthening of their institutional capacity (which is supported, on the supply side, under Component 2). The grant will be spent on both the creation and maintenance of capital assets used in service delivery. The overall goal is to improve GP and municipal performance in local governance and public service delivery. In order to provide a realistic and feasible mechanism for incrementally strengthening the institutional capacities of the GPs and Municipalities, the Performance Grant will be introduced in two phases. The administrative and institutional systems necessary for the introduction of a full performance grant will be established over the first two years of the project (Phase 1). During this time all GPs and Municipalities will receive grant funding, the use of which will be subject to basic fiduciary requirements. From year three onwards the performance dimension of the grant, where qualification to receive a grant is based on an annual performance assessment, will be applied (Phase 2). Component 1 intends to introduce the Performance Grant system as an integral part of the Kerala Local Self Government fiscal framework which will continue beyond the life of the project.

4.4 Component 2: Capacity Building (US$11.2 million – IDA) This component will provide capacity building inputs to strengthen and supplement the existing systems and human resource of LSGs to enhance their institutional performance. The focus will be in four core areas:. (i) the development and improvement of administrative systems used by LSGs; (ii) formal training to strengthen the human resource capacities of LSGs using these systems; (iii) mentoring directed at human resource capacity improvement and supplementation; and (iv) strengthening of the overall institutional capacities of the key organizations responsible for delivering LSG training in Kerala. In the longer term, the component will support the formulation of a State-wide capacity building strategy for LSGs. 4.5

3

Component 3: Enhancing State Monitoring of the Local Government System (US$3.4 million - IDA). This component will provide support to strengthen the system of performance monitoring of LSGs in Kerala. This component will comprise four subcomponents:: a) Establishment of Database of LSGs Information; b) LSG Service delivery Survey;

These are the numbers in place following the LSG (Local Self Government) elections in October 2010.

11

c) d)

4.6

Project evaluations, and Establishment of a Decentralization Analysis Cell (DAC) to provide policy advisory functions to GoK and the State Finance Commission (SFC) with independent analysis of the State’s intergovernmental fiscal system, service delivery and institutional issues.

Project Management (US$6.8 million - IDA). This component will provide support to the Project Management Unit (PMU) within the LSGD in overall coordination, implementation, monitoring and evaluation of the project..

12

SECTION 1

FINANCING AGREEMENT

Draft as Negotiated February 10, 2011 CREDIT NUMBER 4872-IN

Financing Agreement (Kerala Local Government and Service Delivery Project)

between

INDIA

and

INTERNATIONAL DEVELOPMENT ASSOCIATION

Dated

, 201_

13

CREDIT NUMBER ________ -___ FINANCING AGREEMENT AGREEMENT dated __________________________, 201_, entered into between INDIA (“Recipient”) and INTERNATIONAL DEVELOPMENT ASSOCIATION (“Association”). The Recipient and the Association hereby agree as follows: ARTICLE I — GENERAL CONDITIONS; DEFINITIONS 1.01.

The General Conditions (as defined in the Appendix to this Agreement) constitute an integral part of this Agreement.

1.02.

Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II — FINANCING

2.01.

The Association agrees to extend to the Recipient, on the terms and conditions set forth or referred to in this Agreement, a credit in an amount equivalent to one hundred twenty eight million one hundred thousand Special Drawing Rights (SDR 128,100,000) (variously, “Credit” and “Financing”) to assist in financing the project described in Schedule 1 to this Agreement (“Project”).

2.02.

The Recipient may withdraw the proceeds of the Financing in accordance with Section IV of Schedule 2 to this Agreement.

2.03.

The Maximum Commitment Charge Rate payable by the Recipient on the Unwithdrawn Financing Balance shall be one-half of one percent (1/2 of 1%) per annum.

2.04.

The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three-fourths of one percent (3/4 of 1%) per annum.

2.05.

The Payment Dates are March 15 and September 15 in each year.

2.06.

The principal amount of the Credit shall be repaid in accordance with the repayment schedule set forth in Schedule 3 to this Agreement.

2.07.

The Payment Currency is Dollars. ARTICLE III — PROJECT

3.01.

The Recipient declares its commitment to the objectives of the Project. To this end, the Recipient shall cause the Project to be carried out by the Project Implementing Entity in accordance with the provisions of Article IV of the General Conditions and the Project Agreement. 14

3.02.

Without limitation upon the provisions of Section 3.01 of this Agreement, and except as the Recipient and the Association shall otherwise agree, the Recipient shall ensure that the Project is carried out in accordance with the provisions of Schedule 2 to this Agreement. ARTICLE IV — TERMINATION

4.01.

The Effectiveness Deadline is the date ninety (90) days after the date of this Agreement. ARTICLE V — REPRESENTATIVE; ADDRESSES

5.01.

The Recipient’s Representative is any of the following: Secretary, Additional Secretary, Joint Secretary, Director, Deputy Secretary or Under Secretary of the Department of Economic Affairs in the Ministry of Finance of the Recipient.

5.02.

The Recipient’s Address is: Department of Economic Affairs Ministry of Finance, Government of India North Block New Delhi 110001 India Facsimile: 91-11-23092039

5.03.

The Association’s Address is: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Facsimile: 1 -202-477-6391

AGREED at ______________, __________, as of the day and year first above written. INDIA By Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By

Authorized Representative 15

SCHEDULE 1 Project Description The objective of the Project is to enhance and strengthen the institutional capacity of the local government system in Kerala to deliver services and undertake basic administrative and governance functions more effectively and in a sustainable manner. The Project consists of the following parts:

Part A: Performance Grants

1.

Provision of annual, performance-based Grants, for the carrying out of Sub-projects, to eligible GPs and Municipalities to improve local governance and service delivery.

Part B: Capacity Building

1.

Strengthening the institutional capacity of local self governments to deliver basic services, through the provision of technical advisory services, equipment, formal orientation and training of local self government officials and representatives.

Part C: Enhancing State Monitoring of the Local Government System 1.

Strengthening of the Project State’s systems of performance monitoring of GPs and Municipalities to enable the Project State to carry out (i) Annual Assessments; (ii) improvement of internal monitoring and reporting systems in respect of GPs and Municipalities; (iii) evaluations of the different activities carried out under the Project; (iv) establishment of a database of basic GP and municipal level information; (v) service delivery survey, evaluations and studies for Project; and (vi) establishment, in GIFT, of a Decentralization Analysis Cell.

2.

Strengthening the capacity of KILA and SIRD through the provision of equipment, technical advisory services and training.

Part D: Project Management 1.

Provision of technical advisory services and logistical assistance to support the management and implementation of the Project, including for the organization of information, education and communications campaigns, reporting, annual audits, mid-term review, and final evaluation of the Project.

16

SCHEDULE 2 Project Execution Section I. A.

Implementation Arrangements

Institutional and Other Arrangements

1. To facilitate the carrying out of the Project, the Recipient shall make the proceeds of the Financing available to the Project State in accordance with the Recipient’s standard arrangements for developmental assistance to the State of India. 2. The Recipient shall protect the interests of the Recipient and the Association to accomplish the purposes of the Financing. 3. The Recipient shall cause the Project State to ensure that Sub-projects, for purposes of which withdrawal of the proceeds of the Credit is sought, shall have been prepared in accordance with the procedures, terms and conditions set forth or referred to in the Project Agreement and in the PIM.

B.

Anti-Corruption

The Recipient shall ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines and those of the GAAP. Section II. A.

Project Monitoring, Reporting and Evaluation

Project Reports

The Recipient shall cause the Project State to monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 4.08 of the General Conditions and on the basis of indicators acceptable to the Association. Each Project Report shall cover the period of one semester, and shall be furnished to the Association not later than forty-five days after the end of the period covered by such report. B.

Financial Management, Financial Reports and Audits

1.

The Recipient shall maintain or cause to be maintained a financial management system in accordance with the provisions of Section 4.09 of the General Conditions.

2.

Without limitation on the provisions of Part A of this Section, the Recipient shall, or shall cause the Project State to prepare and furnish to the Association not later than forty-five (45) days after the end of each semester, Interim Unaudited Financial Reports (IUFRs) for the Project covering the semester, in form and substance satisfactory to the Association.

3.

The Recipient shall have the Project’s Financial Statements audited in accordance with the provisions of Section 4.09(b) of the General Conditions. Each audit of the Project Financial Statements shall cover the period of one financial year of the Recipient, commencing with the fiscal year in which the first withdrawal was made. The audited Project Financial Statements for each such period shall be furnished to the Association not later than six (6) months after the end of such period. 17

Section III. Procurement All goods, works and services required for the Project and to be financed out of the proceeds of the Financing shall be procured in accordance with the provisions of Section III of the Schedule to the Project Agreement.

Section IV.

Withdrawal of the Proceeds of the Financing

A.

General

1.

The Recipient may withdraw the proceeds of the Financing in accordance with the provisions of Article II of the General Conditions, this Section, and such additional instructions as the Association shall specify by notice to the Recipient (including the “World Bank Disbursement Guidelines for Projects” dated May 2006, as revised from time to time by the Association and as made applicable to this Agreement pursuant to such instructions), to finance Eligible Expenditures as set forth in the table in paragraph 2 below.

2.

The following table specifies the categories of Eligible Expenditures that may be financed out of the proceeds of the Financing (“Category”), the allocations of the amounts of the Credit to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category: Category

Amount of the Credit Allocated (expressed in SDR)

(1) Goods, works, consultants’ services, workshops, training, and Incremental Operating Costs under Parts B, C and D of the Project

13,700,000

(2) Performance Grants under Part A of the Project

114,400,000

TOTAL AMOUNT

128,100,000

Percentage of Expenditures to be Financed (inclusive of Taxes) 100%

100% for FY 2011/12; 84% for FY 2012/13; 70% for FY 2013/14; and 60% for FY 2014/15 and thereafter

B.

Withdrawal Conditions; Withdrawal Period

1.

Notwithstanding the provisions of Part A of this Section, no withdrawal shall be made for payments made prior to the date of this Agreement.

2.

The Closing Date is December 31, 2015. 18

SCHEDULE 3 Repayment Schedule

Date Payment Due

Principal Amount of the Credit repayable (expressed as a percentage)*

On each March 15 and September 15: Commencing September 15, 2021 to and including March 15, 2031

1.25% 2.5%

commencing September 15, 2031 to and including March 15, 2046

* The percentages represent the percentage of the principal amount of the Credit to be repaid, except as the Association may otherwise specify pursuant to Section 3.03 (b) of the General Conditions.

19

APPENDIX Section I.

Definitions

1.

“Annual Assessment” means the Project State’s assessments of GPs and Municipalities (as hereinafter defined) to determine their annual eligibility to receive Performance Grants (as hereinafter defined), such assessment to be carried out on the basis of performance conditions and criteria agreed with the Association, including those set out in the PIM (as hereinafter defined).

2.

“Anti-Corruption Guidelines” means the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006 and revised in January 2011.

3.

“Category” means a category set forth in the table in Section IV of Schedule 2 to this Agreement.

4.

“Consultant Guidelines” means the “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published by the Bank in May 2004 and revised in October 2006 and May 2010.

5.

“Displaced Person” means a person who, on account of the execution of the Project, has experienced or would experience direct economic and social impacts caused by: (i) the involuntary taking of land, resulting in (A) relocation or loss of shelter; (B) loss of assets or access to assets; or (C) loss of income sources or means of livelihood, whether or not such person must move to another location; or (ii) the involuntary restriction of access to legally designated parks and protected areas, resulting in adverse impacts on the livelihood of such person; and “Displaced Persons ” means, collectively, all such Displaced Persons.

6.

“Environmental and Social Management Framework” and the acronym “ESMF” mean the Project State’s framework dated November 10, 2010, and incorporated into the PIM (as defined hereinafter), which framework sets out the principles and procedures for carrying out environmental and social assessments, and preparing and implementing environmental and social management plans in respect of the Project, as said Framework may be revised from time to time with prior agreement between the Recipient and the Association.

7.

“Fiscal Year” or the acronym “FY” means the fiscal year of the Recipient, starting April 1 and ending March 31 of the following year.

8.

“General Conditions” means the “International Development Association General Conditions for Credits and Grants”, dated July 31, 2010.

9.

“Governance and Accountability Action Plan” and the acronym “GAAP” mean the Governance and Accountability Action Plan, incorporated in the PIM (as defined hereinafter), which identifies key governance issues and sets forth mitigation measures to address said issues in respect of the carrying out of Project activities, as said plan may be amended from time to time in agreement with the Association.

20

10.

“Gram Panchayat” and the acronym “GP” mean a local government body at the village level, constituted under the Kerala Panchayat Raj Act, 1994, and under the Panchayat Raj Institution system (as hereinafter defined).

11.

“GIFT” means Gulati Institute of Finance and Taxation, an autonomous institution, registered under the Travancove-Cochin Literacy, Scientific and Charitable Societies Act, 1955

12.

“Implementing Agencies” means collectively GIFT, KILA (as hereinafter defined) and SIRD (as hereinafter defined).

13.

“Incremental Operating Costs” means Project-related costs incurred on account of Project management, including salaries of Project staff, costs of staff travel, conveyance and subsistence, office and vehicle rentals, and equipment maintenance contracts.

14.

“KILA” means Kerala Institute of Local Administration, an autonomous institution registered under the Travancove-Cochin Literacy, Scientific and Charitable Societies Act, 1955 .

15.

“LSGD” means the Local Self Government Department of the Government of the Project State.

16.

“MOU” means the Memorandum of Understanding between LGSD and GIFT, KILA and SIRD (as hereinafter defined) respectively, and referred to in Section I A.1 of the Project Agreement.

17.

“Municipality” means a local government body established under the Kerala Municipality Act, 1994, but excluding a Municipal Corporation, as defined in the Act 1994.

18.

“Participating GP” means any GP that has been selected, in accordance with criteria set forth in Section B.I of the Schedule to the Project Agreement, to be eligible to receive a Performance Grant under Part A of the Project.

19.

“Participating Municipality” means any municipality that has been selected, in accordance with criteria set forth in Section B.I of the Schedule to the Project Agreement, to be eligible to receive a Performance Grant under Part A of the Project.

20.

“Panchayat Raj Institution” and the acronym “PRI” mean a Panchayat Raj Institution, as provided for in the Constitution of India.

21.

“Performance Grant” means a grant made or proposed to be made by the Project State, out of the proceeds of the Financing, to a Participating GP or Municipality to finance the costs of goods, works and services incurred under Sub-projects (as hereinafter defined).

22.

“Procurement Guidelines” means the “Guidelines: Procurement under IBRD Loans and IDA Credits” published by the Bank in May 2004 and revised in October, 2006 and May 2010.

21

23.

“Procurement Plan” means the Recipient’s procurement plan for the Project, dated February 10, 2011, and referred to in paragraph 1.16 of the Procurement Guidelines and paragraph 1.24 of the Consultant Guidelines, as the same shall be updated from time to time in accordance with the provisions of said paragraphs.

24.

“Project Implementing Entity” means the State of Kerala.

25.

“PMU” means Project Management Unit, established within LGSD.

26.

“Procurement Manual” means the manual included in the PIM, as Section 7, and which sets forth, inter alia, methods and procedures for the procurement of goods, works and services under Part A of the Project, as said manual may be revised from time to time in agreement with the Association.

27.

“Project Implementation Manual” and the acronym “PIM” mean the implementation manual for the Project, dated February 10, 2011, satisfactory to the Association, containing, inter alia, the operating procedures for the carrying out of the Project, including implementation and institutional arrangements, funds flow, performance indicators, eligibility criteria for the selection of Participating GPs and Municipalities to carry out Sub-projects and a list of expenditures ineligible to be financed under Sub-projects, as such manual may be revised from time to time in agreement with the Association.

28.

“Project State” means the Recipient’s State of Kerala, which is the Project Implementing Entity for purposes of the General Conditions.

29.

“Resolution” means a resolution or any legal instrument of a Participating GP or Participating Municipality setting forth, inter alia, the terms and conditions for: (a) the intended use, and nature of activities and expenditures to be financed with the proceeds of a Performance-Grant; and (b) the reporting and monitoring requirements relating to the use of said Performance Grant.

30.

“SIRD” means State Institute for Rural Development, an autonomous body established and operating under the auspices of the Government of the Project State.

31.

“Sub-project” means an activity whose objective is to create, maintain and/or operate capital assets used in service delivery within the Project State, to be carried out by a GP or a Municipality using the proceeds of a Performance Grant.

32.

“Tribal and Other Vulnerable Group Development Framework” means the Project State’s framework, dated November 10, 2010, incorporated in the ESMF and the PIM, which framework sets out the principles and procedures to address the concerns of tribal populations within the Project State to ensure that they duly receive social and economic benefits that are due to them.

22

SECTION 2 : DETAILED PROJECT COMPONENT DESCRIPTION The project will focus on all the 978 Gram Panchayats and 60 Municipalities in the State and will enable the State to deepen and sustain fiscal decentralization in the State. To support this goal the Project has the following four Components:

Component 1: Block Grants to Gram Panchayats and Municipalities Component 2 : Capacity Building for Local Bodies Component 3 : Enhancing State Monitoring of Local Government Systems Component 4 : Project Management The detail description of each component is as follows:

2.1 Component 1: Performance Grants to Grama Panchayats and Municipalitiesfrom IDA & Government of Kerala (US$ 238.6 million) 2.1.1

Objective. This component will phase in an annual, performance-based grant to all 978 GPs and 60 Municipalities in Kerala.4 The main objective is to provide GPs and Municipalities with additional discretionary funds for expanded local investment for the creation and maintenance of capital assets in a manner which incentivizes the strengthening of their institutional capacity (which is supported under Component 2). The grant will be spent on both the creation and maintenance of capital assets used in service delivery. The overall goal is therefore to improve GP and Municipal performance in local governance and public service delivery.

2.1.2

Establishment of Grant. Component 1 will introduce the performance grant in two phases. The administrative and institutional systems necessary for the introduction of a full performance grant will be established over the first two years of the project (Phase 1). During this time all GPs and Municipalities will receive grant funding, subject to some basic fiduciary requirements. From year three onwards the performance dimension of the grant, where eligibility is based on an annual performance assessment, will be

4 These are the numbers which will be in place following the LSG (Local Self Government) elections in October 2010.

23

applied (Phase 2). The annual key performance areas which will be assessed would include:: (i) planning and budgeting; (ii) project execution and service delivery; (iii) accounting, financial reporting and audit; and (iv) participation, transparency and accountability. Compliance with the ESMF, procurement and financial management requirements will be covered in these areas. 2.1.3

Allocation formula and funding levels. The performance grant will amount to the ` equivalent of $238.6 million over five years from IDA and GoK. The allocation of funds will be based on the prevailing State Finance Commission (SFC) recommended approach: the (currently ad hoc) proportional division between GPs and Municipalities overall; and the (formula-based) horizontal allocations among GPs and Municipalities respectively. Initial estimates of allocations are as follows: Project Year

Year 1 (2011-12)

Year 2 (2012-13)

Year 3 (2013-14)

Year 4 (2014-15)

Total

35.0

61.0

67.6

75.0

238.6

GP

30.5

53.1

58.8

65.3

207.7

4.5

7.9

8.8

9.7

30.9

GP

31,152

54,293

60,168

66,754

212,368

Munic.

75,556

131,683

145,931

161,905

515,075

Total to LSGs ($m)

Munic. Average per LG ($)

Total

Average Per Capita ($)

GP

0.8

1.4

1.6

1.7

5.6

Munic.

1.3

2.2

2.4

2.6

8.4

Source of Funds ($m)

IDA

35.0

51.0

47.6

45.0

178.6

-

10.0

20.0

30.0

60.0

State

The full allocation for any year will be divided, according to the allocation formula, amongst those Gram Panchayats and Municipalities qualifying for the grant using a simple, spreadsheet based, grant allocation model. 2.1.4

Additionality :The Government of Kerala will give the performance grant as a fully additional its own SFC allocation provided annually to LSGs.;

2.1.5

Use of Grant Funds. The performance grant will be utilized for the acquisition of capital assets; capital works; and maintenance and operation of these assets in line with the functional mandates of local bodies. The grant will be fully discretionary within these parameters, subject to a clear negative list which will refer to activities prescribed for environmental and other reasons. Although the grant will amount to less than 10% of a typical GP’s and Municipality’s overall revenue, it will increase the discretionary funding available for capital expenditures significantly by approximately 50% in GPs and 80% for Municipalities on average. It will also significantly increase discretionary funding available for maintenance of capital assets by 60% in GPs and 20% for Municipalities. A 24

detailed Grant Operation Manual is enclosed as Annexure 1 for GPs and Municipalities to refer while utilization of the block grant. 2.1.6

Budgeting, Planning and Execution. Funds will be programmed and projects prepared and executed using existing budgeting, planning, DPR (Detailed Project Report) and implementation procedures at GPs and Municipalities. In addition, an Environmental and Social Management Framework (ESMF) will be introduced to establish simple social safeguards; mitigate adverse environmental effects; and cater for Vulnerable Groups. Procurement by LSGs will be as per an updated new procurement manual for Goods and Services and consolidated rules for Works, subject to a small number of special GPs and conditions which will be outlined in the Grant Operations Manual.5 Municipalities will use their existing financial management systems to budget, manage and account for the use of PG funds. External annual audit of these entities will be undertaken by the LFA (Local Fund Auditor) on a certification basis.

2.1.7

Reporting. Two types of reporting will be introduced in the context of the grant. First, for “upward” accountability, a system of half yearly administrative reporting to the State Government on physical progress and asset creation funded from the PG will be introduced; this will supplement the existing monthly financial reports produced by LSGs, which will include reporting on Performance Grant Funds. Therefore, by the end of April6 and October of each year each participating local body will be required to submit a report to the Local Self Government Department containing the following: •

•

For the first two financial years covered by the project, the reports include physical and financial performance information for the schemes funded by the performance grant only. For the final two financial years covered by the project, the reports will cover physical and financial progress in all schemes implemented in the plan, and capital maintenance works.

Secondly, for “downwards accountability” and to enhance local transparency a simple local annual plan and budget report: Within one month of the DPC approval of the Annual Plan, a GP/Municipality will prepare a report which •

Provides an overview of revenues and plan and non plan budget allocations for the new financial year, and outturns for the previous year. • Summarizes plan activities for the new financial year, and performance in the past financial year. These reports will be distributed widely to the public within wards, at ward sabhas, and be posted in public places. In synchrony with administrative reports, the annual report on the plan distributed to the public will become more sophisticated over time: 5 6

If these are not approved and issued in time a project procurement manual will be necessary. Except in the first year

25

•

For the first two years of the project, the report will provide financial information only. For example the report for the annual plan will provide a simple list of planned and actual expenditure by scheme, and whether each scheme has been completed, or not. • For the final three years of the project, reporting will incorporate information on physical performance as well, drawing from information contained in administrative reports. The Decentralization Analysis Cell (under Component 3) will aggregate the information in these two types of report. 2.1.8

Phasing in of the Grant. As indicated above, the grant will be introduced over two phases. During phase 1 – year 1 to 2 of the project - the performance grant systems will be established and capacity building for GPs and Municipalities will start. Over this time all GPs and Municipalities will receive grant funds subject to certain basic fiduciary and procedural requirements. During phase 2 the local self governments will only receive grant funds on the basis of demonstrated institutional performance as measured through an annual performance assessment and procedural requirements. In order to access the grant in any year all participating local bodies will be required to have passed a resolution with respect to participation in the performance grant programme at its commencement.

2.1.9

Procedures for allocation of grant under Phase 1 are as follows:

•

Grant Access criteria: In order to be allocated the grant during the first two years participating local bodies will be required to meet the below given basic fiduciary requirements. For the first year, the PMU, supported by the necessary technical expertise, will verify whether local governments have met these fiduciary requirements. For the second year, an independent firm will be contracted by PMU to verify that the requirements are met . Table-2.1 Phase 1 - Basic Fiduciary Access Criteria

For access to grant in Year 1 (2011/12) - “Clean” external audit (not adverse or disclaimed) for 2008/09 External audit for 2008/09 does not include observations pertaining to significant financial 7 management weaknesses.

For access to grant in Year 2 (2012/13) −

“Clean” external audit (not adverse or disclaimed) for 2009/10 and 2010/11 − External audit for 2009/10 and 2010/11 does not include observations pertaining to significant financial management weaknesses. − Annual Plan for 2010/11 approved by both the council and DPC and a copy availed to LSGD by end of April.

7

These significant financial management weaknesses will be pre-specified in the Project Implementation Manual. A more detailed discussion of this may be found in the Financial Management and Disbursement section of this Annex.

26

•

Grant Allocation Announcement. Using a simple grant allocation model based on the prevailing SFC allocation formula, the PMU will then calculate the share of the grant allocation for each qualifying local body. A grant allocation announcement will be made alongside the State Budget during February of each year. This will include a list of the local bodies to which the grant has been allocated and the indicative allocation amounts for the performance grant for the forthcoming year.

•

Grant release and receipt. In order to actually receive the grant in both years all LSGs to which the grant has been allocated will need to pass an annual budget for the forthcoming year in the approved format by end March and to submit this budget to the LSGD by end April.

•

Grant Cycle.

For performance Grants disbursed in Year-1 (2011-12) of the Project, the actions under grant cycle will be as follows: (a) An audit for the 2008-09 financial year will be completed for all GPs and Municipalities by 1st January, 2011; (b) The audit opinions reviewed and grant allocation decision made by March 15, 2011; (c) In March 2011, the grant allocation decision will be communicated to Local Bodies for financial year 2011/12 alongside the State Budget. (d) Between January and July of 2011, the Local bodies will prepare their annual plans and budgets for FY 2011-12. (e) By the end of July GPs and Municipalities must have passed resolution agreeing to participate in the grant scheme, including both phase 1 and phase 2. (f) The grant will be disbursed to qualifying local governments in one installment August 2011

For performance grants disbursed in Year-2 (2012-13) of the Project, the actions under the grant cycle will be as follows: (a)

(b)

(c) (d)

An audit for FY2009-10 and 2010-11 will be completed for all GPs and Municipalities by the end of October 2011. Following this the eligibility criteria will be assessed by the end of December 2011. In February 2012, the grant allocation decision will be communicated to Local Bodies for financial year 2012-13 alongside the State Budget using the grant allocation model. Between January and July 2012 local bodies will prepare their budgets and annual plans. The grant will be disbursed to qualifying local governments in a single tranche in April.

27

2.1.10 Procedures for allocation of grant funds under Phase 2 will be as follows: Access criteria & performance measures. In order to access the grant all participating local bodies will be required to a) meet a set of mandatory minimum conditions in full; and b) achieve a certain score against a set of performance criteria. An Annual Performance Assessment will be carried out between September and December each year during which performance against mandatory minimum conditions and performance criteria will be measured. This will be conducted by an independent organization contracted by the PMU. The results of each assessment will be independently validated on a sample basis. The assessment will be phased in, as described below. The table which follows sets out the proposed Mandatory Minimum Conditions and Performance Criteria. A draft of the detailed Assessment Manual that will provide the basis for the annual performance assessment is being produced as part of project preparation and will need to be finalized before the beginning of the 2011/12 financial year. The manual will need to strike an appropriate balance between setting performance targets high enough to leverage meaningful institutional strengthening, and setting them so high that local governments – particularly weaker local governments – find them impossible to achieve and are thus discouraged from participating in the grant program. Table 2.2 :

Mandatory Minimum Conditions and Performance Criteria for accessing Grants in Phase 2

28

Phase 2 – Annual Performance Assessment PERFORMANCE AREA

MANDATORY MINIMUM CONDITIONS

PERFORMANCE CRITERIA

1. Planning & Budgeting

- Annual Plan for preceding year approved by council and DPC and copy submitted to LSGD

N/A

2. Project Execution and Service Delivery

- Minimum of 80% of performance grant funds spent for those LSGs which received the grant in the preceding year.

- Compliance with ESMF safeguards during execution (only for performance grant projects )

- Compliance with the regulatory list from the ESMF in DPR process during preparation and execution (only for performance grant projects) - Physical assets funded from performance grant verified. 3. Accounting, reporting & audit

- “Clean” LFA audit (not adverse or disclaimed) for the year preceding assessment. - Audit report for the year preceding the year of funding, but one, does not include observations pertaining to significant financial management weaknesses as reflected in Sec 2.1.11 of this document.

4. Transparency and accountability

- Preparation and distribution of a public report on the annual budget and plan

- Transparent and appropriate methods of procurement are followed and properly documented. - More than 90% of performance grant funds spent for those LSGs which received grant in the preceding year. - Functional IT infrastructure connected to the internet - Semi-annual reports prepared and submitted to the State Government - Unqualified external audit opinion for the year preceding assessment - Follow up actions taken to address significant financial management weaknesses observed in the audit for the preceding year but one to assessment. - Availability of public reports at the ward level - Vulnerable groups participate in and benefit from planning and execution - Citizen charter developed and displayed

-

Indicative Grant Allocation Announcement. Based on the results of the Annual Performance Assessment, the LSGD will make an indicative grant allocation announcement by the February each financial year, much ahead of the planning and 29

budget approval process of local bodies. The aforesaid grant allocation model will be used to calculate each LSGs share of the Performance Grant for the following financial year. -

Grant release and receipt. In order to actually receive the grant in all years, all LSGs to which the grant has been allocated will need to pass an annual budget for the forthcoming year in the approved format by end March and to submit this budget to the LSGD by end of April.

-

Grant Cycle for Phase 2. The full allocation and disbursement cycle for the performance grant will come into effect during the second year of the project (the Indian financial year 2013-14) and continue thereafter. This cycle will be as follows: i).

ii).

iii). iv).

In August, the annual assessment process will start and be completed by the beginning of December. The audit conducted for the previous financial year will feed into the assessment. The grant allocation decision will be communicated to local bodies alongside the State Budget in of each year (starting in 2013 for the FY 2013-14).). This will include a list of the qualifying local bodies and allocations for the performance grant for the forthcoming year computed using the grant allocation model. Between April and September local bodies will prepare their budgets and annual plans for the following financial year. The grant will be disbursed to qualifying local governments in a single tranche in April

2.1.11 Audit eligibility criteria for local bodies: The office of the Local Fund Audit (LFA) in Kerala is responsible for statutory audit of the LSGIs and this audit is conducted by following the guidelines for certification issued by the C&AG of India. The audit is done is two stages - i) the audit of the Annual Financial Statements (AFS) is conducted to enable the LFA to provide an opinion on the "proper presentation" of the AFS, and ii) this is followed by a detailed compliance and transaction audit in the second stage. At the first stage audit, the auditors issue an Audit Certificate along with observations, if any, and indicating if the financial statements present a "proper position of the entity". The opinion is classified into one of the following four categories (- Unqualified, Qualified, Adverse and Disclaimer. An unqualified opinion is given when the auditor is satisfied in all material respects that(a) The financial statements have been prepared using acceptable accounting basis and policies which have been consistently applied. (b) The statements comply with statutory requirements and relevant regulations(c) The view presented by the financial statements is consistent with the auditor's knowledge of the audited institution. Where the auditor is uncertain or disagrees with one or more particular items in the financial statements that are material but not fundamental to understanding of he accounts a qualified opinion would be given. The opinion in case of uncertainty would

30

be "subject to" i.e., the auditor would qualify opinion that the accounts "properly present" by saying “subject to ............... Where the auditor is unable to form an opinion on the financial statements taken- as a whole due to disagreement which is so fundamental that it undermines the position presented to the extent that an opinion which is qualified in certain respects would not be adequate, an adverse opinion is given. The wording of such an opinion makes clear that the financial statements are not fairly stated, mentioning clearly and concisely all matters of disagreement. Where the auditor is unable to arrive at an opinion because of uncertainty or restrictions on scope of audit that is so fundamental that an opinion, which is qualified in certain aspects. would not be adequate, a disclaimer is given. The wording of the disclaimer opinion makes it clear that an opinion cannot be given, mentioning clearly concisely all matters of uncertainty. A review conducted by the Bank has brought out that some Audit Certificates of some of the local bodies have a "Qualified opinion" ie the audit certificate states that the “financial statements, subject to the comments/ observations, present a proper position of the entity”. The comments/ observations contained therein are the types that could affect the integrity of the financial statements and/or indicate significant weaknesses in financial management/accounting practices, Such entities therefore should have been given an adverse opinion instead of a qualified one. As per the project design, one of the conditions for any LSGI to qualify for project funds is that it has received a "clean" audit certificate (i. e. not Adverse or Disclaimed) for the year preceding the award year. Also, the audit certificate should not be qualified with observations indicating significant financial management weaknesses that could affect the integrity and true and fair view of the financial statements. It has therefore been agreed that at the time of assessment of compliance with basic access criteria/minimum mandatory conditions by the LSGI, the following comments/ observations should not appear in the Audit Certificate or the Audit Report of that LSGI, issued by the LFA, for the year preceding the year of funding, but one (for example, for the funding year 201112, the LFA audit reports of the LSGIs for the year 2008-09 will be examined). If these or any similar comments/ observations are appearing in the audit certificate/ report of the LFA8, such an LSGI will not qualify the basic eligibility criteria/minimum conditions to receive funds under the project for the year in which the LSG is being considered for funding. 1).

(In the auditor's opinion) The Annual Financial Statements do not properly present the picture of income, expenditure and closing balance ( Adverse Opinion )

8

These are generic comments and not a complete listing. Comments conveying a similar meaning (but with different wording) will also be treated as qualifications that affect the integrity of the financial statements and their true and fair view.

31

2).

We (i. e. the Auditor) have not been able to form an opinion as to whether the Annual Financial Statements properly present the picture of income, expenditure and closing balance ( Disclaimer )

3).

The Annual Financial Statements are subject to (qualified opinion with significant /serious observations that could affect the integrity of financial statements or their true and fair view) one or more of the following qualifications: • • • • • •

The closing balance/s as taken in the Annual Financial Statements do not match with the closing balance/s as per the Cashbook The figures taken in the Annual Financial Statements do not match with the relevant figures as per the Receipt Register or the Payments Register Opening balance in the Cashbook does not match with the closing balance in the Cashbook of the previous year Cashbook or the Receipt Register or the Payments Register is incomplete Cashbook or the Receipt Register or the Payments Register was not produced for audit Any other qualification which significantly affects the integrity and proper presentation (true and fair view) of the Annual Financial Statement.

Before declaring a local body eligible for receiving of Performance Grants in a particular year, the PMU will certify in writing that they have done a due diligence as prescribed and all the local bodies recommended for funding for that year satisfy the minimum eligibility criteria as laid out in the PIM, including the complete audit eligibility criteria. 2.1.12 Disbursement. Each local body will maintain a project specific dedicated treasury based account public (sub) account for the Performance Grant with the State treasury/subtreasury, and the funds allocated to the GP/municipality for the Bank project will be allotted to this account. The transaction will be treated as expenditure in the state accounts once the amount is transferred from the state consolidated fund to the state public account.. Unspent balances in the local government accounts at the end of the year will be non-lapsable, will be carried over to the next financial year. As such, the GPs/ ULBs will have timely access to funds whatever their cash flow requirements. The administrative and financial approvals for the projects to be implemented by a GP are given by the Standing Committee of the GP. Typically, actual implementation is overseen by the Implementing Officers (IOs), who are usually officials of the line departments, allotted to the GP. On completion of a project, the Implementing Officers (IOs) verify the work done, and requisition the treasury for the release of funds to make payments to the contractors and/or implementing agencies. The Treasury Officers (TO) release the funds to the IOs after the local body authorizes the release, and the IO presents bills to the treasury for payment The PG release will be made to the GPs/ Municipalities through annual budgetary allocations in a single annual tranche (in April every year except for the first year when the release will be in August) in line with the receipt of advances from the Bank based on 32

the annual cash forecast of the PG requirement which, in turn, is based on the annual performance assessment. As with existing grants, “release” will not mean the actual flow of cash but will constitute an authorization limit for the local body to incur expenditure to that (accumulated) limit over a particular period.9 Funds will be transferred from the Kerala state consolidated fund to the common state public account and thereon to the project specific treasury based accounts of the individual GPs/ municipalities. Each local body will maintain a project specific dedicated Treasury based account for the Performance Grant with the State treasury/sub-treasury, and the funds to the GP/municipality for the PG will be allotted to this account. The transaction will be treated as expenditure in the state accounts once the amount is transferred from the state consolidated fund to the state public account. Unspent balances in the local government accounts at the end of the year will be carried over to the next financial year. Every six months the PMU will compile a report on the PG expenditure performance of LGs which will include details of the receipt, utilization and unspent balances in the individual LG Treasury based accounts. This will be reported to the Bank as an Annex to the IUFR. The project has an in-built mechanism to ensure that the difference between PG funds disbursed to LGs and the actual expenditure of these funds does not become too great;10 however, this situation will be monitored and if, for any reason, significant unspent balances accumulate in aggregate, appropriate remedies will be worked out in consultation with the GoK Finance Department and LSGD to ensure that PG funds are spent by LSGs on a timely basis in accordance with grant rules. Any Performance Grant funds provided by the Bank which are not utilized by local governments by the closing date of the project will be refunded to the Bank. 2.1.13 Sub-project Implementation. Funds will be programmed and sub-projects prepared in the LSGs, approvals processed and implemented using existing arrangements in the GPs and Municipalities. In addition, compliance to the Environmental and Social Management Framework (ESMF) prepared, approved and disclosed to mitigate adverse environmental effects of the proposed works and cater for Vulnerable Groups identified in the Project, should be ensured. Procurement and engagement of contractors will be in accordance with new procurement manual for Goods and Services and the consolidated rules for Works11 prepared by LSGD. GPs and Municipalities will use their existing financial management systems to budget, manage and account for the use of these grant funds. GPs and Municipalities will move towards use of Suleka and Sankhya software (developed by IKM) on a day-to-day basis by 1st June 2011. External audit of these entities will be undertaken by the LFA on a certification basis. These include the annual statutory audit undertaken by the LFA (which covers all LSG expenditures, including those related to the PG), the six monthly financial and physical progress reports, and the annual performance assessment which includes an

9

The “accumulated limit” means the annual grant amount plus any rolled over balance from previous financial years. 10 In Phase 2, no local government which has not spent at least 80% of its PG fund allocation for the previous year will qualify for a PG fund allocation for the next year. 11 If these are not approved and issued in time a project procurement manual will be necessary.

33

assessment of local government performance in areas such as financial management (drawing on the LFA audit), procurement, safeguards, and so on. 2.1.14 Reporting. The GPs and Municipalities will submit two types of reports12 in the context of this grant. First, for “upward” accountability – submission of half yearly administrative reports to the PMU under LSGD on the physical progress and asset creation funded by the Performance Grant. This reporting system should be expanded to other expenditures from other schemes financed by Govt. of Kerala and Govt. of India by the FY 2015-16. Secondly, for “downwards accountability” and to enhance local transparency, (a) a simple local annual budget report, and (b) a simple local plan execution and project report will be produced and issued to the public as part of the awareness and information dissemination program. GoK will explore the scope to expand the system to other schemes by FY 2015-16.

2.2 2.2.1

Component 2: Capacity Building For Local Bodies (US 11.2 m - IDA) Objective. This component will provide capacity-building inputs to strengthen and supplement the existing systems, human resource knowledge and improve capacities of LSGs, to enhance their institutional performance. The project has adopted a two track approach. In the short and medium term, immediate capacity development activities to address critical capacity gaps in local governments must be taken up by KILA and SIRD. These will be focused in four core areas: i). the development and improvement of business systems used by LSGs; ii). formal training to strengthen the human resource capacities of LSGs using these systems; iii). mentoring human resource capacity improvement and supplementation; and iv). strengthening the overall institutional capacities of the key organizations responsible for delivering LSG training in Kerala. In the longer term, the component will support formulation of a State-wide capacity building strategy for LSGs. Sub-components and activities

2.2.2

12

Systems Improvements. This sub-component will support activities to develop and improve the systems that enable local self governments in Kerala to function efficiently, effectively, with increased accountability. It will provide support to the development of key aspects of systems which are currently in place as well as the development of new systems. For example, although the GoK have issued orders for the key local government functional areas (i.e., budget, planning, finance management, procurement, etc) most of these orders have not been codified into operational manuals. A new simple system of local reporting on budget, plan implementation and performance evaluation is being introduced through the project for improving the functions of the LSGs. Hence, this component will support to develop manuals for key function areas

The report format is given in Annexure X

34

based on existing policies, entering legacy data into newly developed e-systems, and incorporating specific Bank procedures into budgeting, planning, and finance management. These operational manuals are being developed to facilitate immediate reference for the operations personnel in the LSGs to improve their processes of administration and service delivery in their respective local government bodies. The table below summarizes the scope of activities under this component, and the main agency responsible for the implementation.

Systems Budget, Planning, FM, and Asset Management Auditing Finance Management

Administrative Management

2.2.3

Scope of Activities

Responsibility

• Support for preparation of Public Report, Budget, Plan, FM, Asset Management, Public Works & Maintenance Manuals

•

KILA

• Support for preparation of Statutory Auditing Manual • Support for entering legacy data in FM system • Support to develop the toolkits (PRA, Social Audits, ESMF, DPR) • Support for the development of a Grievance Redressed Mechanism only for the Bank funded projects (future expansion) • Support for the development of Office Management Manual • Support for the develop of manual for the management of transferred institutions and local service delivery

•

KILA

• •

KILA KILA/SIRD

•

KILA/ SIRD

•

KILA

•

KILA

Formal Institutional Training. KILA and SIRD will offer formal institutional training in all key aspects of local self governance, including budgeting, planning, financial management, asset management, procurement, public works implementation and maintenance, and other new systems introduced in this project. In these areas, KILA and SIRD will be provided with support under the Project for development of course content and training of master trainers for introduction of improved systems, and incorporation of the same into the existing courses and delivered according to their ongoing training calendars. In addition, local government project orientation will be developed and roll-out by KILA targeting the key officials of all LSGs. The table below summarizes the scope of activities under this component.

35

Training Support Areas

Budgeting, Planning, FM, Procurement, and Asset Management

Statutory Auditing Social Audits Project Orientation 2.2.4

Training Activities • Support for the course design and master training on ESMF/VGDF • Support for course design and master training on annual budget and planning public reports • Support for course design and master training on the new procurement manual (amended) for LSGs • Support for course design and master training on the new statutory auditing manual • Support for course design and master training on the new social audit manual • Support for development and roll-out of local government project orientation training

Responsibility • KILA • KILA

• KILA

• KILA • SIRD • KILA

Mentoring. Local governments in Kerala have increased their responsibilities and resources in the past years without similar increase of staff. As result, execution of some key functions has been affected due to lack of staff to carry out these functions. This is particularly critical in the area of engineering, where preparation of DPRs, monitoring of public works and, the introduction of e-governance systems have posed an additional challenge for local staff who are not used to computer based systems. The project will focus mentoring support to GPs and Municipalities providing mentoring/handholding support to the LSGs in the following important areas in addition to those for compliance with ESMF for drawing performance grants in the project: •

Sub-project technical support: The project will cover the operational costs (travel, etc) of engineers (1 per block) working for the Department of Self Local Government to provide technical assistance (engineering design, EMF, procurement, contract supervision, quality assurance) to individual GPs and Municipalities during preparation of DPRs and supervision of works funded by Project. One engineer per Block will be placed to provide assistance to the LSGs within the Block, in the aforesaid areas.

•

LSG technical support – KILA: The project will support expansion of the existing Help-Desk located at KILA in terms of registration and response to queries and would also incorporate and respond to queries in new areas such as ESMF and procurement procedures drawn up in the revised Procurement Manual for Goods and Services and Consolidated rules of Work, in addition to supplementing existing general capacities; and,

•

LSG technical support - IKM: The project will provide support to the expansion of the capacity of IKM to provide technical support (on-line and mentoring at field level) to LSGs for the implementation of e-governance systems, and accounting systems. The enhancement will carried out through placement of one accountant-cum-IT 36

specialist in each Block to assist the staff in the LSGs for familiarizing themselves in computer operations expert and use of Suleka and Sankhiya software in their daily operations. 2.2.5

Institutional Strengthening of KILA and SIRD. The project will support KILA and SIRD needs to improvise the training techniques to increase the effectiveness. KILA and SIRD courses use mainly traditional face-to-face lecturing mode, simple text books, and traditional pedagogy. Both institutions have also a very small number of core staff, who are mainly course management and not experts in specific fields, and do not have many opportunity to update their knowledge. The methods and techniques used for evaluation of training are also not sufficiently advanced and thus may undermine the potential of gathering information for continuous improvement of their learning programs. KILA and SIRD have also not incorporated the modern course management software, which are particularly important for training institutions with large number of courses and participants. To address these institutional constraints, the project will focus on these specific areas and activities:

Areas Pedagogy and learning design

Scope of Activities • Support the services of external experts on effective adult learning pedagogy to re-train KILA and SIRD faculty and trainers on how to design and delivered effective learning programs and support for preparation of course modules

Enhance specialization of KILA and SIRD

• Support a series of efforts to enhance institutional expertise, including additional faculty member, study visits, mid-career courses, and faculty exchange initiatives

M&E for Capacity Building

• Support the service of external experts to strengthen M&E system for both KILA and SIRD (guidelines, manuals, templates and software)

Upgrade Training Facilities

• Equip KILA and SIRD classrooms with modern and adequate furniture and training equipments

Administrative Management

• Support the implementation (software and technical assistance) of a course management system for KILA and SIRD • Support the implementation of office automation (software) for KILA and SIRD

2.2.6

Medium and Long-Term Strategic Capacity Development Support. There is also a growing consensus among the key stakeholders that the institutionalization of capacities at local level in Kerala needs to be guided by a sound capacity development strategy for local self governance. At a policy level, the State-wide efforts needs an overall strategy for capacity development which could ensure better coordination among the different 37

resource institutions, leverage of resources, and foster complementarities to training programs. Similarly, the resource institutions are often not applying technically sound needs assessment to design their training programs, but are only offering semistructured roundtable discussions with representative institutions. Both, the needs assessment and the strategy are very important for providing long term directions for the multiple capacity development initiatives that take place every year, including system development, mentoring, and institutional training. A two-track approach (long term strategy and short-medium term capacity support) will ensure that the vast resources invested in capacity development of local governments in Kerala achieve greater results. The Project will also, therefore, support two main activities under this sub-component: (i) state-wide Capacity Needs Assessment of Local Governments; and (ii) State-Wide Capacity Development Strategy. 2.3

2.3.1

Component 3: Enhancing State Monitoring Of The Local Government System (US $ 3.4m-IDA) Objective: This component will strengthen the system of performance monitoring of GPs and municipalities in Kerala. Sub-components and activities

2.3.2

This component will comprise four sub-components: (a) a database of basic GP and municipal level information; (b) service delivery survey; (c) evaluations and studies for Project: and (d) the Decentralization Analysis Cell (DAC) which, among other things, will be responsible for (a) and (b).

2.3.3

Database of LSGs and Municipalities information. The project will establish a database of LSGs information which will store basic information regarding LSGs and municipal profiles: population, vital statistics, livelihoods, employment, education, water and sanitation, budget expenditures and physical assets. The data will be collected from existing datasets such as the 2001 and 2010 census, administrative records, state audits, and line department routine data. As more information becomes available through the project and other surveys, relevant LSGs level data can be added to the system. The database will be web-based and available to the general public. DAC will be responsible for operating and updating the system, including generating reports on LSGs profiles and aggregating data annually.

2.3.4

LSG Service Delivery Survey. The second sub-component is a survey to gauge trends on LSG service delivery performance and citizen satisfaction throughout the state. The survey, to be contracted to an external survey firm/s, will examine delivery trends statewide in sectors where LSGs and municipalities have some responsibility, explore citizen satisfaction and usage of basic services as well as awareness of LSG planning and budget processes. The survey will use a stratified sample of LSGs. It will take place every two years with baseline, mid-term and final rounds. The DAC will produce a 38

report of findings after each round, and will disseminate the findings on the web and through the media. 2.3.5

Project Evaluations - In addition, the project is planning two evaluations to evaluate the quality of the capacity building efforts (Component 2) and block grant investments (Component 1): • Capacity Building Evaluation. Given the importance of the capacity building component, the project will want to monitor, evaluate and document the training activities carefully. Aspects for review are: the number and types of persons undergoing training; the appropriateness of delivery methodologies such as formal institutional training and mentoring; suitability and effectiveness of the curriculum; duration of capacity building interventions; levels of effort by the training institutions and trainers, and feedback from participants. These evaluations will be done in Years 2 and 4. •

2.3.6

Service Delivery Technical Evaluation. This study will examine a random sample of ten percent of GPs and review their service delivery outputs related to physical assets issues. The evaluation will examine in depth: the technical quality of public goods financed by the project; cost effectiveness (value-for-money); use of goods; operations and maintenance, and safeguard issues. This evaluation will be completed in Years 2 and 4.

Decentralization Analysis Cell (DAC). The DAC will play two key functions: (i) as mentioned above, it will collect, store, compile and report LSGs level and service delivery data; (ii) the DAC will also carry out a policy advisory function providing independent analysis on the performance of the State’s intergovernmental fiscal system and service delivery system and provide ongoing policy advice to GoK and the SFC on local and intergovernmental fiscal and institutional issues. The core activities of the policy advisory function will be preparation of annual fiscal report, just-in-time policy advice to the GoK and policy studies on key policy issues (e.g. property taxation, municipal borrowing, analysis of intergovernmental transfers, etc.). The key clients of DAC’s outputs will include the Department of Local Self Government (LSGD), Department of Finance (DoF), State Finance Commission (SFC), LSGs, and citizens. The DAC has been established in the Gulati Institute of Finance and Taxation (GIFT), formally the Centre of Taxation Studies. GIFT falls directly under the Taxes Department of the State Government but DAC funding will come directly from Department of Local Self Governments (LSGD) through the PMU to GIFT. The DAC will fall under the overall governance structure of GIFT; however a Steering Committee headed by LSGD and comprising DoF, GIFT, PMU and DAC (Director) will provide overall strategic oversight for the DAC and will approve its annual work plan. The DAC will submit a report on its annual work plan to the PMU which report to the LGSD and the World Bank on DAC activities. DAC senior staff, which has yet to be recruited, will comprise a full time Director, a Deputy-Director: Data and Deputy-Director: Policy Advisor. Other staff could include computer programmer, service delivery specialist, financial management 39

/procurement specialist, administrative assistant, research analyst, and two data analysts. All DAC positions will be subject to competitive selection of interested, eligible and qualified candidates. The DAC positions will be advertised in the local media to attract a pool of qualified applicants.

2.4 Component 4: Project Management (US$ 6.8 million- IDA) 2.4.1

Objective: This component will provide support to the Project Management Unit (PMU) within the LSGD for overall coordination, implementation, monitoring and evaluation of the project. The three main activities envisaged under this component are:

2.4.2

Support to Project Management. This project will provide support to the management of the overall project and coordination of various activities. The project will finance the project-related establishment and operating costs of these agencies, salaries of core project staff, support in contract management (including the recruitment process), support, the augmentation of the capacity of the project management team through training and exposures visits, training of officials, consultancies, and goods and equipment for management support to the local bodies. A Project Management Unit (PMU) constituted for the purpose within LSGD will be directly responsible for the day-today project management co-ordination and implementation. The Project Management Unit is responsible for planning, co-ordination and monitoring of the project performance in line with the project implementation schedule and will facilitate day-to-day decisions for implementation of various components of the project. The Project Management Unit will prepare annual work programs, budgets, annual procurement plans, will disburse funds, review fund execution and accountability, conduct review meetings, contract and supervise project staff and consultancy assignments, prepare reports and other documents to provide quality control and report on status of project implementation, progress and results of monitoring and evaluation.

2.4.3

Financing: The project will provide financing towards office and administrative expenses for the PMU within the LSGD. The project will also provide resources for technical assistance, training of the project team, goods and equipment to augment the LSGD’s capacity in the areas of monitoring and evaluation, contract management, and communication and funding for the annual Performance Assessment and Quality Assessment of the PA.

2.4.4

Project Reporting. This sub-component will provide resources to support the Project M&E, including monitoring of the project outcome indicators; preparation of annual project audit reports and semi-annual progress reports, Financial Monitoring Reports, consulting services for preparation and review of documents for the Mid Term Review and project completion reports and workshops for final evaluation of the project. Preparation of a follow on support prior to closure of the project is also envisaged under the project.

40

2.4.5

Project Information, Education and Communications. This sub-component will finance the following activities: (i)

broad communications about the project including its objectives and expected outcomes, roles and responsibilities of Gram Panchayats and Municipalities, and

(ii)

focused IEC to the targeted GPs and Municipalities on eligibility, allocation, rules and procedures of the block grants (brochures, pamphlets, etc).

The primary objective of this sub-component is to build awareness and provide basic information on the untied, block grant that is accessible to local bodies. The target audience includes participating local bodies and civil society, local government officials (including district and block level officials) and other departments in GoK. A communications campaign, including media planning will be implemented by the LSGD. The communications strategy will provide detailed information on the availability and utilization of the grants, as well as sensitize communities on the performance of their local bodies. It has two dimensions, namely: i.

Overall Project Communication: The main thrust of the project level communication is to provide basic information on the project objectives and outcomes, and to build awareness on the overall roles and responsibilities of local bodies. The campaign will provide local bodies with detailed information on the allocation of the block grant, rules and procedures for compliance by using popular, effective communication channels such as internal circulars, use of Satcom service, public notice boards, display of information in public areas like libraries and print media.

ii. Citizens Communication: This will focus primarily on increasing levels of awareness and capacity among general public to voice their demands and make the local government accountable to them. It will inform communities on their entitlement to participate in the planning and monitoring processes, such as in social audit and peer review processes. iii. The IEC Cell within the PMU will implement IEC activities through selected service providers using appropriate communications channels.. The core information package developed will be disseminated, through monthly newsletters in vernacular and quarterly newsletters in English. A series of information dissemination workshops will be held where various stakeholders such as the district officials, selected staff from local bodies, related line departments and civil society will participate. The specific activities in this sub-component will include: (i) the design of communication campaign and the development of the core information package; (ii) media planning and dissemination; (iii) communications workshop; and (iv) citizen communication.

41

2.5 Implementation Arrangements 2.5.1 General: The project supports the GoK to strengthen the institutional capacities of the GPs and municipalities for improved service delivery and local governance. The project’s institutional arrangements have been designed to utilize the existing institutional structures with management, coordination and facilitation support provided by the project management and executing units at the state level. The state government is committed to strengthen the GPs and municipalities as critical service delivery and local governance units within the PRI system. The responsibilities and obligatory duties of the GPs and Municipalities are specified in legislation, particularly the Kerala Panchayat Act (1960) 2.5.2 Local Self Government Department (LSGD): The LSGD, administratively led by the Principal Secretary, will have primary responsibility for project implementation and ensuring that the project development objectives are met. The department will be supported by the PMU established for the project. 2.5.3 Execution Support Agencies : Three executing support agencies will implement specific project components and sub components under the overall direction of LSGD: i). ii).

iii).

The KILA and SIRD will execute the capacity building training programs for GPs and Municipalities under Component 2; GIFT will provide the institutional “home” for the DAC and will be responsible for its establishment and governance under the overall oversight of the PMU and subject to the arrangements as specified; In addition, the IKM will execute the roll out of the software solutions including training and implementation of the e-governance software to the GPs and Municipalities under Component 2. The IKM is an integral part of the LSGD and is not therefore classified as an independent executing agency.

2.5.4 Project Management. The Project Management Unit (PMU) established under the LSGD has the overall responsibility for day to day project management, coordination and monitoring of the project performance in line with the project implementation schedule. Its will also facilitate day to day decisions for implementation of various components of the project and ensure that the project resources are budgeted for and disbursed, and project accounts are audited. Specifically the PMU is responsible for: i.

ensuring timely implementation according to the Project Implementation Manual (PIM); ii. preparing for annual work programs, budgets, annual procurement plans and providing quality control; iii. preparing withdrawal applications for disbursements for submission to IDA; iv. maintaining consolidated project accounts and arranging for project audits to be done on time and as per specifications; 42

v. preparing quarterly Financial Monitoring Reports (FMRs), information on financial execution, activity progress as well as procurement progress on all components of the project; vi. supporting coordinating and interacting with Local Fund Audit for GP and Municipalities and with KILA, SIRD and GIFT, the three executive support agencies involved in the project; and vii. ensuring proper implementation of the ESMF and VGDF within the planning process by the GPs and Municipalities.

2.6 Detailed Project Budget 2.6.1. The total project financing requirements are estimated at US$260.0 million, inclusive of price and physical contingencies, and taxes. The Government of Kerala will finance US$60.0 million for the Performance Grants. The remaining costs of US$200.0 million for Performance Grants, goods, consultant services, and operating costs will be funded under the IDA credit. Detailed information on costs and sources of financing are provided in Tables 2.3 & 2.4 below. Table-2.3: Project Costs by Component Project Costs by Component Program Cost By Component

Local

Foreign

Total

US $million

US $million

US $million

Performance Grant Capacity Building Enhancing State Monitoring of the Local Government System Project Management Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs

238.6 9.9 2.0

0.0 0.7 1.3

4.8 255.3 0.0 0.8 256.1

1.5 3.5 0.2 0.2 3.9

238.6 10.6 3.3 6.3 258.8 0.2 1.0 260.0

The detail breakdown costs Component wise is given in Annexure III.

Table 2.4: Project Costs by Component and Sources of Financing Component and/or Activity 1). Performance Grant 2). Capacity Building 3). Enhancing State Monitoring of the Local Government System 4). Project Management Total Project Costs

GOK US$ million 60.0 0.0 0.0 0.0 60.0

IDA US$ million 178.6 11.2 3.4 6.8 200.0

Total US$ million 238.6 11.2 3.4 6.8 260.0

43

SECTION 3 MAJOR LOAN COVENANTS AND TARGET DATES

3.1

Description of Major Loan Covenants & Target Dates Two dated covenants were agreed for the project: i). ii).

iii).

Government of Kerala, shall, no later than six months after project effectiveness, appoint the LSG support engineers to the LSGD; Government of Kerala shall ensure that, throughout the duration of the Project, the total annual budgeted State Finance Commission award amount for LSGs shall not decrease in real terms, as measured using the national inflation rate as deflator and using 2010/2011 as the base year. Government of Kerala shall within 30 months of the effective date carry out jointly with the World Bank a Mid Term Review of the progress made in carrying out the project.

44

SECTION 4 : INSTITUTIONAL AND COORDINATION ARRANGEMENTS

4.1.

Overall Institutional Arrangements

4.1.1

The institutional arrangements for project implementation will broadly follow the state and local government structure.

4.1.2

Project Oversight. The Department of Local Self Government of Kerala (LGSD) will have the primary responsibility for project implementation and shall ensure that the project development objectives are met. The LSGD will execute the project through a Project Management Unit (PMU) with overall responsibility for project execution, ensuring that the project resources are budgeted for and disbursed and project accounts are audited.

4.1.3

Project Management. The Project Management Unit (PMU) within LGSD will assume direct responsibility for day to day project management, coordination and implementation. The PMU will take the lead role in planning, coordination and monitoring of the project performance in line with the project implementation schedule and facilitate day to day decisions for implementation of various components of the project and will be responsible for inter-institutional coordination. The PMU will carry out the annual performance assessments of the GPs and Municipalities, quality assurance of the assessment, prepare annual work programs, budgets, annual procurement plans, will disburse funds, review fund execution and accountability, oversee quarterly review meetings and contract and supervise project staff and consultancy assignments, prepare reports and other documents and provide quality control. The PMU will organize annual workshops/ seminars to present status of project implementation, progress and results of monitoring and evaluation. The PMU will identify focal personnel for each project component, and they will be accountable for implementation, coordination, monitoring and reporting of their respective components and sub-components. The designated focal points will work under the overall leadership of the Project Director and the Deputy Project Director, and their assignments are reviewed periodically, with formal reviews held quarterly and annually with the Secretary, LSGD. Strong leadership, technical competence and professional skills will be required for timely implementation of the project. The PMU will be headed by a Project Director assigned from the state government, reporting to the Secretary and the Principal Secretary, LSGD, and will be supported by a full time Deputy Project Director for this specific role. PMU’s functional areas and staffing to complement identified for project implementation is given in the Table below. Experts/consultants engaged on contract basis will be recruited through a competitive selection process

45

1. 2. 3. 4. 5. 6. 7. 8. 9.

Subject Areas Project Management Financial Management Procurement Information & Communications Safeguards Grant Management Capacity Building Performance Monitoring & Evaluation Project Administration Total Positions

Designated Officials Project Director + Dy. Project Director Finance Manager + Finance Assistant Procurement Specialist Communication Specialist Environment Specialist + Social Specialist Grant Management Specialist Capacity Building Specialist Monitoring & Evaluation Specialist IT Specialist + Support Staff (3 nos) 15 nos

The PMU will engage the services of the Project Facilitators (Engineers) one per Block, drawn from the LSGD to provide assistance to the GPs and Municipalities in development, design, contract supervision of the works approved for grants under Component 1. 4.1.4

Information Kerala Mission (IKM), is an e-governance project of the Government of Kerala under the LSGD, aiming at strengthening local self-governance through ICT (Information Communication Technologies) applications. IKM will support the process of updating legacy data of GPs relating to inventory of assets, infrastructure, taxation, and other revenue related information in to the financial management e-system at GP level. The expenditure to be incurred by IKM will be limited to the costs of data entry services and expansion of technical assistance to the staff of GPs. IKM will position 1 accounts and IT expert in each block to facilitate this service to the GPs in each of the 152 Blocks in Kerala State. All payments for the services of personal engaged by IKM under the Project will be paid directly by PMU.

4.1.5

Implementation Support. Three execution support agencies will implement specific project components and sub-components thereof under the overall direction of the PMU in LSGD. A Memorandum of Understanding (MoU) will be signed by the PMU, LSGD and the respective institutions to facilitate project implementation. •

Kerala Institute of Local Administration (KILA) is an autonomous entity, established under the aegis of Local Self Governance Department (LSGD), GoK to support training, research and consultancy in decentralized governance and administration. KILA will be responsible for the execution of the various activities under the Component 2 as outlined.

•

Social Institute for Rural Development(SIRD) is an autonomous body under the auspices of the GoK with the objective of developing managerial skills, organizational abilities, leadership qualities and decision making skills among different categories of officials, elected representatives of Panchayats and members of NGOs. SIRD will carry out some activities as detailed in Component 2 of the project. 46

•

4.2.

Gulati Institute of Finance and Taxation (GIFT), an autonomous institution, will house the Decentralization Analysis Cell responsible for policy analysis on fiscal decentralization and to track the performance of local governments.

Specific Project Management Arrangements For the implementation of the various components of the project, the institutional arrangement is described below and summarized in the chart that follows.

4.2.1. Component 1: At the local government level, the GPs and Municipalities will be responsible for meeting the eligibility requirements based on performance parameters and utilizing the discretionary grants (Component 1) as per the annual plans and budgets. The GPs and Municipalities will be directly responsible for the implementation of the local projects. The LSGs will develop annual plans based on the guidelines provided in the Grant Operation Manual in PIM. The PMU will provide support with the services of engineers to provide technical assistance and handholding support to GPs and Municipalities for implementation of sub-projects, particularly in the areas of engineering design, ESMF, procurement and contract supervision during preparation of DPRs and supervision of works funded by the Project. The LSGs will prepare quarterly yearly physical progress reports covering physical progress and asset creation funded by the performance grant. The physical progress reports will be submitted by participating GPs and Municipalities to the LSGD (PMU). All GPs and Municipalities will disclose their annual plans and expenditures to the public at their respective local government level. The reporting details are provided in Component 3. The annual performance assessment of GPs and Municipalities will be undertaken by independent agencies contracted by the PMU. The project will work closely with the office of the Local Fund Audit (LFA) which is responsible for conducting regular annual audits of the GPs, and will seek to improve the quality and timeliness of its submission of Inspection Reports to the GPs and Municipalities, To this end the project will work closely with LFA to enhance performance of the state's oversight of public expenditures at the GP and Municipalities levels. 4.2.2. Component 2: A Memorandum of Understanding (MoU) will be in place between the execution support agencies (KILA and SIRD) and LSGD for the implementation of capacity building program of the project. The draft MoU13 is attached in Annexure 4. Project funds will be made available by the PMU to KILA and SIRD for smooth implementation of project activities. Procurement of goods, works and consultancy services above $50,000 to be undertaken by KILA and SIRD will be procured by the PMU based on the approved annual plans. Core faculty members and resource persons will be hired in KILA and SIRD to provide capacity-building inputs to strengthen and supplement the existing systems of Municipalities and GPs. KILA and SIRD will report to PMU on the activities undertaken as per the agreements/contracts between the 13

Copies of the signed MoUs will be attached as and when the same is signed.

47

institutions. In addition, IKM – which is a centre already, established within the LSGD – will be responsible for implementing the e-governance activities of Component 2 under the overall supervision of the PMU. 4.2.3. Component 3: The Decentralization Analysis Cell (DAC) will be established in GIFT for policy analysis, strengthen the system of performance monitoring of GPs and Municipalities in state. The project will provide financial assistance to DAC to produce annual fiscal reports, policy advisory support to LSGD and policy studies. The MoU signed between GIFT and LSGD outlining the nature of engagement between the two institutions and procurement thresholds is given in Annexure IV. DAC will be reporting to PMU on the project related activities as well to the Department of Finance of GoK.

Institutional Arrangements for KLGSDP

State Government of Kerala

Department of Finance LFA

LSGD Principal Secretary SPAO

PMU

DUA / DP

Project Facilitators -1 Engineer Per Block to assist GPs - 1 Engineer to assist 20 Municipalities - 1 Accts-cum-IT Specialists per block

-Project Director - Dy. Project Director

IKM

COMPONENT 2 KILA

COMPONENT 1

SIRD

Gram Panchayats

COMPONENT 3 Municipalities GIFT

Project Management Oversight LG Audits Reporting Structure Implementation Support

48

SECTION 5 : PROJECT PLANNING AND IMPLEMENTATION

5.1 Project Implementation Period The Project will be executed over a period of four years – July 1 2011 to June 30, 2015. 5.2 Project Implementation Schedule Summary The Detail Project Implementation Schedule is given in Table-1.7 below.

49

Table 1 : Project Implementation Schedule for Phase -1

Component Activity

FY 2010/11 Nov

Dec

Jan

Feb

FY 2011/12 Mar

Apr

May

June

July

Aug

Orientation

31

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Component 1 - Performance Grant (i). GP/Municipality Resolution to Participate (ii).

Certification Audit ation Audit

FY 09-10 FY 08-09

FY 10/11

FY 10-11

(iii). Annual Performance Assessment (iv). Allocation Decision (v).

Budget Process

(vi). Planning Process (vii). Release of funds by FD

1

1 31

Revision

Rv

Revision

1

31

1

(viii). Monthly Financial Report to LSG (ix).

Six Monthly Physical Progress Report

(x).

Annual Reports to the Public on Plan and Budget

Component 2 - Capacity Building A) System Development

(i).

Preparation of Public Report, Budget, Plan, FM, Asset Management, Public Works & Maintenance Manuals (ii). Preparation of Statutory Auditing Manual (iii). Support entering legacy data into FM systems (iv). Support KILA/SIRD to develop the toolkits (Perf. Audits, ESMF, DPR) (v). Develop Grievance Redress Mechanism for the project (vi). Develop Adm. Manual for transferred institutions (vii). Develop office management manual

50

Component Activity

FY 2010/11 Nov

Dec

Jan

Feb

FY 2011/12 Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

B) Formal Institutional Training (i). (ii). (iii). (iv). (v). (vi).

Support to KILA for designing ESMF training Support to KILA deign course on budget and planning public report Support to KILA for design and TOT on the new procurement system Support to KILA for design statutory training Support to SIRD for design social audit training Local Government Project Orientation

C) Mentoring

(i).

Expansion of KILA Help Desk

(ii).

Expansion of IKM's Technical Support

D) KILA/SIRD Institutional Strengthening

(i). (ii).

Strengthening pedagogy skills of faculty members Specialization of faculty members

(iii).

Improving Capacity Building M&E

(iv).

Upgrading Training Facilities

(v).

Administrative Modernization

E) Capacity Development Strategy

(i).

Capacity Development Assessment

(ii).

Formulation of Capacity Development Strategy

Component -3 : Enhancing State Monitoring of Local Governance systems 51

Component Activity (i).

Database of GP and municipal information

(ii). (iii).

LSG Service Delivery Survey Project evaluations -PMU responsibility

FY 2010/11 Nov

Dec

Jan

Feb

FY 2011/12 Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Feb

Mar

Begin secondary data collection and establish database QCBS - Consultant Selection Process

QCBS - Consultant selection Process

- Capacity building evaluation

QCBS - Consultant Selection Process

- Service delivery technical evaluation (iv).

Jan

Decentralization Analysis Cell - Staff recruited - Office Equipment

Staff recruitment Procurement

- Production of annual fiscal report - Consultancies (Policy Studies)

Two studies - engagement of consultants

- Just in time policy advisory

Just in time policy advisory starts April 2011 and continues throughout the project.

Component -4 : Project Management a) Support to Project Management

i) Project preparation activities (i). (ii).

(iii). (iv). (v). (vi).

Completion of audit certification for Financial year 2008-09 Establishment of PMU office including procurement of office equipments, furniture and fittings Staff hiring in PMU Finalisation of ToRs for consultancy services Staff orientation Development of Budget, planning, asset management, O&M, Finance Management, Accounting, Manuals and Public Works Manuals for reference

FY 2008-09

DGS&D Rates/ Shopping

Recruitment Submission

Project Components Procedures QCBS - consultancy selection process

Development of Manuals by Consultants

52

Component Activity (vii).

Preparation of annual Work Program

(viii).

Preparation of Annual Procurement Plans

(ix). (x).

Support & review of procurements in GPs/MCs Support and review of ESMF compliance

(xi).

Implementation of GAAP

FY 2010/11 Nov

Dec

Jan

Feb

FY 2011/12 Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Preparation & approval

Dec

Jan

Feb

Mar

Preparation & approval By PMU specialists

Review & report

b) Project Reporting (i).

Project Performance Assessment

(ii).

Annual assessment Validation

(iii).

Financial Management Report ( FMRs)

(iv). (v).

Preparation of Annual Project Audit Reports Semi- Annual Project Reports

(vi).

Mid Term Reviews

(vii).

Project Completion Report

(viii).

Preparation of Follow up Project

QCBS Consultant selection 1st AA

c) Project Communications (i).

Project launch

(ii).

Project IEC material development & dissemination Community communication

(iii).

Preparation and Dissemination

53

Project Implementation Schedule for Phase -2 Component Activity

FY 2012/13 Apr

May

Jun

July

Aug

Sep

Oct

FY 2013/14 Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Component 1 Performance Grant i). GP/Municipality Resolution to Participate ii). Certification Audit iii). Annual Performance Assessment iv). Allocation Decision

FY 11/12

31

FY 12/13

PA1

1

PA2

1

1

v). Budget Process

1 31

vi). Planning Process vii). Release of funds by FD viii). Monthly Financial Report to LSG ix). Six Monthly Physical Progress Report x). Annual Reports to Public Plan & Budget

31

31

1

1 1

30

1

31 30

30

31 30

Component 2 – Capacity Building a) System Development i). Preparation of Public Report, Budget, Plan, FM, Asset Management, Public Works & Maintenance Manuals ii). (ii) Preparation of Statutory Auditing Manual iii). (iii) Support entering legacy data into FM systems iv). (iv) Support KILA/SIRD to develop the toolkits (Perf.

54

Component Activity

FY 2012/13 Apr

May

Jun

July

Aug

Sep

Oct

FY 2013/14 Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Audits, ESMF, DPR) v). (vii) Develop Grievance Redress Mechanism for the project vi). (viii) Develop Adm. Manual for transferred institutions vii). (xi) Develop office management manual b) Formal Institutional Training i). Support to KILA for designing ESMF training ii). Support to KILA deign course on budget and planning public report iii). Support to KILA for design and TOT on the new procurement system iv). Support to KILA for design statutory training v). Support to SIRD for design social audit training vi). Local Government Project Orientation c)

Mentoring

i). Expansion of KILA Help Desk ii). Expansion of IKM's Technical Support d) KILA/SIRD Institutional Strengthening i). Strengthening pedagogy skills of faculty members ii). Specialization of faculty members

55

Component Activity

FY 2012/13 Apr

May

Jun

July

Aug

Sep

Oct

FY 2013/14 Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

iii). Improving Capacity Building M&E iv). Upgrading Training Facilities v). Administrative Modernization e) Capacity Development Strategy i). Capacity Development Assessment ii). Formulation of Capacity Development Strategy

Component -3 : Enhancing State Monitoring of Local Governance systems i). Database of GP and municipal information ii). LSG Service Delivery Survey

Continues updating database Questionnaire dev, prep & training

Survey fielded

QCBS cont'd

Questionnaire dev, prep & training

Data collection, compilation and reporting continues throughout the project life

Data cleaning, analysis, report production

iii). Project evaluations − Capacity building evaluation

− Service delivery technical evaluation

QCB S cont' d

Questionnaire dev, prep & training

Evaluation study fielded

Analysis & report production

Evaluation study fielded

Analysis & report production

iv). Decentralization Analysis Cell

56

Component Activity

FY 2012/13 Apr

May

Jun

July

Aug

Sep

Oct

FY 2013/14 Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

− Staff recruited − Office Equipment − Production of annual fiscal report − Consultancies (Policy Studies) − Just in time policy advisory

Annual GP/ ULB report

Annual GP/ ULB report Two studies commissioned

Two studies commissioned

Just in time policy advisory started in April 2011 and continues throughout the project.

Component -4 : Project Management a)

Support to Project Management

i). Project preparation activities ii). Completion of audit certification for Financial year 2008-09 iii). Establishment of PMU office including procurement of office equipments, furniture and fittings iv). Staff hiring in PMU v). Finalisation of ToRs for consultancy services vi). Staff orientation vii). Development of Budget, planning, asset management, O&M, Finance Management, Acccounting, Manuals and Public Works Manuals for reference viii). Preparation of annual Work Program

First Training program for ToTs & staff on new use of Manuals

Preparation & Approval

Preparation & Approval

57

Component Activity

FY 2012/13 Apr

May

Jun

July

Aug

Sep

Oct

ix). Preparation of Annual Procurement Plans x). Support and review of procurements in GPs/MCs xi). Support and review of ESMF compliance xii). Implementation of GAAP

b)

FY 2013/14 Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Review & report

Nov

Dec

Jan

Feb

Mar

Review & report

Project Reporting

i). Project Performance Assessment ii). Annual assessment Validation iii). Financial Management Report ( FMRs) iv). Preparation of Annual Project Audit Reports v). Semi- Annual Project Reports vi). Mid Term Reviews

2nd APA

1st PA

MTR

vii). Project Completion Report viii). Preparation of Follow up Project

c)

Oct

Preparation process

Project Communications

i). Project launch ii). Project IEC material development & dissemination iii). Community communication

Info Workshops

Info Workshop s

Info Workshop s

58

Project Implementation Schedule for Phase -2 (cont’d) Component Activity

2014/15 Apr

May

Jun

July

Aug

Sep

2015/16

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Component 1 - Performance Grant i).

GP/Municipality Resolution to Participate

ii).

Certification Audit

iii).

Annual Performance Assessment

iv).

Allocation Decision

v).

Budget Process

vi).

Planning Process

vii).

Release of funds by FD

viii).

Monthly Financial Report to LSG

ix).

Six Monthly Physical Progress Report

x).

Annual Reports to Public Plan & Budget

FY 13/14

31 PA3

1 1 31

1 1

30

31

30

30

Component 2 - Capacity Building a) System Development i).

ii).

Preparation of Public Report, Budget, Plan, FM, Asset Management, Public Works & Maintenance Manuals Preparation of Statutory Auditing Manual

iii).

Support entering legacy data into FM systems

iv).

Support KILA/SIRD to develop the toolkits (Perf. Audits, ESMF, DPR)

v).

Develop Grievance Redress Mechanism for the project

vi).

Develop Adm. Manual for transferred institutions Develop office management manual

vii).

b) Formal Institutional Training i). Support to KILA for designing ESMF training

59

Component Activity

2014/15 Apr

May

Jun

July

Aug

Sep

Oct

2015/16 Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

ii). Support to KILA deign course on budget and planning public report iii). Support to KILA for design and TOT on the new procurement system iv). Support to KILA for design statutory training v). Support to SIRD for design social audit training vi). Local Government Project Orientation

c)

Mentoring

i). Expansion of KILA Help Desk ii). Expansion of IKM's Technical Support

d) KILA/SIRD Institutional Strengthening i). Strengthening pedagogy skills of faculty members ii). Specialization of faculty members iii). Improving Capacity Building M&E iv). Upgrading Training Facilities v). Administrative Modernization

e) Capacity Development Strategy i). Capacity Development Assessment ii). Formulation of Capacity Development Strategy

Component -3 : Enhanciing State Monitoring of Local Governmence systems i). Database of GP and municipal information

ii). LSG Service Delivery Survey

Data collection, compilation and reporting continues throughout the project life Questionnaire dev, prep & training

Survey fielded

Data Analysis, report production

iii). Project evaluations -

60

Component Activity

2014/15 Apr

May

Jun

July

Aug

Sep

Oct

2015/16 Nov

Dec

Jan

− Capacity building evaluation

Questionnaire dev, prep & training

Evaluation study fielded

− Service delivery technical evaluation

Questionnaire dev, prep & training

Evaluation study fielded

Feb

Mar

Apr

May

Jun

Analysis & report production

Analysis & report production

iv). Decentralization Analysis Cell − Staff recruited − Office Equipment − Production of annual fiscal report − Consultancies (Policy Studies) − Just in time policy advisory

Annual GP/ ULB report Two studies commissioned Just in time policy advisory started in April 2011 and continues

Component -4 : Project Management a)

Support to Project Management

i). Project preparation activities ii). Completion of audit certification for Financial year 2008-09 iii). Establishment of PMU office including procurement of office equipments, furniture and fittings iv). Staff hiring in PMU v). Finalisation of ToRs for consultancy services vi). Staff orientation vii). Development of Budget, planning, asset management, O&M, Finance Management, Accounting, Manuals and Public Works Manuals for reference viii). Preparation of annual Work Program

Preparation &

61

Component Activity

2014/15 Apr

May

Jun

July

Aug

Sep

Oct

2015/16 Nov

Dec

Jan

ix). Preparation of Annual Procurement Plans

Feb

Mar

Apr

May

Jun

Approval

x). Support and review of procurements in GPs/MCs xi). Support and review of ESMF compliance

Review & report

xii). Implementation of GAAP

b)

Project Reporting 3rd APA

i). Project Performance Assessment ii). Annual assessment Validation iii). Financial Management Report ( FMRs) iv). Preparation of Annual Project Audit Reports v). Semi- Annual Project Reports vi). Mid Term Reviews vii). Project Completion Report

ICR

viii). Preparation of Follow up Project

c)

Preparation process continues

Project Communications

i). Project launch ii). Project IEC material development & dissemination

Info Workshops

Info Workshops

Info Workshops

iii). Community communication

62

SECTION 6: PROCUREMENT ARRANGEMENTS A procurement assessment carried out in 16 GPs/Municipalities in 2 districts Thiruvanthapuram and Thrissur and the LSG Department had found that The Kerala Panchayati Raj Act 1994, the Kerala Municipality Act 1994, Kerala Stores Purchase Rules and Kerala Panchayati Raj (execution of Public Works) Rules 1997 provide the legal foundation for the local government system and procurement management in Kerala. The review of procurement practices around various stages in a procurement cycle indicated overall higher levels of compliance with the suggested procedures, however, further improvements are recommended in developing detailed specifications, market search for bidders, consistent standards of tender conditions and detailed evaluation process. It was found that the unavailability of a defined Procurement rules, regulations and tools like clear definitions of roles and responsibilities and functional process flows, standard bidding documents, various formats for tendering, evaluation, grievance handling mechanism and a monitoring and evaluation framework cause the shortcomings in the above areas.

6.1.

Applicable Procedures and Guidelines

6.1.1

General Guidelines: All goods, works and services required for the Project, shall be procured in accordance with the requirements set forth or referred to in Section I of the World Bank “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised in October 2006 and May 2010 and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised in October 2006 and May 2010. For procurement under Component 1 of the project, the applicable procedures and guidelines for procurement are given in the revised Procurement Manual for Goods and Services issued vide Govt. Order no. 259,/2010/LSGD dated 08-11-2010 and Consolidated Works Rules for LSGs issued vide Govt. Order no. 2565/DA1/2011/LSGD dated 12-01-2011 to ensure consistent standard procurement processes across all LSGs in the State. The focus of the procurement arrangements will remain a combination of beneficiary lead or open tender for activities implemented by the LSGs under the untied Performance Grant component. A series of capacity building measures including training of implementing officers in the LSGs and officers in Municipalities towards operationalizing the new Procurement manual, strengthening the Performance Audit Wing (PAW) through developing tools for procurement post review and training programs for skill development of PAW staff are recommended.

6.1.2

For procurement under Components 2, 3 and 4 each contract to be financed under the project, the procurement methods and consultant selection methods, estimated cost, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated annually or as required to reflect the actual project implementation needs and improvements in institutional capacity

6.1.3

Procurement support to GPs and Municipalities: Ongoing support to GPs to utilize the mandated procurement system will be provided by Component 2 of the project. This will include both formal training and day-to-day mentoring and direct support by roaming teams 63

which will each have a member devoted specifically to financial management and procurement support. The supervision from World Bank will be carried out as per the Bank procedures on a post review basis consisting review of technical, financial and procurement reports carried out by the Project. In this instance the third party Annual Performance Review to be commissioned by the project based a ToR and selection process agreed in advance with the Bank and the quarterly internal audit by the State Performance Audit Wing under the LSGD will be extensively utilized. Project will mandatorily make available the outcomes from such reports to the Bank during the Supervision Missions. Based on the assessment of the findings and the extent of compliance with procurement manual and works rules, Bank will or may carry out further triangulation exercises or sample based post review of procurement in order to take informed decision on the progress of the project.

6.2.

Procurement-Risk Mitigation Action Plan

6.2.1. The procurement risks at the principal implementing and oversight entity, i.e. the Department for Local Self Government is rated as Moderate, and for LSGs which will implement the major component 1 as “Low”. Overall Procurement risk for the project is assessed as “Low”, with the following key factors: • •

Low Capacity in LSGs to implement and manage the procurement process Insufficient Procurement Monitoring and Accountability measures

6.2.2. Risk mitigation measures have been discussed with the Government. The measures include procurement arrangements and processes need to bring to consistent standards across the board for all LSGs, which are also acceptable to Bank standards. The most important measure undertaken has been adaption the revised Procurement Manual for Goods and Services and consolidated rules for Works for LSGs developed by the State and reviewed by Bank in August 2010. The focus of the procurement arrangement will remain a combination of beneficiary lead or open tender for activities implemented by the GPs and Municipalities under the untied Block Grant component. A series of capacity building measures including training the implementing officers in the LSGs on the new Procurement manual, strengthening the Performance Audit Wing through developing tools for procurement post review and training programs for skill development of PAW staff are recommended. 6.2.3. A Governance and Accountability Action Plan (GAAP) including procurement risks has been prepared.

64

SECTION 7: PROCUREMENT MANUAL

7.1.1

All goods, works and services required for the Project, shall be procured in accordance with the requirements set forth or referred to in Section I of the World Bank “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised in October 2006 and May 2010 and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised in October 2006 and May 2010.

7.1.2

Procurement Arrangements for Component 1 : The LSGs will procure goods, works and services under Component 1 using government systems For project purposes, the government Procurement Manual for Goods and Services issued vide Govt. Order no. 259,/2010/LSGD dated 08-11-2010 and Consolidated Works Rules for LSGs issued vide Govt. Order no. 2565/DA1/2011/LSGD dated 12-01-2011 subject to the stipulations detailed below will constitute the procurement arrangements for GPs and Municipalities under Component 1: •

The use of DGS &D Rate Contracts or Rate Contracts established by Kerala Medical Services Corporation will be subject to a maximum per contract value of $50,000For procurement up to the value of $50,000 per contract, Rate Contracts established by autonomous and commercially operating state corporations and agencies which are not under the LSGD, if available, can be considered as one of the 3 quotations/tenders. It is essential to invite quotations/tenders in all such cases, if funding from Bank supported project is used.

•

Direct Contracting using Block Grants will be carried out only when the conditions of (i) extension of an existing contract; (ii) standardization of the item being purchased; (iii) proprietary and obtainable only from one source and in (iv) in exceptional cases, such as in response to natural disasters.

•

Kerala Works contracts Rules allows for 2 stage -pre qualification and tendering- above Rs 10 million (approximately $210,000). At this stage, no single contracts using the Bank support is expected to be valued above $200,000. Notwithstanding this assumption, Use of funds for works contracts from Bank support shall not follow 2 envelope/stage procurement process.

•

Negotiations shall not be carried out with any bidders including the lowest bidder. In the event the bid prices are considerably above the estimated budget and a fresh bidding is not expected to result in better offers and the need for negotiations arise, these shall follow the guidelines set by the Central Vigilance Commission, Govt. of India.

Upon effectiveness of the project, GoK will issue a order to comply with the Project specific procurement arrangements as detailed above.

65

7.1.3

Procurement Arrangements for Component 2 and 3 by LSGD, KILA, SIRD, GIFT. Prior-review and procurement method thresholds for the Components 2, 3 and 4 of the project are indicated in the table below. PMU with in-house procurement unit is authorized to carry out procurement above $50,000 thresholds. Given the project requirements in KILA, SIRD and GIFT, the maximum value of a single contract that can be procured by these institutions is set as $50,000 under the categories of non consulting services, individual consultants; goods and equipment and works. For all consulting assignments irrespective of value following QCBS, QBS, CQS, LCS or SSS and all other contracts valued above $50,000, PMU will be responsible for procurement and placing the items/services for the respective agencies. 7.1.4

Goods Works Consulting Services

7.1.5

Prior Review Thresholds Proposed (US$ million) 0.3 10.0 − 0.3 for firm − 0.05 for Individuals − SSS: all

Procurement Thresholds for KLGSDP Procurement Method Thresholds Proposed (USD million) ICB

NCB

Shopping

≥0.5 ≥10 NA