Report No: AUS0003329 . Nepal Federalism Filter Guidance Note February 2023 . . . © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2023, Nepal: Federalism Filter Guidance Note. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. About the Federalism Filter Nepal has seen massive political change over the last few decades − from monarchy to republic, from conflict to peace, and from a unitary to a federal state. Much progress has been made on the transition to federal governance systems and structures since the introduction of the federal Constitution in 2015. This fundamental change has seen a transition from a highly centralized unitary state to a federal state with three tiers of government. This transformation is ongoing requiring changes in politics, society and the economy. The new federal system requires each tier of government to build their new roles in line with the constitutional division of powers, with the Federal Government responsible for national vision, strategic policy direction and large national initiatives; the 7 provincial governments for provincial visions, economic development within provinces and provincial specific sectoral strategic plans; and the 753 local governments for local visions, service delivery and local inclusive economic and environmental development. Such fundamental change is requiring major changes in financial and human resource capacities at each tier of government, and new mechanisms for inter-governmental coordination to enable provincial and local governments (PLGs) to fulfill their powers and deliver their functional assignments. The PLGs are, however, constrained by their inability to recruit and manage adequate technical staff. And the enabling environment needs improving to enhance the ability of PLGs to carry out their new roles and improve the prospects for the positive impact of federalism. This Federalism Filter is part of the wider efforts of the World Bank to support the Government of Nepal to operationalize federalism. It provides a mechanism for World Bank Nepal country teams to systematically support and guide the design of future projects through the lens of federalism. Acknowledgments This Federalism Filter was developed by a team led by Gabriel Dedu, Sr. Governance Specialist (Task Team Leader) with Yoshihiro Saito (Public Sector Specialist) and Ojeswee Pande (Public Sector Consultant) under the technical guidance of Tae Hyun Lee (Program Leader). Inputs were provided by Alidu Babatu Adam (Sr. Social Development Specialist), Caroline Sage (Sr. Social Development Specialist), Kene Ezemenari (Sr. Economist), Jonas Ingemann Parby (Sr. Urban Specialist), Timila Shrestha (Sr. Financial Management Specialist), Sarah Subba (Social Development Consultant), Tracy Ghale (Social Development Consultant), Jaya Sharma (Sr. Social Development Specialist), Karthika Radhakrishnan-Nair (Senior Education Specialist), Serdar Yilmaz (Lead Public Sector Specialist), Shambhu Prasad Uprety (Senior Procurement Specialist), Syed Khaled (Sr. Public Sector Specialist), Victor Boakye-Bonsu (Sr. Financial Management Specialist) and Marcela Rozo (Senior Public Sector Specialist). The filter benefited from peer reviews by Simon Carl O'Meally, (Sr. Public Sector Specialist), Pedro Arizti (Sr Public Sector Specialist), Rama Krishnan Venkateswaran (Sr. Public Financial Management Specialist), Hiska Noemi Reyes (Sr. Social Development Specialist) Erik Caldwell Johnson, (Sr. Social Development Specialist), Aline Coudouel (Lead Economist), David Tuchschneider, (Sr. Agriculture Economist), and Keith Mclean (Lead Governance Specialist); and was reviewed and cleared by Hoon Sahib Soh (Practice Manager, Governance Global Practice, South Asia Region) and Lada Strelkova (Operations Manager, Maldives, Sri Lanka, and Nepal). i Abbreviations CBO Community-based organizations CMU Country Management Unit CSO Civil society organization DPC Development Policy Credit FCGO Financial Comptroller General Office FY Fiscal year GDP Gross domestic product GESI Gender equality and social inclusion IPFMRP Integrated Public Financial Management Reform Project MIS Management information system MoFAGA Ministry of Federal Affairs and General Administration MoLMACs Ministry of agriculture, land management, and cooperatives MoU Memorandum of understanding MSFAG Multi-Sectoral Federalism Advisory Group NFFASP Nepal Fiscal Federalism Advisory Support Program NGO Non-government organization NUGIP Nepal Urban Governance and Infrastructure Project PCC Provincial coordination committee PLGs Provincial and local governments PLGSP Provincial and Local Government Support Program PPMO Public Procurement Monitoring Office PSC Project steering committee REED Rural Enterprise and Economic Development project Sr. Senior SUTRA Subnational Treasury Regulatory Application UDST Urban Development Support Team Note: All dollar amounts are US dollars unless otherwise indicated. ii Contents About the Federalism Filter ........................................................................................................................ i Acknowledgments ........................................................................................................................................ i Abbreviations .............................................................................................................................................. ii Contents ...................................................................................................................................................... iii Executive Summary .................................................................................................................................... 4 Part 1: Evolving Context of Federalism in Nepal .................................................................................... 6 The Institutionalization of Federalism in Nepal........................................................................................ 7 The Design and Application of the Filter.................................................................................................. 8 The Framework of the Filter ..................................................................................................................... 8 Beneficiaries and Application of the Filter ............................................................................................. 10 Part 2: The Filter – The Pillars, Actions, and Sub-Actions ................................................................... 11 Pillar 1: The Institutional and Implementation Arrangements of Projects.............................................. 11 Pillar 2: The Fiduciary Capacity and Systems of PLGs .......................................................................... 12 Pillar 3: Citizens’ Engagement and GESI in Federal and PLG Programs .............................................. 13 Part 3: Filter Implementation Arrangements ........................................................................................ 15 References .................................................................................................................................................. 18 Annex 1: Federalism Readiness Checklist for World Bank-Supported Projects................................ 19 Annex 2: Notes on Examples of Good Actions, Approaches, and Tools for Promoting Federalism . 24 Annex 3: Guiding Questions for Designing and Integrating GESI in PLG Projects .......................... 26 Annex 4: List of Experts Consulted......................................................................................................... 27 iii Executive Summary The Federalism Filter aims to provide a mechanism for World Bank Nepal country teams to systematically support and guide the design of future projects through the lens of federalism. Its framework of three pillars and seven principles with recommended actions were identified through broad-based consultations with the filter’s key stakeholders such as task team leaders, the Country Management Unit, operations staff, development partners and government counterparts. It was developed through a desk review of institutional and implementation arrangements in a sample of twenty four World Bank projects in six federal or decentralized countries: India, Indonesia, Mexico, Nigeria, Brazil, and Kenya. The projects were selected based on (i) the coverage of thirteen target thematic areas,1 (ii) being under implementation or completed, and (iii) having at least two levels of government as beneficiaries (even if the project was implemented only by the Federal Government). The wide range of actions contained in this Federalism Filter Guidance Note are not intended to be prescriptive but seek to provide task teams with a menu of options to choose from depending on the lending instrument. Task teams should review and adopt these principles considering the existing conditions and scope of projects. The Public Sector Governance Team (otherwise known as the Federalism Secretariat) will lead the implementation of this filter. The Secretariat will coordinate hands-on operational support to task teams to implement the filter. The main target group of the filter is World Bank Nepal task teams, with Provincial and Local Governments (PLGs) as the direct beneficiaries. The filter has been developed around three pillars and seven principles: 1. The Institutional and implementation arrangements of projects: with the aim to strengthen the devolved institutional and implementation arrangements of PLGs under the federal system of governance by promoting strategic inter-governmental collaboration, enhancing PLGs engagement in designing projects and strengthening PLGs role in managing projects. a. Promote strategic inter-governmental collaboration - Collaboration between the three tiers of government to increase institutional responsiveness, reduce administrative bottlenecks, promote accountability, and enhance development outcomes. b. Increase PLG engagement in designing projects – promote consultations and seek inputs from PLGs into the design of projects, and incorporate in the design PLG-managed sub-projects − both of which will strengthen the capacity of beneficiary PLGs for project design. c. Strengthen PLG’s involvement in managing projects – Engagement of PLG officials with significant roles in the implementation of projects should enhance the local ownership of projects and projects’ outcomes. Therefore, as far as possible, the implementation of World Bank projects should be driven by PLGs. 2. The fiduciary capacity of provincial and local governments: to proactively support the fiduciary capacity and systems of PLGs through World Bank projects since weak fiduciary capacity of most PLGs is one of the bottlenecks to institutionalizing federalism. This has arisen from the devolution of key fiduciary functions such as budgeting, spending, and internal controls to PLGs without a corresponding transfer to local governments of an adequate number of civil servants with appropriate fiduciary skills. d. Enhance the fiduciary capacity and system of PLGs – While developing mitigation measures to address potential fiduciary risks based on fiduciary risk assessments, task team can go one step further to develop the fiduciary capacity of PLGs by reviewing the capacity requirements of PLGs to perform 1 Education, health, governance, climate change, agriculture, transport, social protection, jobs, social development, urban governance, water and sanitation, education, and energy. 4 their fiduciary functions and responsibilities under the project, and promoting experimental learning to engage PLGs in developing their fiduciary capacities. e. Strengthen and promote the fiduciary oversight of project and PLG operations – External oversight of projects and their activities is a key approach to promoting fiscal discipline and accountability by PLGs. Task teams can support measures in World Bank projects that promote the institutionalization in PLGs of the external supervision of their fiduciary functions with the active involvement of PLGs Audit Committees. 3. Citizens’ engagement, gender equality and social inclusion (GESI): to encourage proactive support to the participation and inclusion of women and marginalized groups in PLGs’ programs through World Bank operations in Nepal, and the corresponding accountability for such inclusion. This pillar covers the integrating of citizen engagement and GESI in PLGs programs. f. Integrate citizens engagement: create and support the enabling environment for mainstreaming citizens’ engagement in federal and PLGs’ functioning. Under the correct enabling conditions, citizens’ engagement creates opportunities for participatory and inclusive development, and helps attain desired development outcomes (World Bank 2014). g. Promote GESI so it becomes an integral part of PLG planning and programs, while PLGs are proactive in measuring and demonstrating that GESI has a significant role in development outcomes. There is a particular need to strengthen the enabling environment to enhance the engagement and empowerment of women and marginalized groups. Through these principles and their complementing actions, World Bank Nepal aims to design and implement projects within the context of Nepal’s federal system of governance. This Guidance Note and the tools contained in it have been prepared under the guidance of the Nepal Country Management Unit (CMU) with the long-term goal of building critical capacity, strengthening systems, and operationalizing government policies pertinent to the implementation of federalism. This Federalism Filter Guidance Note has three main parts. Part 1 discusses the evolving federalism context, the objectives and beneficiaries of the filter, and its application. Part 2 presents the filter with its key principles and corresponding actions for task teams to consider in mainstreaming federalism in World Bank projects in Nepal. Part 3 describes the governance and institutional arrangements and processes for implementing the filter. The annexes include: (i) the federalism readiness checklist, structured as a matrix of principles and actions for task teams to indicate which ones have been integrated into a project and to reinforce teams’ commitments to implementing them; (ii) notes on good practice examples of actions, approaches, and tools that are recommended in the filter; (iii) guiding questions for designing and integrating GESI in PLG projects; and (iv) the list of experts consulted to develop the filter. An additional supplementary document with a more detailed in-depth description of the filter is available to support operational teams for implementation. It discusses and explains each pillar of the Federalism Filter in detail including the principles to be promoted under each pillar, the rationale behind these principles, and associated actions and activities that can be included by task teams in projects to support the achievement of the principles.. 5 Part 1: Evolving Context of Federalism in Nepal 1. Nepal’s federal system of governance − Nepal now has a distinctive federal governance structure that guarantees the functional independence of provincial and local governments while requiring all three levels (or tiers) of government (federal, provincial and local) to coordinate, collaborate and co-exist. Good progress has been achieved since the adoption of the new Constitution in 2015 in putting in place institutional structures and legislation to strengthen the regulatory environment for federalism. The reorganization of the civil service has re-allocated, adjusted, and transferred civil servants into PLGs. This has resulted in the devolution of frontline staff in education, health, agriculture, and administration to PLGs. The process, which is still underway,2 is providing PLGs with key officials and staff. Since September 2019, the government has been deploying senior- level joint secretaries from the federal level to provincial governments as secretaries on a rotational basis to strengthen the human resources capacity and the implementation of federalism at the provincial level.3 2. Fiscal situation − Within the first four years of federalism operation (FYs 2019 to 2022) 4, Nepal’s PLGs accounted for about 30% of the national budget, illustrating their fiscal significance. The country’s overall fiscal management improved in this period. Better expenditure controls decreased the fiscal deficit from 6.7% of GDP in FY 2018 to only 3.5% in FY 2022. Although the pandemic overwhelmed the drivers of growth and contributed to the country’s first economic contraction since 1983, a strong recovery is now underway, supported by vaccine rollouts and the reopening of borders, with growth estimated to have accelerated to 5.8% in FY22. 3. Need to strengthen and institutionalize federalism − Notwithstanding the significant progress, the institutionalization of federalism is lagging behind. The COVID pandemic has further slowed down the implementation of federalism. Although the government is taking measures to promote inclusive governance, more efforts are needed to strengthen inter-governmental coordination and institutional capacity for the cooperative federalism envisaged by the Constitution. The weak institutional capacity of many PLGs is severely constraining the institutionalization of federalism across the three tiers of government. The devolution of functional assignments is incomplete as PLGs are unable to recruit adequate technical staff and manage them, thus limiting their ability to fulfill their mandates as autonomous levels of government. Measures are needed to address the slow pace of federalization, hence . the support provided by Nepal’s development partners, including the World Bank, needs to be directed more to strengthening and institutionalizing federalism. 4. Current World Bank projects − As of the start of 2022, there are approximately 26 active World Bank projects in Nepal, which were providing about $3.3 billion in funding to federal, provincial and local governments. An additional eight projects were in the pipeline with an estimated funding tag of $700 million. These 34 projects cut across a range of sectors, including health, education and agriculture. Bank operations that were approved after FY 2017/18 have the principles of federalism explicitly incorporated in their designs; but overall, there is substantial variation in the extent to which current World Bank projects take the new federal structure of governance into account. Given the importance of the federal structure in the way services are to be delivered, there is a strong need to ensure that all Bank projects are supportive of the strengthening of the federal system. 2 Despite the Government of Nepal’s statement that the process of staff adjustment has been completed in 2019, it is reportedly on- going, with considerable challenges. Due to the pending passing by Parliament of Federal Civil Service Act, the government has yet to report on the progress of the recruitment of personnel for PLGs. 3 Note that once sent to provinces, joint secretaries become eligible to become secretaries at the federal level after about one year meaning that, on average, these joint secretaries serve about one year in the provinces. Some of them serve as principal secretaries of provinces even after being promoted. 4 Note that all fiscal years mentioned in this document are Nepali fiscal years unless otherwise stated. Nepali fiscal years run from mid-July. 6 The Institutionalization of Federalism in Nepal 5. Project institutional and implementation arrangements − The roll-out of federalism in Nepal, which has been underway since 2017, has been slow. The Intergovernmental Relations Act, 2020 was introduced to foster inter-governmental coordination across the three levels of government, but limited institutional capacity and weak coordinating mechanisms are affecting its operationalization. The Federal Government is responsible for strengthening the enabling environment for inclusive governance but has only made limited progress on setting up the critical supporting structures for provincial and local governments to coordinate with the Federal Government to carry out their functions. The World Bank task teams have begun to recognize the new roles and relationships of the three levels of government by reconfiguring the institutional arrangements of supported projects to increase the involvement of PLGs in the design, implementation, and evaluation of projects. PLGs need to be empowered to provide inputs derived from the local context into conceptualizing the problems that projects intend to address. Accordingly, the early involvement of PLGs in designing projects should improve their ownership of projects and project implementation. 6. PLGs’ fiduciary capacity and systems – The fiduciary capacity of an organization is its capacity to ensure that budgeted resources are used for their intended purposes. The weak fiduciary capacity of many of Nepal’s PLGs is a fundamental challenge to the institutionalization of federalism in Nepal. The devolution of the key fiduciary functions of budgeting, spending, and internal controls to PLGs has increased fiduciary risks. This is because public financial management practices are not adequately developed, especially in local governments, to assure that public finances are spent on their intended purposes, with the procurement of goods and services being particularly weak (World Bank and UNDP 2019). The Government of Nepal is making some investments in developing the fiduciary capacity and fiduciary systems − under the $10.8 million Integrated Public Financial Management Reform Project (IPFMRP: 2018-2023) and the $130 million Provincial and Local Government Support Program (PLGSP). But there is a need to significantly scale up investment, particularly to build the capacity of PLGs.5 The PLGSP, which is supported by other development partners and started in 2020, supports the strengthening of PLGs’ public financial management systems, including planning, budgeting, revenue administration, and internal auditing systems. A Public Financial Management (PFM) Multi Donor Trust Fund (MDTF) administered by the World Bank is funding the IPFMRP, which started in 2018 , and is implementing key federal-level public financial management initiatives, including building the capacity of all three levels of government on public financial management.6 Task teams should examine the feasibility of leveraging the PLGSP, IPFMRP, and its associated PFM MDTF to develop PLGs’ fiduciary capacity and systems for the improved implementation of federalism. 7. Citizens’ engagement in Federal and PLG programs − Meaningful participation and accountability are key ingredients of the effective institutionalization of federalism in Nepal. Under the right conditions, citizens’ engagement can create opportunities for participatory and inclusive development and help attain development outcomes. The opportunities created through citizens’ engagement can also enable citizens to advocate for and demand transparent and accountable governance. Citizens’ engagement has long played a key role in service delivery in Nepal. As federalization evolves in the country, there is the need to identify and support opportunities for increasing the participation of citizens in governance and development programs. The Federalism Capacity Needs Assessment (World Bank and UNDP 2019) identified a lack of formal channels to facilitate citizens’ 5 Shrestha (2019) identified the main public financial management challenges at PLGs as (i) fiscal indiscipline due to poor enforcement and non-compliance with financial laws and regulations; (ii) disconnected planning and budgeting; (iii) high fiduciary and corruption risks in the absence of the digitization of most financial functions; (iv) the inadequate number of public financial management experts and the generally weak technical capacity of accountants, and (v) poor internal control and enforcement measures in PLGs to address the recommendations made by the Office of the Auditor-General. 6 The IPFMRP is supporting (i) establishing public financial management procedures for planning, budgeting, reporting and internal controls across all tiers of government; (ii) establishing public financial management training arrangements; (iii) strengthening the Office of the Auditor General its strategic objectives; and (iv) improving public procurement performance. 7 participation. This is concerning as the interests and voices of poor and disadvantaged populations are often distant and marginalized from mainstream development policies and programs in the country. 8. Promoting gender equality and social inclusion (GESI) in Federal and PLG programs – There is a pressing need to strengthen the implementation of gender equality and social inclusion in the work of provincial and local governments. The federal system of governance is empowering PLGs to promote the participation of marginalized and underrepresented groups in decision making.7 While PLGs have made progress on inclusive development, the representation of traditionally excluded groups in these two levels of government is at risk of being a mere tick box exercise rather than entailing equal representation and meaningful participation. The Federalism Capacity Needs Assessment identified substantial gaps between the needs and capacity at all levels of government to address and manage GESI issues (World Bank and UNDP 2019). The Constitution envisions Nepal as an inclusive state and guarantees the right to equality for all its citizens. The Design and Application of the Filter 9. Development of the filter – To address the above points, in 2021 the World Bank decided to produce a federalism filter to systematically guide the inclusion of support in World Bank projects for strengthening federalism. The filter was developed through an inclusive and participatory approach. It’s framework of three pillars and seven principles for the institutionalization of federalism8 and its recommended actions were identified through broad-based consultations and consensus in engagements with development experts and filter’s key stakeholders such as task team leaders, the Country Management Unit leadership, operations staff, development partners and government counterparts. The development of the filter began with a desk review of institutional and implementation arrangements in a sample of twenty four World Bank projects in federal or decentralized countries. These projects were selected from six countries (India, Indonesia, Mexico, Nigeria, Brazil, and Kenya) based on (i) the coverage of thirteen target thematic areas,9 (ii) being under implementation or completed, and (iii) having at least two levels of government as beneficiaries (even if the project was implemented only by the Federal Government). 10. Consultations − The desk review was followed by consultations with the 24 sample projects’ task teams10 to gather in-depth knowledge on the experiences of implementing their projects. The consultations focused on issues related to inter-governmental relations, and institutional and implementation arrangements, including fiduciary, gender, and citizen engagement. The consultations also sought specific guidance from the task teams for the development of Nepal’s Federalism Filter. 11. Final reviews − The final draft filter was subjected to consultations with internal and external stakeholders for feedback including World Bank experts; Nepal country office specialists; government counterparts, including staff of selected project implementation units; and development partners11. The Framework of the Filter 12. Purpose of the filter − This Federalism Filter is a mechanism to guide and support World Bank Nepal country teams to systematically design projects within the context of the need to strengthen and support Nepal’s federal system of governance. It has been prepared under the guidance of the Nepal Country Management Unit (CMU) to focus interventions, support institutional capacity building needs and strengthen the underlying 7 See Rai (2019) for more details on the situation of Nepal’s marginalized communities. 8 The institutionalization of federalism is defined as promoting inclusive and effective institutions and governance systems where PLGs are sufficiently empowered and have sufficient institutional capacity, including mechanisms for intergovernmental coordination and meaningful participation and accountability. 9 Education, health, governance, climate change, agriculture, transport, social protection, jobs, social development, urban governance, water and sanitation, education, and energy. 10 See Annex 3 for the experts who were consulted. 11 The development partner consulted were the Swiss Agency for Development Corporation, USAID, UNDP, and the Asian Development Bank 8 arrangements of the federal system of governance. The filter (which is presented in the matrix in Part 2 of this document) is part of the World Bank’s wider efforts to support the Government of Nepal to operationalize federalism. It has been developed around three pillars: 1. The Institutional and implementation arrangements of projects 2. The fiduciary capacity of provincial and local governments 3. Citizens’ engagement, gender equality and social inclusion in PLG programs. 13. Seven principles − The filter promotes seven actionable principles under the three pillars, mainly to apply to the World Bank’s Investment Project Financing (IPF) and Program-for-Results (PforR) operations in Nepal, in order to deepen the institutionalization of the federal system of governance. The application of the following seven principles for implementing projects aims to make World Bank projects more federalism-friendly. The three pillars and seven principles are illustrated in Figure 1. 1. Promote strategic inter-governmental collaboration 2. Increase PLG engagement in designing projects 3. Strengthen PLGs’ involvement in managing projects 4. Enhance the fiduciary capacity and systems of PLGs 5. Strengthen and promote the fiduciary oversight of project and PLG operations 6. Integrate citizens’ engagement in Federal and PLG programs 7. Promote gender equality and social inclusion in Federal and PLG programs. Figure 1: The Federalism Filters’ pillars and principles 9 Beneficiaries and Application of the Filter 14. Principal beneficiaries − The filter is intended to have a positive impact on the World Bank’s portfolio in terms of the increased application of federalism principles in its operations. The main target group of the filter is World Bank country teams, with PLGs as the direct beneficiaries. Indirect beneficiaries will be all the people who benefit from services provided by PLGs and the Federal Government. 15. The selective application of the principles − This filter provides seven key principles and corresponding actions to assist task teams in the preparation and implementation of World Bank projects in Nepal. The wide range of actions contained in this filter are not intended to be prescriptive, but to provide task teams with a menu of options to choose from, depending on the objectives and scope of operations and the choice of lending instrument. There is no one-size-fits-all measure for mainstreaming federalism in projects, nor are the proposed actions ‘silver bullet’ options. Task teams should review and adopt these principles considering the existing conditions and scope of projects. However, it is important to recognize that federalism-friendly projects in Nepal are ones that apply several of the guiding principles in their design and implementation. The long-term goal is to build critical capacity, strengthen systems, and operationalize government policies pertinent to the implementation of federalism. 16. Note that this filter prioritizes the strengthening of PLGs’ fiduciary capacity and systems for the more effective management of public finances (noting that other public financial management functions, such as fiscal transfer systems, which also need improving, are not covered by this first version of the filter). 10 Part 2: The Filter – The Pillars, Actions, and Sub-Actions Pillar 1: The Institutional and Implementation Arrangements of Projects Principle 1: Promote Strategic Inter-governmental Collaboration Principle 1 concerns leveraging the institutional and implementation arrangements of World Bank projects to foster effective interactions among the three levels of government. It encourages task teams to frame institutional arrangements to promote coordination among the three levels of the government on decision-making, which will also support the effective implementation of projects. This principle can be implemented by integrating actions 1.1 to 1.4 in projects. 1.1. Facilitate inter-governmental coordination12 through the following: (a) Vertical coordination between federal ministries and agencies and PLGs, principally between federal ministries and provinces, and between federal ministries and local governments13 (b) Horizontal coordination between two or more provincial governments (c) Vertical coordination between provincial and local governments (d) Horizontal coordination between two or more local governments14. 1.2. Formalize inter-governmental coordination, including through the following but not limited to : (a) Memorandums of understanding (MoUs)15 (see Note 1 in Annex2 for PLGSP example) (b) Participation agreements (see Note 2 in Annex2 for NUGIP example ) (c) Subsidiary agreements16 (see Note 3 in Annex2 for Nigeria example) (d) Performance contracts (see Note 4 in Annex2 for another Nigeria example). 1.3. Promote inclusive federal-level project steering committees to give voice to PLGs in decision-making concerning projects. (See Note 5 in Annex2 for REED example). Include PLG representatives on federal-level project steering committees from umbrella institutions such as: (a) The Inter-provincial Council (b) Provincial coordination councils (c) The Municipal Association of Nepal (MuAN) (d) Nepal Association of Rural Municipalities (NARMIN) (e) District coordination committees. 1.4. Promote inclusive PLG-level project steering committees to serve as connectors with federal level project steering committees, federal ministries and agencies, and provincial and local governments (see Note 6 in Annex2 for PLGSP, REED and NUGIP examples):17 (a) PLG-level project steering committees should usually be located at the provincial level. (b) Define the selection criteria and role of PLGs reps in PLG level project steering committees in project documents. Principle 2: Increase PLG Engagement in Designing Projects Principle 2 seeks the increased engagement of PLGs and local organizations in designing projects. PLGs’ proximity to local people means that they will often better understand local needs and can play a critical role in framing solutions.18 This principle can be implemented by pursuing actions 2.1 and 2.2 in projects: 2.1. Facilitate consultations with PLGs and institutions that serve PLGs’ interests19 for their inputs into the design of projects (a) Integrate relevant suggestions provided by PLG stakeholders into the designs of projects. 12 The Constitution delineates power almost equally among the three tiers of government, with each tier expected to be autonomous, while the relationship between them is expected to be based on cooperation, co-existence and coordination. Thus, there are opportunities for vertical coordination between the Federal Government and provincial governments, between the federal and local government and between provincial and local governments. 13 The Intergovernmental Relations Act, 2020 mandates the Federal Government to coordinate with PLGs on a range of matters, including the implementation of large projects of national importance, and inter-provincial projects and programs. 14 The mayor of a municipality in western Nepal (Gurbhakot, Surkhet) said: “Local government s may be connected through issues like social customs, physical infrastructure projects and natural resources. Inter-municipal relations are important for their management, protection and promotion. (Yet), at the moment, (coordination between local governments) is limited to interpersonal coordination at leadership level as the need arises. But it would be beneficial in the long term to institutionalize this through formal channels.” (DRCN 2020) 15 World Bank projects In India typically support MoUs between states and local governments and implementing institutions. 16 World Bank projects in Nigeria use subsidiary agreements to foster collaboration between the Federal Government and beneficiary states to promote accountability for the implementation of projects. 17 Note that, as PLG-level project steering committees are expected to be located at the provincial level, projects can have such committees in each of the provinces they work in (if they work in more than one province). 18 World Bank projects in Kenya primarily lend to national government and, as a result, high level and important discussions mostly occur at the national level. Subnational governments are only introduced later in programs, resulting in differences in the level of understanding between the different levels of government with respect to the design of projects and implementation modalities. 19 Key institutions include the Interprovincial Council, provincial coordination councils, district coordination committees and municipal associations. 11 (b) Provide evidence in project documents to show the integration of PLG’s suggestions into projects’ design. (c) Ensure that consulted PLG stakeholders are informed about how their suggestions have been considered in the design of projects. 2.2. Strengthen the capacity of PLGs to design sub-projects for their jurisdictions (a) Develop sub-projects to be financed by the project through consultative processes. (b) Design sub-projects to be implemented through appropriate PLG entities. Principle 3: Strengthen PLGs Involvement in Managing Projects Principal 3 calls for increasing PLGs’ involvement in projects for more effective project management. Engaging PLGs in project implementation will provide a learning experience for PLGs officials and will strengthen PLGs ownership of the project, which can result in more effective project implementation. This principle can be implemented by integrating actions 3.1 to 3.6 in projects: 3.1. Brief PLG officials on projects prior to the start of implementation (see Note 8 in Annex2 for PLGSP example) (a) Organize briefings on planned activities, outcomes, implementation modalities, and PLGs’ roles and responsibilities (b) Translate all relevant project documents into Nepali. 3.2. Facilitate the appointment of project focal persons in all targeted PLGs20 to do the following: (a) Facilitate coordination between PLGs, project implementation agency, and World Bank task teams. (b) Participate in project supervision missions, where possible. 3.3. Assign remedial actions21 to PLG officials to address project implementation challenges, including fiduciary challenges to promote proactive action by PLG leadership to address emerging issues and promote ownership. 3.4. Prescribe clear criteria for the participation of PLGs in projects including their willingness, interest, minimum capacity as project stakeholders: (a) Select participating PLGs in consultation with government counterparts based on publicly available, verifiable, and objective data sources. (b) Confirm the commitment and minimum capacity of PLGs, including through participation agreements, their willingness to co- finance sub-projects (typically 5-10%), and by assessing their minimum capacity (e.g., on finance and procurement). (c) While PLGs’ minimum requirements need to be met to participate in certain projects or programs, the criteria should not include elements that will automatically exclude disadvantaged PLGs – for example, revenue performance, which can exclude PLGs with limited revenue-raising capacity. 3.5. Align project staffing with overall national staffing regulations: (a) Design projects to support the strengthening and consolidation of PLG staff. This should happen even where consultants are used by them working hand-in-hand with PLG staff, and by making use of existing capacity building programs such as PLGSP. (b) Avoid creating parallel project management systems. (c) Assess concerned PLG staff during project preparations. 3.6. Promote transparent decision making on implementing projects by supporting the development and institutionalization of the following: (a) Transparency mechanisms, such as by posting important project documents on government websites and noticeboards. (b) Monitoring and feedback mechanisms, including data information systems, tracking feedback mechanisms, and project MISs linked to PLGs’ M&E systems. (c) Accountability mechanisms, such as by closing feedback loops, publishing implementation status and result reports (ISRs) and ensuring timely reporting. (d) Build the capacity for accountability and the institutionalization of accountability and disclosure mechanisms. Pillar 2: The Fiduciary Capacity and Systems of PLGs Principle 4: Enhance the Fiduciary Capacity and Systems of PLGs Principle 4 is concerned with the proactive enhancement of fiduciary systems and the capacity of PLGs to implement World Bank projects. World Bank task teams should prioritize the development of PLGs’ fiduciary capacity and systems, to the extent possible through actions 4.1 to 4.3: 4.1. Identify the capacity and system requirements for PLGs to manage project-related fiduciary tasks: (a) By assessing the capacity needs of PLGs to manage fiduciary risks in project fiduciary assessments. (b) By reviewing existing vs. required staff capacity and existing vs. other required fiduciary systems (processes, procedures, information systems, etc.) in fiduciary reviews. 4.2. Prepare financial management and procurement enhancement action plans that focus on fiduciary capacity building: (a) The plans include costed actions with specific timelines to address weaknesses and mitigate risks 20 Focal persons should be senior government officials who have knowledge and backgrounds relevant to projects and can effectively coordinate across government agencies. 21 Remedial actions are actions proposed by project task teams to address project implementation challenges. These are usually determined at supervision missions and mid-term reviews. 12 (b) The plans specify the entities responsible for overseeing their implementation (e.g., project implementation agencies, steering committees, etc.) with arrangements reflected in projects’ operational manuals; and (c) Progress on the implementation of action plans is regularly assessed. 4.3. Ensure that the building of capacity on fiduciary functions aligns with PLGs’ needs by doing the following: (a) Leveraging training institutions including Nepal Administrative Staff College (NASC), the International Training Centre of the International Labour Organisation (ITC-ILO),22 provincial centers for good governance, and the Ministry of Finance’s Public Financial Management Training Center. (b) Coordinating with agencies such as the Public Procurement Monitoring Office (PPMO), the Financial Comptroller General Office (FCGO), the Ministry of Finance (MoF) and the National Planning Commission (NPC) to provide training on their subject areas. (c) Customizing trainings on fiduciary capacity development to reflect the needs of PLGs. (d) Making training materials on fiduciary capacity development in formats that enable their later use by trainees on completion of trainings. (e) Providing regular training on fiduciary functions to concerned project personnel, including orientations for new fiduciary staff. 4.4. Tailor fiduciary functions performed by third-party agencies and consultants to the goal of transferring these skills to PLGs23 (See Note 9 in Annex2 for NUGIP example). This requires the following: (a) Producing simplified operating procedure manuals, translated into Nepali. (b) Producing user-friendly training materials for PLGs, translated into Nepali. (c) Timely conducting agreed numbers of training for targeted PLG officials on fiduciary functions. (d) Incorporating time-bound fiduciary skills and knowledge transfer in the ToRs of third-party agencies and consultants. Principle 5: Strengthen and Promote the Fiduciary Oversight of Project and PLG Operations Principle 5 focuses on enhancing the internal and external oversight of project fiduciary functions. Task teams should support measures to strengthen the supervision and oversight of projects’ fiduciary functions. Such regular supervision will offer opportunities for concerned Federal Government agencies, such as the FCGO, the Office of the Auditor General and responsible ministries, to collaborate more effectively with PLG audit and project committees to identify and address PLG’s fiduciary weaknesses. Task teams should coordinate with other projects and programs such as PLGSP and IPFMRP, and development partner working groups, such as the Public Financial Management Working Group, and the Integrity and Accountability Working Group, to improve external oversight of PLGs’ fiduciary functions. This can be achieved through actions 5.1 to 5.3: 5.1. Support the addressing of the recommendations of internal and external audits and PLG audit committees: (a) PLGs regularly follow up on the implementation status of audit recommendations. (b) Project implementation units (PIUs) and project steering committees regularly monitor PLGs’ implementation of audit recommendations. 5.2. Promote the regular follow-up by PLG audit committees on the implementation of audit recommendations: (a) Foster frequent PLG audit committee meetings to monitor the implementation progress of audit recommendations. (b) Encourage PLG audit committees to prepare work plans with timelines and milestones to guide follow up on the implementation of audit recommendations. 5.3. Measure the effectiveness of fiduciary oversight activities undertaken by PLGs within projects a) Project results frameworks include indicators on PLG Audit Committees involvement on fiduciary oversight activities. Pillar 3: Citizens’ Engagement and GESI in Federal and PLG Programs Principle 6: Integrate Citizens’ Engagement at federal and PLG levels24 Citizen engagement is very important for inclusive governance. Principle 6 underpins the need for World Bank-funded operations to support the mainstreaming of citizens’ engagement in all government programs. The aim is to promote public faith in, and support for the operationalization of citizen engagement at federal and PLGs levels by implementing actions 6.1 to 6.4: 6.1. Strengthen the regulatory and institutional framework for citizens’ engagement at all levels of government25 (a) Support the development and implementation of citizens’ engagement guidelines by the Federal Government and citizen engagement plans PLGs. Guidelines should promote (i) budget transparency and the disclosure of information; (ii) constructive government-citizen engagement; (iii) building the capacity of PLGs and civil society groups to effectively engage citizens in PLG programs. (b) Provision of incentives to apply the guidelines, including funding their implementation, tracking and measuring compliance. 22 The ITC-ILO supports the PPMO to train government personnel on the procurement of goods and services. 23 Some projects rely on third-party independent institutions to provide technical backstopping to local governments including on mitigating fiduciary risks. For example, NUGIP uses the Urban Development Support Team, which consists of external experts, to support local government financial, procurement, and contract management systems, among other functions. 24 This will emphasize the operationalization of federal and PLGs citizens’ engagement policies and strategies and demand-side innovations. 25 The Government of Nepal acknowledges the need for guidelines and a strategy for citizens’ engagement to support the implementation of federalism. In 2021, the National Planning Commission developed guidelines for citizens’ engagement in PLG planning. And the government’s Public Expenditure and Financial Accountability (PEFA) Secretariat in 2021 developed citizens’ engagement guidelines, focusing on public financial management functions. (Freedom Forum and PEFA Nepal 2022). 13 (c) Support approaches to citizens’ engagement that promote accountability and transparency by producing the following sources of information in accessible formats (i) citizens’ budgets, (ii) interactive institutional websites, (iii) annual sector and PLG reports, and (iv) approved PLG budgets and in-year budget amendments (d) Promote proactive government reporting on citizen engagement outcomes. 6.2. Promote constructive dialogue between governments and citizens at all levels by supporting the following: (a) Consultative mechanisms to strengthen government-citizens interactions such as public hearings, PLG meetings and public participation in federal and PLG budget hearings. (b) Citizen-centered monitoring mechanisms such as social audits, citizens’ report cards and community scorecards. (c) Multi-level grievance redress mechanisms to facilitate feedback, e.g., modernized client service units with grievance redress mechanisms in key government agencies and e-platforms for citizens’ feedback across all levels of government. (d) Beneficiary feedback mechanisms comprising feedback platforms integrated into government agencies’ websites that can close the feedback loop, including interactive feedback mechanisms. 6.3. Strengthen inter-governmental coordination and build capacity on citizens’ engagement: (a) Promote coordination between agencies responsible for public participation in the Federal Government and PLGs including (i) consultations with the range of government stakeholders on the design and implementation arrangements of projects’ citizen engagement mechanisms, (ii) periodic inter-governmental meetings on the implementation of citizens’ engagement in projects and programs, and (iii) involving government and non-government stakeholders in implementing project’s citizens’ engagement activities. (b) Support the development of capacity for citizens’ engagement under projects focusing on both the supply-side through the Federal Government and PLGs, and the demand-side through civil society, NGOs, CBOs, and development associations. 6.4. Promote the transparent operation of PLGs, including by implementing the following mechanisms: (a) Citizens’ budgets. (b) Establishing right to information desks in PLGs to provide information to citizens. (c) Maintaining institutional websites that are accessible to the general public. (d) Holding regular public forums with citizens, e.g., public hearings and radio programs. (e) Maintaining PLG noticeboards. Principle 7: Promote Gender Equality and Social Inclusion (GESI) in Federal and PLGs’ Programs Principle 7 calls for promoting the inclusion and participation of excluded groups, such as women, Dalits, indigenous people, and other marginalized groups, which is a central issue in Nepal’s constitution. While government efforts on GESI are visible, women and marginalized groups are much less involved in decision-making . This principle promotes the integration of GESI in programs and projects through actions 7.1 to 7.3: 7.1. Strengthen the policy and institutional environment for implementing GESI: (a) Develop, update, and implement GESI guidelines, regulations, and action plans at federal and PLG levels. (b) Integrate GESI principles in PLGs’ programs. (c) Design mechanisms for implementing GESI in PLGs, including in and among their GESI units, GESI focal points, gender-based violence referral mechanisms, and gender-responsive planning and budgeting. 7.2. Foster partnership, engagement, and coordination for implementing GESI: (a) Support mechanisms to strengthen projects’ engagement with women and excluded groups at PLG levels. (b) Support mechanisms to strengthen engagement with GESI stakeholders (development partners, CSOs, NGOs) for partnerships and sharing lessons on GESI. (c) Support coordination with PLGSP for partnership and synergy to develop project’s GESI components. 7.3. Build capacity and promote the monitoring and evaluation of activities, projects and programs: (a) Develop the capacity of PLGs’ GESI friendly monitoring systems to collect disaggregated data. (b) Measure the effectiveness of GESI activities supported under projects by including GESI performance indicators in project results frameworks.26 (c) The transparent monitoring and reporting of GESI targets across levels of government.27 (d) Support capacity building for GESI implementation through training and sensitization, especially to make PLG officials more responsive to the priorities of women and vulnerable groups. 26 To be monitored and reported on in project implementation reports such as aide memoires and implementation status and result reports. 27 An important element of good governance is to be equitable, inclusive and responsive. These elements need to be highlighted in terms of indicative gender parity and affirmative action target plans for periods to achieve gender balance. This needs to be a requirement that is consistent within entities and across all supported groups. 14 Part 3: Filter Implementation Arrangements 17. The Public Sector Team (otherwise known as the Federalism Secretariat) in the World Bank Nepal office will lead the implementation of this filter (Figure 2). The Secretariat will coordinate hands-on operational support to task teams to implement the filter.28 The Secretariat will perform this function in coordination with the extended federalism team in the Country Office, consisting of leaders of the various subtasks under the NFFASP and thematic specialists (fiduciary, citizens’ engagement, GESI, urban and governance). The Public Sector Team will be responsible for the following: (a) As part of projects’ teams, briefing task teams on the filter during project preparations, including clarifying their responsibilities for applying the filter. (b) Reviewing project appraisal documents (PADs) and federalism readiness checklists (see Annex 4) completed by task teams to advise decision meetings on the scope of federalism principles to be integrated into the designs of projects. (c) Providing summary inputs to project concept note reviews on task teams’ commitments to integrating the filter’s principles in the design of projects. (d) Providing regular information sessions for Nepal Country Office specialists on the application of the filter. (e) Monitoring the incorporation of the filter’s principles in projects and reporting on their implementation . (f) Conducting annual evaluations of the implementation of the filter and reporting on its rollout, including achievements and implementation challenges. (g) Providing inputs into project implementation completion report on the outcomes of the federalism principles integrated into projects. (h) Collecting and disseminating good practices on the application of the Federalism Filter’s seven principles through ‘brown bag lunches’ and other forums (i) Regular engagement and coordination with the government on the implementation of the filter by (i) explaining the filter to government counterparts, including PLG officials, to promote understanding of the principles and its implementation; (ii) sharing information with government counterparts on the implementation progress and achievements and lessons learned from implementing the filter; and (iii) seeking government inputs to enhance the filter’s design and its implementation. (j) Maintain a roster of global experts on the subjects covered by the filter, who can be invited to support task teams to implement the filter. 18. Extended Federalism Team − In addition to the Federalism Secretariat, the entire cross-World Bank Global Practices team, including social, urban, poverty, fiduciary, and education specialists (constituting the Extended Federalism team), will be involved in implementing the filter. The team will provide technical support to project task teams to integrate relevant principles of the filter in the design of projects and support the Federalism Secretariat to implement the filter. 19. World Bank task teams and task team leaders (TTLs) will be responsible for the following: (a) Following the federalism elements of the Project Readiness Filter that have been harmonized with the Federalism Filter (b) Integrating the Public Sector team as part of the project team to support the application of the filter. (c) Applying the federalism filter’s principles and checklist (see Annex 4) during projects’ preparation, integrating its application in the PADs and projects results frameworks, and informing management at decision meetings about the scope and level of integration of the filter’s principles in projects’ designs. 28 This support may include political economy issues related to federalism when a new project is being prepared or/and when necessary. However, political economy analysis on key sectors, while critical in informing World Bank support to federalism implementation, is beyond the scope of this filter. 15 (d) The strategic use of World Bank financing Box 1: Types of World Bank financing instruments in supporting the government to Instruments implement federalism. While the various World Investment project financing (IPF) is the most used Bank lending instruments are applicable in financing instrument in Nepal. It is used to finance different circumstances, the use of mixed specific investments to improve service delivery, financing instruments (see Box 1) is crucial for strengthen capacity and develop infrastructure. It can helping institutionalize federalism in Nepal. be combined with some type of result-based instrument (e) The strategic use of funding to leverage to incentivize timebound outcomes on institutionalizing federalism in Nepal. implementation of the filter. The Government of Nepal is often unwilling to commit project Development policy credit (DPC) is used to secure funding to institutional capacity and systems government actions to address policy and institutional development. Task teams can coordinate with gaps. In the federal context, which is characterized by weak institutional capacity, DPC operations need to be PLGSP29 and Bank-supported projects, such as accompanied by technical assistance to strengthen NUGIP and IPFMRP to leverage funding to capacity to apply policies, which should contribute to support the implementation of the filter in their institutionalizing federalism. projects. Program for results (PforR) financing helps 20. Country Management Unit – Strong Country governments implement expenditure programs with Management Unit (CMU) ownership of the defined objectives and results. PforR operations need implementation of the filter is critical for its successful to be accompanied by technical assistance to strengthen operationalization. The unit should take the following capacity for applying policies, which should contribute actions: to institutionalizing federalism. (a) Set ground rules and the tone of implementation of the filter by harmonizing the Project Readiness Filter and the Federalism Filter, and by encouraging incorporation of Federalism Filter principles and completion of the federalism readiness checklist by task teams at project design. (b) Verify the inclusion of the filter principles and action points in projects’ designs, by inquiring at decision meeting about (i) ways in which the Concept Notes and the PADs take into account the filter and properly consider the impact of the project in strengthening federalism, and (ii) specific indicators in the projects’ results frameworks that allow for monitoring of the projects’ influence on strengthening federalism and intergovernmental coordination arrangements. (c) Foster collaboration with the government for the effective implementation of the filter by promoting high- level government support for its objectives and principles. The unit should also share lessons learned from implementing the filter with high-level government officials and inform any further actions that may be needed by the government to further strengthen the filter’s principles. 29 The PLGSP funded with US$130 million of which $100 million is from Development Partners --- the Foreign, Commonwealth and Development Office (FCDO), the Swiss Agency for Development and Cooperation (SDC), Norway, the European Union, and the United Nations representing. The government provides $30 million for the four yearlong project (July 2019-July 2023). 16 Figure 2: Operational procedures for implementing the Federalism Filter CMU Setting ground rules of the game, providing incentives Secretariat Coordinate the rollout of the federalism filter and oversee its implementation in coordination World Bank task with the CMU and the extended Extended Federalism teams and leaders (TTLs) federalism team Team Apply the filter to Provide technical integrate federalism in support on the the design and implementation of implementation of the filter projects 17 References Bhargava, Vinay. 2015. ‘Constructive Engagement Process between Governments and CSOs: Are We Getting Results?’ Notes on round-table discussion. Accessed April 2022 at: https://www.ptfund.org/constructive- engagement-process-between-governments-and-csos-are-we-getting-results/ DRCN. 2020. The Interrelationship between Three Levels of Governments in Nepal’s Federal Structure. Kathmandu: Democracy Resource Center Nepal. Accessed April 2022 at: https://www.democracyresource.org/wp-content/uploads/2020/10/Inter-Government- Relation_EngVer_13October2020.pdf Freedom Forum and PEFA Nepal. 2022. Citizen Engagement in Public Financial Management in Nepal. Kathmandu: Freedom Forum. Accessed April 2022 at: https://pefa.gov.np/public/uploads/shares/national_strategy_and_action_plan_2021_english.pdf World Bank and UNDP. 2019. Nepal Federalism Capacity Needs Assessment. Kathmandu: Government of Nepal, the World Bank and United Nations Development Programme. Accessed April 2022 at: https://documents1.worldbank.org/curated/en/503181593615554741/pdf/Nepal-Capacity-Needs- Assessment-for-the-Transition-to-Federalism.pdf NPC. 2021. Guidelines for Citizens’ Engagement in PLG Planning. Kathmandu: National Planning Commission. URL? Rai, Jana. 2019. Deepening Federalism: Post-Federal Analysis on Marginalized Communities in Nepal’s Tarai Region (Federalism in Nepal Volume 3). London: International Alert and Safer World. Accessed April 2022 at: https://www.international-alert.org/wp-content/uploads/2021/08/Nepal-Federalism-Vol3- EN-2019.pdf Shrestha, Rachana. 2019. Governance and Institutional Risks and Challenges in Nepal. Manila, Philippines: Asian Development Bank. Accessed April 2022 at: https://www.adb.org/sites/default/files/publication/543056/governance-institutional-risks- challenges-nepal.pdf World Bank. 2014. Strategic Framework for Mainstreaming Citizen Engagement in World Bank Group Operations. The World Bank. Accessed April 2022 at: https://openknowledge.worldbank.org/bitstream/handle/10986/21113/929570WP0Box380ategicFra meworkforCE.pdf?sequence=1&isAllowed=y 18 Annex 1: Federalism Readiness Checklist for World Bank- Supported Projects This checklist is a tool to facilitate the introduction of the Federalism Filter in the preparation of project designs. It can also be used to assess how far ongoing projects are in line with the recommendations of this Federalism Filter. Actions Checklist Yes No Remarks Pillar 1: The Institutional and Implementation Arrangements of Projects Principle 1: Promote Strategic Inter-Governmental Collaboration 1.1. Will the project facilitate inter-governmental coordination through project institutional and implementation arrangements? If YES, which of the following coordination arrangements will be integrated into the project’s design? (a) Vertical coordination between federal ministries and agencies and PLGs: 1.1 Facilitate inter- governmental ▪ Through coordination between federal ministries and provinces coordination ▪ Through coordination between federal ministries and local governments (b) Horizontal coordination between two or more provinces (c) Vertical coordination between provinces and local governments (d) Horizontal coordination between two or more local governments 1.2. Will the project facilitate the formalization of inter-governmental coordination? If YES, which of the following mechanisms will be applied? (a) Memorandum of understanding 1.2 Formalize inter- governmental (b) Participation agreements coordination (c) Subsidiary agreements (d) Performance contracts (e) Other (which?) 1.3. Will the project support an inclusive federal-level project steering committee? 1.3 Promote inclusive federal-level project (a) To give voice to PLGs in decision making concerning the project steering committees (b) PLG reps included in Federal Level-project steering committee from umbrella institutions, e.g., provincial coordination councils and the Inter-Provincial Council. 1.4. Will the project support an inclusive PLG level project steering committee(s)? 1.4 Promote inclusive (a) To serve as the connecter with the federal level-project steering committee, PLG-level project federal ministries and agencies, provinces and local governments. steering committees (b) The PLG level project steering committee will be located at the provincial level. (c) The selection criteria and roles of PLGs reps are defined in the PLG level project steering committee. Principle 2: Increase PLG engagement in designing projects 2.1. Will the project facilitate consultations with PLGs and key institutions serving 2.1 Facilitate PLGs’ interests for feedback into designing projects? If YES has the consultation consultations with resulted in any of the following actions? PLGs and institutions (a) The integration of relevant inputs from PLG stakeholders into the design of that serve PLGs’ the project. interests for their (b) The provision of evidence in the project’s document to show the integration of inputs into the design PLG inputs in project design. of projects (c) Have consulted PLG stakeholders been informed about how their views have been considered (or not) in the project’s design? 19 Actions Checklist Yes No Remarks 2.2. Will the project support the submission of sub-projects by PLGs for funding? 2.2. Strengthen the If YES will the project follow the following measures? capacity of PLGs to design sub-projects (a) Financed sub-projects must be developed through consultative processes. for their jurisdictions (b) Financed sub-projects must be designed to be implemented through appropriate PLG entities Principle 3: Strengthen PLGs’ involvement in managing projects 3.1. Brief PLG 3.1. Will the project include the following? officials on the project prior to the (a) PLG officials to be briefed on planned activities, outcomes, implementation start of modalities, and PLGs’ roles and responsibilities implementation (b) Relevant project document will be translated into Nepali 3.2. Will the project support the appointment of PLG project focal persons? 3.2. Facilitate the appointment of (a) Focal persons will facilitate coordination between involved PLGs, the project’s project PLG focal implementation agency, and the World Bank task team persons (b) Where feasible, focal persons will participate in project supervision missions 3.3. Assign remedial actions to PLG 3.3. Will the task team assign remedial actions to PLGs officials to address, when officials to address necessary? project implementation (a) The project will promote proactive actions by PLG leadership to address challenges, including emerging issues, to support their ownership of the project. fiduciary challenges 3.4. Does the project provide clear criteria for the eligibility of participating PLGs including their willingness, interest, and minimum capacity to take part, as project stakeholders? 3.4. Prescribe clear (a) Select participating PLGs in consultation with government counterparts based criteria for the on publicly available, verifiable, and objective data sources. participation of PLGs in projects including their willingness, interest, and (b) Confirm the commitment and minimum capacity of PLGs minimum capacity as project stakeholders (c) Ensure that criteria and minimum requirements for PLG participation do not include elements that will automatically exclude disadvantaged PLGs 3.5. Will project staffing arrangements align with overall national staffing regulations? 3.5. Align project staffing with national (a) Design projects to support the strengthening and consolidation of PLG staff. staffing regulations (b) Avoid creating parallel project management systems. (c) Assess concerned PLG staff during project preparations 3.6. Promote 3.6. Will the project support the development and institutionalization of the transparent decision following? 20 Actions Checklist Yes No Remarks making on the (a) Transparency mechanisms including the publication of important implementation of project documents on PLGs’ websites and noticeboards. projects (b) Monitoring and feedback mechanisms, including data information systems, tracking feedback mechanisms, and project MISs linked to PLGs’ M&E systems. (c) Accountability mechanisms, such as by closing feedback loops, publishing implementation status and result reports (ISRs) and ensuring timely reporting (d) Capacity building for accountability through the institutionalization of accountability and disclosure mechanisms. Pillar 2: The Fiduciary Capacity and Systems of PLGs Principle 4: Enhance the fiduciary capacity and systems of PLGs 4.1. Has the project identified capacity and systems requirements for PLGs to 4.1. Identify the manage fiduciary tasks under the project? If YES: capacity and system requirements for (a) The fiduciary assessment of the project covered the capacity requirements of PLGs to manage beneficiary PLGs to manage project fiduciary tasks project-related (b) The scope of the fiduciary review covered existing vs. required staff capacity fiduciary tasks and existing vs. required fiduciary systems to identify gaps between needs and existing capacities 4.2. Has the team prepared a financial management and procurement enhancement action plan based on simplified and streamlined fiduciary systems. If YES, does the plan include the following? 4.2. Prepare financial (a) Actions with timelines to address identified weaknesses and risks focusing on management and fiduciary capacity building. procurement (b) Funding sources to support the implementation of the action plan. enhancement action (c) The plan specifies the institution(s) responsible for overseeing its plans implementation. (d) Measures are in place to promote the periodic assessment of progress on the implementation plan. 4.3. Will the project support measures to build capacity on fiduciary functions? If YES, do the measures include the following: 4.3. Ensure that the (a) Promoting the use of training institutions in Nepal to support fiduciary capacity building of capacity development under the project. on fiduciary functions (b) The signing of contractual agreements with training institutions for providing align with PLGs’ capacity development. needs (c) Training modules developed for fiduciary capacity building are customized to reflect the needs of project PLGs. (d) The provision of regular training to project PLGs on fiduciary management. 4.4 Will the project use third-party agencies or consultants for fiduciary functions under the project? If YES, will the following happen? (a) The production of simplified operating procedure manuals translated into 4.4 Tailor project Nepali. fiduciary functions performed by third- (b) The production of user-friendly training materials for PLGs, translated into party agencies and Nepali. consultants to the goal of transferring these (c) Timely conducting agreed numbers of training for targeted PLG officials skills to PLGs (d) The ToRs of the third-party agency or consultants will incorporate time-bound fiduciary skills transfer and reflect the above points. Principle 5: Strengthen and promote the fiduciary oversight of Project and PLG Operations 5.1. Support the 5.1. Will the project support the external supervision of PLG audit committees? If addressing of the YES, will it include any of the following? recommendations of (a) The focus of external fiduciary supervision will be on the effective internal and external implementation of PLG audit committees’ recommendations by PLGs. audits and PLG audit (b) The promotion of inter-governmental coordination to facilitate the committees implementation of audit recommendations. 21 Actions Checklist Yes No Remarks 5.2. Promote regular 5.2. Will the project promote the monitoring of audit recommendations by PLGs? follow up by PLG If YES, will this include any of the following? audit committees on the implementation of (a) Fostering frequent PLG audit committee meetings to monitor the internal and external implementation of audit recommendations. audit (b) Ensuring that PLG audit committees prepare work plans with timelines and recommendations milestones to guide the addressing of audit recommendations. 5.3. Measure the 5.3 Will the project support the measuring of the effectiveness of fiduciary effectiveness of oversight activities? If YES, will this include any of the following? fiduciary oversight activities undertaken by PLGs within (a) The project results framework includes indicators on PLG Audit Committees projects involvement for tracking the progress of fiduciary oversight activities. Pillar 3: Citizens’ Engagement and GESI in PLG Programs Principle 6: Integrate citizen’s engagement in Federal and PLG programs 6.1. Will the project support measures to improve the regulatory and institutional framework for citizens’ engagement in governance? If YES, do the measures include 6.1. Strengthen the any of the following? regulatory and (a) Support for the development of citizens’ engagement guidelines for the institutional Federal Government and/or citizens’ engagement plans for PLGs framework for citizens’ engagement (b) Provisions of incentives to apply the guidelines at all levels of (c) Support for citizens’ engagement approaches that promote the greater government accountability and transparency (d) Promote proactive government reporting on citizen engagement outcomes 6.2. Promote 6.2. Will the project support measures to promote constructive dialogue between constructive dialogue governments and citizens? If YES, do the measures include any of the following? between governments (a) Consultative mechanisms and citizens at all levels (b) Citizen-centered monitoring mechanisms (c) Multi-level grievance redressal mechanisms (d) Beneficiary feedback mechanisms. 6.3. Strengthen inter- 6.3. Will project support strengthen inter-governmental coordination and capacity governmental building for citizens’ engagement? If YES, do the measures include the following? coordination and (a) Promoting coordination between agencies responsible for public participation build capacity for in government at federal and PLG levels. citizens’ engagement (b) Supporting capacity development for citizens’ engagement as an explicit project activity. 6.4 Will the project implement any transparency mechanisms? If YES, do the mechanisms include any of the following? (a) Citizens’ budgets. 6.4 Promote the (b) Operational right to information desks established in PLGs that provide transparent operations information to citizens as needed. of PLGs (c) Updated PLG institutional websites that are accessible to the general public. (d) Regular public forums held with citizens such as public hearing and interactive radio programs. (e) PLG noticeboards. Principle 7: Promote Gender Equality ans Social Inclusion (GESI) in Federal and PLGs’ programs 7.1. Does the project support measures to strengthen the policy and institutional 7.1. Strengthen the environment for implementing GESI? If YES which of the following measures have policy and been integrated into the project’s design? institutional (d) The development, updating and implementation of GESI guidelines and action environment for plans at Federal or PLG level. implementing GESI (e) Supporting the development and institutionalization of mechanisms for across all levels of improved GESI implementation by project PLGs. government (f) Providing and updating guidelines for gender-responsive planning and budgeting and monitoring in PLG programs. 22 Actions Checklist Yes No Remarks 7.2. Does the project support measures to foster partnership, engagement, and coordination on GESI? If YES, which of the following measures are integrated in 7.2. Foster the project’s design? partnership, (a) Supporting the development and implementation of mechanisms to promote engagement, and stakeholder engagement (development partners, CSOs, NGOs) for dialogue coordination for the improved and partnership for the improved implementation of GESI. implementation of (b) The proactive engagement of CSOs, NGOs, women’s groups, and other GESI vulnerable persons in identifying gaps and needs for implementing GESI. (c) The promotion of partnership and synergies with government programs such as PLGSP to leverage resources and technical support to GESI through the project. 7.3. Does the project support capacity building and M&E on GESI? If YES, which 7.3 Build capacity and of the following measures have been integrated into the project design? promote the (a) Support to PLGs’ GESI monitoring systems. monitoring and (b) Measuring and reporting on the effectiveness of GESI activities supported evaluation of PLG under the project. activities, projects and (c) The transparent reporting of GESI targets across levels of government. programs (d) Support to build the capacity of PLG officials on GESI through training and sensitization. 23 Annex 2: Notes on Examples of Good Actions, Approaches, and Tools for Promoting Federalism Note 1. Implementation of MoUs, PLGSP Nepal: The Provincial and Local Governance Program (PLGSP), which began in 2020, is the Government of Nepal’s flagship capacity development program for federalism. The program initially established memorandums of understanding between the Ministry of Federal Affairs and General Administration (MoFAGA) and provincial governments to implement it. The MoUs were signed between MoFAGA and the offices of provincial chief ministers and council of ministers (OCCMs). The program document noted that: • the three levels of governments are autonomous in their respective spheres of official business; • the implementation of the program at the provincial level can only be fully effective if provincial governments agree with the PLGSP on their roles and responsibilities, program financing and implementation modalities and its fiduciary arrangements; and • such understandings should be reached by the signing of MoUs. Note 2. A participation agreement, NUGIP Nepal: The Nepal Urban Governance and Infrastructure Project (NUGIP), which began in 2020, established participation agreements between the Department of Urban Development and Building Construction in the Ministry of Urban Development and participating municipalities. The agreements spell out the rights and responsibilities of beneficiary PLGs under the project. They also specify the likely consequences of PLGs’ non-compliance with the terms of the agreements, including the suspension or termination of the right to access project benefits. Note 3. Subsidiary agreements, Nigeria: In Nigeria, subsidiary agreements have been signed between the Federal Government and state project implementation entities (PIE) under the terms and conditions approved by the World Bank for projects it supports. State governments receive finance either as credit or grants for projects designed by state-level representatives and experts. These state entities are required to develop annual work plans, which they must submit to their state governments. Note 4. Performance contracts in Ibadan Urban Flood Management Project, Nigeria: Performance contracts were entered into by the Office of the Oyo State Governor and ministries, departments, and agencies involved in this project. This was intended to improve horizontal coordination and maintain accountability throughout project implementation. The contracts stipulated the commitments and obligations of the ministries, departments, and agencies, including by ensuring the participation of technical staff and mutual performance obligations between the two parties, and by including indicators of success and their relative priorities. The continued access of beneficiary institutions to project funding was conditional on satisfactory results in annual performance evaluations. Note 5. An inclusive federal-level project steering committee, REED project, Nepal: The Nepal Rural Economic and Enterprise Development project has an inclusive federal–level project steering committee, which includes representatives of beneficiary provincial governments. While only four of the six beneficiary provinces have representatives on the committee, the initiative reflects the principles of the Federalism Filter. Note 6. Examples of PLG level project steering committees, PLGSP and REED, Nepal: The PLGSP is being implemented across all Nepal’s 753 local governments and 7 provinces. The program is supported by provincial coordination committees (PCC), which are its supreme decision-making bodies for the program at the provincial level. These committees follow broad policy guidelines and policies provided by the National Steering Committee on implementing the program. The PCCs also promote collaboration with local governments to strengthen the support to decentralization and local governance. The PCCs are chaired by chief ministers with the membership of: • secretaries of provincial ministries of economic affairs and planning, ministries of internal affairs and law (MoIALs), social development (MoSDs), and infrastructure development (MoIDs); • provincial financial comptroller generals and the program’s National Program Director or manager; 24 • local government mayors (2), chairpersons (2), deputy mayors (2 women), deputy chairpersons (2 women) designated by the provincial offices of chief ministers and councils of ministers (OCMCM) in consultation with local government representative organizations; and • representatives of the Municipality Association of Nepal (MuAN) and the National Association of Rural Municipalities in Nepal (NARMIN). The REED project has economic corridor technical and coordination committees (ECTCCs) that serve as project steering committee at the PLG level. These committees are made up of the provincial ministries of agriculture, land management, and cooperatives (MoLMACs) of the four targeted economic corridors. They are headed by provincial secretaries of the four MoLMACs and serve as the project’s steering committee at the provincial level to: • provide strategic oversight of overall project implementation at the provincial level; • facilitate provincial-level program planning and implementation of project activities in their provinces; • coordinate with concerned implementing line departments, agencies and stakeholders; • take part in periodic progress reviews; • support the monitoring and supervision of project field work; • promote and manage coordination and cooperation among participating agencies at the provincial level; and • provide overall guidance during project implementation. Note 7. State level action plans, Indonesia: Indonesia’s national program for upgrading slums, which was partly funded by the World Bank’s National Slum Upgrading Project (NSUP), required states to prepare action plans for the upgrading of slums. These plans had to follow the central government’s national guidelines, and once approved, were financed under the project. These plans provided the instruments for municipal participation and project ownership. Note 8. Briefing officials on approved projects, PLGSP Nepal: PLGSP requires MoFAGA to conduct consultative meetings with senior officials of all seven provincial offices of chief minister and councils of ministers (OCCMs) and their ministries to brief them on its concept and implementation modality. Note 9. Fiduciary role of the Urban Development Support Team consulting firm, NUGIP Nepal: NUGIP’s Urban Development Support Team supports the project’s local governments (municipalities) on financial management, procurement, and contract management. The team is supporting the municipalities to strengthen their planning, budgeting, accounting, financial reporting, and internal controls systems for transparent and robust financial systems. A major component is supporting them to implement financial systems including the Subnational Treasury Regulatory Application (SUTRA), guidelines, procedures, and requirements as mandated by the Federal Government for planning, budgeting, accounting, and internal control. The municipalities are being supported to strengthen their procurement and contract management systems focusing on carrying out competitive bidding for strategic and complex urban infrastructure projects and mainstreaming the use of e-procurement systems as per the Federal Government’s PPMO guidelines. 25 Annex 3: Guiding Questions for Designing and Integrating GESI in PLG Projects 1. The identification of potential constraints, challenges, and opportunities (a) Are projects’ objectives and expected impacts potentially constrained by lack of gender equality or social inclusion? If yes, explain how this could undermine achieving projects’ objectives and impacts. (b) Will proposed project activities potentially exacerbate gender inequality or social exclusion? Are there any risks of women or other groups of people being excluded from participating in projects’ decision-making processes, benefits, and opportunities? If yes, what are the risks? (c) Do proposed projects provide opportunities to promote gender equality and social inclusion? If yes, what are the opportunities? 2. The identification of potential project design features (a) If projects’ objectives and expected impacts are potentially constrained by lack of gender equality or social inclusion, what possible actions, measures, mechanisms, tools, and processes could be introduced to address these constraints by involving PLGs? How can PLGs be supported for this? (b) If there is a risk of proposed project activities adversely affecting gender equality or social inclusion, what actions, measures, mechanisms, tools, and processes could be introduced in projects to address those risks? Can PLGs be supported to address them in any way? (c) If proposed projects provide opportunities to promote gender equality and social inclusion, what possible actions, measures, mechanisms, tools, and processes could be introduced to take advantage of these opportunities? How can PLGs be involved or supported to foster these opportunities? 3. The monitoring and evaluation of project design features (a) Are there are any possible actions, measures, mechanisms, tools, or processes included in project s’ designs to address GESI constraints, challenges, and opportunities, and have monitoring and/or evaluation tools and arrangements (e.g., indicators and targets) been identified to assess related progress and results? 26 Annex 4: List of Experts Consulted Name Country Position Maria de Fatima Amazonas Brazil Senior Rural Development Specialist Daniela Pena de Lima Brazil Senior Operations Officer Raghava Neti India Senior Infrastructure Specialist Anju Gaur India Senior Water Resources Management Specialist Anindo Chatterjee India Senior Social Development Specialist S. Krishnamurthy India Senior Financial Management Specialist Christina I. Donna Indonesia Senior Financial Management Specialist Noriko Toyoda Indonesia Senior Governance Specialist Budi Permana Indonesia Senior Procurement Specialist Novari Asra Indonesia Senior Financial Management Specialist Marcus Lee Indonesia Senior Urban Economist Griya Rufianne Indonesia Operations Analyst Adri Asmoro Laksono Poesoro Indonesia Urban Economist Abdu Muwonge Kenya Senior Urban Specialist Davison Muchadenyika Kenya Urban Specialist Muratha Kinuthia Kenya Senior Social Development Specialist Daniel Chalupowicz Mexico Financial Management Specialist Gabriel Penaloza Mexico Procurement Specialist Luis Barajas Gonzalez Mexico Financial Management Specialist Antonio Leonardo Blasco Mexico Senior Financial Management Specialist Guillermo Hernandez Gonzalez Mexico Energy Specialist Daniel Kajang Nigeria Senior Procurement Specialist Olu Kayode O. Taiwo Nigeria Senior Social Development Specialist Robert Reid Nigeria Senior Disaster Risk Management Specialist Michael Corlett Nigeria Senior Financial Sector Specialist Ikechukwu John Nweje Nigeria Senior Public Sector Specialist 27