FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA ETHIOPIA DIGITAL FOUNDATIONS PROJECT (P171034) Addis Ababa, Ethiopia Mid-term review Mission, April 15-25, 2024 Aide-Mémoire/MTR A. Introduction 1. The mid-term review (MTR) mission took place between 15th–25th April, 2024, for the Ethiopia Digital Foundations Project (EDFP; P171034) in Addis Ababa. The mission was co-led by Tim Kelly (co-Task Team Lead, Lead Digital Development Specialist), and Milaine Rossanaly (co-Task Team Leader, Senior Private Sector Specialist)1. As well as the midterm review, the mission also covered an Implementation Support Mission for the Eastern Africa Regional Digital Integration Program (EARDIP SOP-II; P180931). A separate aide-memoire has been prepared for that project. 2. The Bank team met with the Ministry of Finance (MoF), the Ministry of Innovation and Technology (MInT), the Ethiopian Communications Authority (ECA), the Ethiopian Education and Research Network (EthERNet) under the Ministry of Education (MoE), the National ID Program (NIDP) and other stakeholders. The mission wishes to thank the beneficiaries and others for making the time to meet and for the productive discussions. A list of senior officials met during the virtual mission is listed in Annex B, together with the mission agenda, in Annex C. 3. The objectives of the mission were to advance the implementation of the project, notably to: a) To meet with the State Minister and senior management team at MInT to provide a briefing on the two projects and identify measures to facilitate recruiting and retaining PIU staff specialists and consultant; b) To meet with the PIU to discuss progress reports and staffing plans. c) To undertake the midterm review (MTR) for the project, assessing whether the project objectives continue to be relevant, assessing progress towards the project development objective, and specific progress of the project ratings and indicators, as well as of the various project components; d) The MTR will assess the likelihood of achieving the project objectives within the current timeframe, and consider the need for any further project restructuring, including modification to indicators, and a plan of corrective action as needed, in particular for recruiting and retaining PIU staff; e) To continue policy dialogue on the telecom reform process, including the partial privatization of EthioTel and the award of additional licenses, for instance for internet service providers, satellite operators and independent tower companies; f) Discuss whether any adjustments may be needed to accelerate implementation or reach or surpass the project objectives, and whether a further restructuring maybe beneficial, including for revising project indicators; g) To discuss and agree measures to accelerate disbursement and advance an action plan for activities which have not yet started, such as support for the Data Protection Office (under sub-component 1.3); internet pre-purchase for Government (under sub-component 2.2), and Capacity-building for participation in the digital economy (under sub-component 3.1). h) To review the updated procurement plan and draft Annual Work Plan and Budget (AWPB) for FY25, with a view to operationalize any recommendations coming out of the midterm review, and with focus on big ticket 1 Other mission participants were Victor Kyalo (Senior Digital Development Specialist), Philip Grinsted (Private Sector Consultant), Luda Bujoreanu (Senior Digital Development Specialist), Giacomo Assenza (Young Professional), Lamia Naji (Consultant), Abel Brook (Senior Investment Officer, IFC), Audrey Sun Hwa Oh (Digital Development Consultant) and Vadim Vintila (Data Center Consultant), supported by Almaz Bedada (Program Assistant) and Ethiopia Temesgen (Temp). The team were supported by the country office team, notably by Demelash Demssie (Senior Procurement Specialist), Abiy Demissie Belay (Senior Financial Management Specialist), Dereje Habtewold (Senior Environmental Specialist) and Feben Hailemeskel (Social Development Specialist). The team also drew upon support from Xiaoping Wang (Infrastructure Program Leader), Doina Petrescu (Operations Manager) and Abebe Zerihun (Operations Officer). 1 Official Use items, notably the EthERNet Core IP Network, Data Center, e-Services portal, Government IXP, Database integration and Biometric ID kits. 4. The main beneficiary agencies are Ministry of Innovation and Technology (MinT), Ministry of Finance (MoF), Ethiopian Communications Authority (ECA), the Ethiopian Education and Research Network (EthERNet) within the Ministry of Education (MoE), the Ministry of Labour and Skills (MoLS) and the National ID Program (NIDP) within the Prime Minister’s Office (PMO). Briefings with the Country Management Unit (CMU) were held at the start and end of the mission. 5. A draft of this Aide Memoire was discussed with the client on April 29, 2024 in a meeting chaired by Mr. Berhanu Anbesa, Acting Head, International Financial Institutions Cooperation Division, Ministry of Finance. The revised version of this Aide-Memoire has been endorsed by Bank Management and can be publicly disclosed, upon confirmation from the Government, in line with the World Bank’s Access to Information Policy. B. Project data and ratings 6. The Ethiopia Digital Foundations Project (EDFP) is in its third year of implementation and disbursement, which currently stands at 23 percent (see Table 1). When submitting the Interim Financial Reports (IFRs) for Q2 FY24, the MInT had requested a further withdrawal from the designated account of US$26m. However, the IFRs have not yet been cleared by the Bank because of discrepancies in the numbers submitted for sub-component 1.1, which is handled by MoF. Once the IFRs are cleared and the withdrawal takes place, then disbursement will stand at around 35 percent and may rise higher as a number of direct payments are planned. But there are still delays to overcome in progressing major procurements. Component 3 has been downgraded to Moderately Unsatisfactory (MU) due to the lack of progress made in implementing Window 2, even though it is now free of any disbursement condition. Safeguards performance is upgraded to Moderately Satisfactory (MS) now that a new team of specialists has been recruited. The overall risk rating for the project is maintained as Substantial, having been previously downgraded from High. Table 1: Project Implementation and Performance Snapshot Project Development Objective (PDO): to increase the inclusiveness and affordability of digital services and digital job creation in Ethiopia. Project Disbursement Project Performance Ratings Original Project Amount US$200m Ratings Previous Current In SDRs XDR138.9m PDO S S Total Disbursement US$45.77m (22.9%)* IP MS MS Disbursement in FY24 to date US$3.52m (1.8%)* Component 1 S S Date of Board Approval April 21, 2021 Component 2 MS MS Closing Date October 31, 2026 Component 3 MS MU Ratings: HS: Highly Satisfactory; S: Satisfactory; MS: Moderately Project Mgmt MS MS Satisfactory MU: Moderately Unsatisfactory; U: Unsatisfactory; Procurement MS MS HU: Highly Unsatisfactory. FM MS MS ESS MU MS Note*: Disbursement figures do not include the withdrawal from the designated account requested under the Q2 FY24 IFRs (US$26m). Ratings are based on the latest Implementation Status Report (ISR), dated November 6, 2023 and this AM. C. Summary of MTR Findings and Recommendations 2 Official Use 7. The Government reiterated its commitment to the Digital Foundation Project and the relevance of the current Project Development Objective (PDO) “to increase the inclusiveness and affordability of digital services and digital job creation in Ethiopia�. The ratings towards achieving the PDO is maintained at Satisfactory. Specifically, the good progress that has been observed in transforming the competitive market environment under Component 1 (see below), compared with the situation that prevailed during project preparation, justifies this rating. Project indicators on the number of licenses issued by ECA, the affordability of services, mobile broadband coverage and on eGovernment services have all been exceeded. The projects support to ECA has certainly contributed to this, as did the earlier technical assistance provided to the Government, under Trust Funds, which included support for the passage of the Law and the selection of the second operator. Indicators on internet and mobile usage are also on track. However, indicators related to component 3, on digital job creation have not started to show any movement yet. This is perhaps understandable as the disbursement condition was only lifted in November 2023, but if no progress is seen by the time of the next supervision mission, then restructuring of this component will need to be considered. A firm has been hired under the project to assist the PIU in updating the results framework. 8. Implementation Progress is rated as Moderately Satisfactory (MS). This rating reflects the delay experienced in disbursement, which is currently at around 11 months, and procurement delays for certain “big ticket� items in component 2 (see Annex 4). If the 2nd Quarter IFRs can be approved at the Bank, and the discrepancies in data generated by MoF for implementation of sub-component 1.1, can be reconciled, then disbursement will stand at around 35 percent. This is reasonable for a project at mid-term review stage. However, these also remains a large balance in project funds that have been withdrawn from the designated account, but not yet spent. The PIU needs to pay closer attention to contract management and to speed up the payment of invoices to vendors, especially those in foreign currency. The PIU has recruited a contract manager for this purpose. 9. The Government’s digital agenda is guided by the White Paper on market reform, which dates from 2018, and the Digital Ethiopia 2025 strategy, adopted in 2020, both of which the Bank provided assistance in drafting. From the White Paper, two of the four objectives have now been met (reform of the legal and regulatory environment and introduction of competition), while two are still pending (partial privatization of Ethio Telecom and the separation of its infrastructure and service arms). During the mission, ECA published two new Determinations, on Mobile Termination Rates and Significant Market Power, which provide for remedies to be applied in the absence of a wider reform of Ethio Telecom’s dominant market position. Both were prepared with support from project funds, But these will need to be activated by complaints from Safaricom or other market players. The Digital Ethiopia project can provide technical assistance to ECA in assessing these complaints, if requested. The Government is currently reviewing progress on implementing the Digital Ethiopia 2025 strategy and, to this end, has set up a new National Digital Transformation Council, for which MinT will provide the secretariat. Again, project funds can be used to support this activity, if requested, and the Bank team would appreciate a chance to meet with members of the Council. 10. As of April 2024, the project has been running for 32 months since effectiveness (July 2021) and has a further 30 months to go until project closure, which is currently planned for October 31, 2026. It will need strong momentum to realize significant achievements across all the project components as we approach the end of the third year of implementation. During the mission, the MinT Minister expressed his intention to request an extension of the project closing date. However, MoF confirmed that any extension to the closing date should be avoided, if at all possible. The MinT Minister also made requests for four new activities to be considered: a) Creating up to 14 new government network nodes to better serve the national regional states and administrative councils, to complement the national data center already funded under the project, and generally improving connectivity and services delivery among the regional states. An initial feasibility and design study will be carried out under EDFP to assess likely demand. b) Extending the digital mapping and addressing system, currently covering four cities, to a total of 14 cities in the national regional state and administrative councils; 3 Official Use c) Implementing the vision of the newly-created National Digital Transformation Council (NDTC), for which MinT provides the secretariat. This includes a number of large-scale initiatives including a nationwide program to build general digital literacy across the country. d) Establishing a data exchange platform for Government Ministries, Departments and Agencies (MDAs). 11. The new requested activities go well beyond the current funding envelope for Digital Ethiopia. Even with the possible restructuring of component 3, they cannot be accommodated within the current US$200m allocation, though feasibility studies can be carried out. An additional financing may be considered, but the MInT Minister also expressed strong interest in joining the new regional multiphase programmatic approach (MPA), called Inclusive Digitalization for Eastern and Southern Africa (IDEA; P502532). The IDEA MPA foresees funding of up to US$3 billion over a period of eight years and is due to be approved by the WB Board on June 27, 2024. An expression of interest would not commit the Government to joining the program, and would also depend on the availability of IDA, but would make the process easier if it is received before Board Approval. The CMU also indicated support for Ethiopia joining IDEA. Evolution of the Digital Market Environment 12. The Digital Ethiopia project was prepared in a market environment of almost total monopoly, in a market dominated by a largely unregulated state-owned enterprise. Following a competitive selection process in which the Government was assisted by IFC, a license was awarded to the Safaricom Ethiopia consortium shortly after the Digital Ethiopia project was approved by the Board in April 2021. The entry of competition also had the effect of stirring the incumbent into action, to the benefit of the market as a whole. Compared to the baseline of 2020, Ethiopia has now added around 7 million new unique mobile subscribers (reaching 33 percent of the population), and 4 million new internet users (reaching 19 percent). There are now 45 million users of mobile money services (principally telebirr and mPesa), compared to none in 2020, and the price of a mobile data bundle has fallen to less than 10 per cent of its previous level. There are now some 3,051 firms licensed to provide a variety of digital service in the country, and they are in the process of creating thousands of new digital jobs. In 2020 there were no licences issued, not even for Ethio Telecom. In addition, some 1,477 user licences have been issued for use of satellite and land mobile radio services. Safaricom, the new market entrant, has now taken more than nine million subscribers, of which five million are active, since launching activities in October 2022 and is constructing 2.500 new cell towers. The passage of the Digital ID Proclamation through Parliament in April 2023 and the Data Protection Proclamation on April 4, 2024, are also significant achievements. A new US$350m WB-funded project to support the roll-out of Digital ID was approved by the Board in December, and EDFP has provided seed funding of US$10m to start roll-out of the Fayda ID, which now reaches over 3.8 million Ethiopians. In short, therefore, the market environment has been transformed and the PDO is well on the way to being achieved. 13. Nevertheless, considerable challenges remain to establishing an enabling market environment to have the conditions in place for true digital transformation in Ethiopia. a) The planned partial privatization of Ethio Telecom has not progressed. There remains only limited private sector interest in investing in EthioTel unless the Government is willing to sell a majority shareholding, with management control. Instead, the Government is now pursuing a new plan to sell 10 percent of EthioTel’s shares to the public though an Initial Public Offering on the new stock exchange, via the Capital Markets Authority, which the project is supporting. b) Similarly, the planned award of a “License B� has been “parked� as it has not been possible to attract a firm that would be willing to pay a similar license fee as Safaricom (US$850m plus US$150m for mobile money). Interest may revive if a more even-handed regulatory playing field can be established. c) In this respect, the policy changes that will have the most impact are the new determinations on interconnection charges and Significant Market Power, as well as licensing of additional facilities-based operators. During the mission, ECA published its recommendations on mobile termination rates and fixed termination rates, based on the DETECON study. The main mobile termination rate will fall from 0.31 birr per minute to 0.23 birr, as from May 1, 2024. The mission urged ECA also to consider a faster glidepath towards lower rates, as the current proposal foresees only a reduction of 0.01 birr per year. ECA announced it would also license Internet Service Providers as 4 Official Use from July 1, 2024. The mission urged it to go further and license also satellite companies, independent tower companies and wholesale fiber providers. d) There are also issues over the implementation of mobile money, although this is regulated by the National Bank of Ethiopia, rather than by ECA. Currently, for payments for Government services (e.g. to pay for fuel, taxes etc), only EthioTel’s telebirr is accepted, which effectively locks out Safaricom, commercial banks and other providers of digital financial services. Opening up access to other mobile money providers will help in creating a more level playing field for the further growth of this market, and will help to address EthioTel’s currently dominant position. D. Implementation Progress Component 1: Digital Economy, enabling legal and regulatory environment 14. Component 1 continues to be the best performing part of the program with 54 percent of funds disbursed or committed, to date, and a Satisfactory rating. a) Under sub-component 1.1, on the partial privatization of Ethio Telecom, the contract with the transaction advisor has been extended twice but the process remains incomplete. The project team urged the Government to close this activity, which was funded under the Project Preparation Advance, by the end of this FY and to finance any further work directly from the main project under MinT. Having two project accounts is leading to delays in the approval of IFRs. The MoF confirmed that the PPA should be closed by the end of the FY as the last payment to the transaction advisor has been scheduled.. b) Under sub-component 1.2, on support for ECA, the regulatory authority, a number of large contracts have now been completed, including on studies on interconnection rates, eCommerce and establishment of a Certification Authority (CA), provision of systems for spectrum management, and numbering plan management, as well as supply of office furniture and equipment. Other activities under implementation include quality of service monitoring. a network infrastructure database, for the management of the .et domain name, establishment of the CA, and a retainer contract for a regulatory training organization (AFRALTI). The mission encouraged ECA to finalise contracts and to submit bidding documents for new activities, previously agreed. These include additional support on monitoring network coverage (both a consultant study and a software tool), a SIM card registration database, a consultancy on mobile number portability, and a study of additional license awards. In this context, the mission requested ECA to share the non-confidential parts of the draft report prepared by DETECON on interconnection and designation of significant market power. c) Under sub-component 1.3, on support for Ethiopia’s digital econom y including seed funding for the national Digital ID program, a number of large procurements have been initiated to take advantage of the additional funding (US$7.3m) re-allocated to ID as part of the November 2023 restructuring. The new procurements include: i) supply of an additional 1,500 Digital ID registration kits; ii) Development of Fayda Encode Platform ; and iii) Supply and Installation of servers for the Authentication Service Modules at NIDP. In each case, the RFPs have been launched, and the technical evaluation in progress with the contract awards expected between May-June. Another contract under implementation include pre-printing of Fayda ID cards. The hiring of 29 consultants to work with the Digital ID team are at different stages of procurement, with 21 candidates offered positions and other positions readvertised. The hiring of the PIU team for NIDP, including a project coordinator, financial specialist, procurement specialist, and a safeguards specialist, is now also completed, though both the FM and procurement specialists have resigned due to low pay, twice. While the procurement specialist has been re-hired, a secondment from NIDP now serves as FM specialist. Under this activity, around US$2m is set aside to support the new Data Protection Authority (to be housed at ECA). The Parliament approved the Data Protection Act in March 2024, so this support can now be activated. Component 2: Digital Government, Connectivity and Skills 15. Component 2 is picking up pace, after a slow start, and now 24 percent of funds are disbursed or committed with a rating of Moderately Satisfactory. The status of major procurements under component 2 is summarized in Annex D. More than half the total value of contracts are still under revision and not yet advertised: 5 Official Use a) Under sub-component 2.1, on eGovernment and COVID-19 response, an additional 24 communications rooms have been contracted and implementation is underway. The mission urged the PIU now to advertise for the remaining 21 rooms. The upgrades and software licenses to the existing Government data center were successfully completed. Evaluation of bids for the new pre-fabricated data center is at the final stages and should be awarded during this quarter. It is being co-located with other privately-owned data centers, at the ICT Park, to encourage data exchange with the private sector. The tender documents for the e-Services platform and data warehouse systems are under review for advertisement during this quarter as well. These have taken longer than planned initially and the team was urged to expedite. For the Digital Mapping and Addressing project, the Government is now seeking to substantially increase the number of cities to be covered in phase I be raised. An initial increase from two to four was approved, but the Government would now like to raise it to 14, as part of its aims to achieve equity in investment between regional states and administrative councils. Digitla mapping will help with the provision of other Government services. Finally, it was agreed that EthERNet would take the lead on developing advanced digital skills courses for civil servants, as it has been given this mandate by the NTDC. b) Under sub-component 2.2, on connecting targeted institutions to broadband, the contract for the supply of internet bandwidth to the ICT Park is under implementation, and a consultant study of government bandwidth requirements (Gap Analysis), is progressing. For the bidding documents on a Federated System of Internet Exchange Points, the scope and budget was reduced to focus just on that Government’s needs as the private sector is already establishing national IXPs. However, ECA expressed concerns over this activity and it was agreed to hold a stakeholder workshop on IXPs, with the participation of international experts, to seek a way forward. The mission urged MInT to start working also on the tender documents for the supply of international bandwidth for Government. c) Under sub-component 2.3, on connectivity for higher education, the contract for international bandwidth has been implemented, and supplemented with additional funds from the Government. The evaluation of the bids for connecting 40 Universities and 30 TVETs via an IP Core Network is now cleared by the Bank and the contract should be awarded by the end of April 2024. A series of training workshops benefitted some 100 participants. Digital literacy training based on the International Computer Driver’s License (ICDL) phase I was successfully completed; 62 future trainers out of 64 completed the certification. The second phase will shortly be launched. The planning process of procuring digital skills training phase II under EARDIP SOP-2 is complete, and the PIU will upload the RFP for NOL consideration. EthERNet is exploring extending the digital literacy training for civil servants once the requisite clarifications are received from the National Digitalization Transformation Council. This can be supported under component 2.1. EduRoam training in collaboration with UbuntuNET is also progressing well and is supported by the project. A further initiative has been launched to use an open-source learning management system (LMS) for managing access to open educational resources (OER). Again, this will be expanded further under EARDIP SOP2. Component 3: Digital business and entrepreneurship 16. Component 3 has been the slowest to disburse, with only 5 percent disbursed or committed. However, this is not unexpected given that the disbursement condition on sub-component 3.1, proposed by the Ministry of Finance, was only lifted on November 14, 2023 with the project restructuring. Component 3.1 has also undergone multiple rounds of revisions due to shifting Government priorities since the start of project implementation. Overall the component is rated Moderately Unsatisfactory. 17. The mission noted slow progress on the sector assessment commissioned under Component 3.1 which is currently being conducted by a consultancy (target for completion had been 15 April 2024 as per the last Aide Memoire). The World Bank team urged the PIU to request the consultancy to prioritize delivery of essential aspects required for implementation of Component 3.1 , notably a list of digital businesses and other organizations that are qualified to be contracted for the provision of digital capacity building (especially for micro, small and medium-zed enterprises (MSMEs) which are not yet participating in the digital economy). It was noted that the inception report underwent multiple rounds of review between the consultancy, the PIU, and the World Bank team. 6 Official Use 18. It was agreed that the implementation of digital capacity training under Component 3.1 may advance before completion of the sector assessment. However, the mission team requested the PIU to carefully draft TORs in line with the intention and target beneficiaries and to collaborate with reputable training providers that ensure delivery of capacity building to the target beneficiaries of the project. The discussions reiterated that the goal of Component 3.1 is enabling individuals and MSMEs to participate in the digital economy which is why the collaboration with digital businesses, which can provide hands-on onboarding training to their potential suppliers, shall be prioritized. 19. Overall, the World Bank team highlighted the need for closer alignment of proposed activities under Component 3.1 with the objectives and results indicators only associated with the previously called Window 2 (“Capacity building program for participation in the digital economy�). As Window 1 was dropped from the project during restructuring, Component 3 is measured by the results indicator “Number of owners of offline SMEs and farmers receiving benefits (e.g., digital platform training, access to digital devices)� while the results indicator related to Window 1 is no longer included (formerly it was “ Number of digital start-ups created and received funding that use a tech solution for commercial purposes (Number)"). It was agreed that the targets for number of trainees and budgets offered by the PIU in the progress report could be increased. 20. The mission team noted the addition of several planned activities under Components 3.1 and 3.2. The World Bank team kindly requested the PIU to prioritize activities and plan them according to the remaining budget and project timeline. The PIU is also expected to share corresponding ToRs in due time and ensure close alignment with the objectives of Component 3, and to avoid committing funds for workshops and conference without informing the Bank ahead of time, for instance through a concept note. It was agreed that the PIU will recruit an international consultant to support the implementation of Component 3 as soon as possible. 21. The future performance of Component 3 will be measured against the following objectives to be achieved by the next supervision mission: a. Completion of the sector assessment for Component 3.1; b. Hiring of an international consultant to support the PIU in implementing 3.1; c. Hiring of service providers to start training of beneficiaries under Component 3.1. If these intermediate objectives are not achieved by the time of the next supervision mission, the team will reevaluate the component and reallocate funds to well performing activities under other components. Component 4: Program Management 22. Component 4 has been relatively fast disbursing, with 18 percent of available funds disbursed or committed and a rating of “Moderately Satisfactory�. The PIU is now functioning better having successfully recruited all the key staff (notably procurement, financial and environmental specialists – 12 in total). However, it will be important to retain the current team to maintain the current implementation momentum. Fiduciary 23. Procurement Management. As part of the joint implementation support mission for Digital Ethiopia Project, the performance of the planned procurement activities has been reviewed. The mission reviewed the progress report submitted by the PIU and the information extracted from STEP. This is further discussed in Annex D. 24. Financial Management. As part of the mission, a supervision mission was conducted on financial management (FM). review focused on assessing: (a) the status and continuing adequacy of the project’s financial management arrangements; (b) compliance with the legal covenants related to financial management; (c) the adequacy of the project’s financial management in providing the Bank and other stakeholders with accurate and timely 7 Official Use information regarding the project performance; and (d) the progress of actions taken to implement FM actions plan recommended in the previous supervision mission. The full supervision report is annexed to this Aide memoire under Annex E. Based on supervision of the project, it is the conclusion of this mission that the existing system within the project provides reasonable assurance that the project’s fund is used for intended purposes. As a result, the FM Implementation Support Rating (FM ISR) and risk rating is maintained as Moderately Satisfactory and Substantial respectively. However, during the mission, the following main points were noted that need management attention, action, and follow up: a. Budgeting: The Project budget utilization continues to be low and needs close attention. Financial reports should be improved in providing adequate explanations for variances. Additionally, budget planning should consider actual capabilities to set a realistic budget. There is also a need to improve transaction-level budget monitoring, using excel spreadsheets or alternative mechanisms, as implementing entities are not monitoring as such. b. Internal control issues: We have observed internal control issues such as incomplete project fixed asset register, absence of monthly bank reconciliation at MoF, late settlement of travel advances and failure to use PAID stamp. It is necessary to address these issues to enhance the overall control environment. c. Unreconciled balances between PIU and implementing entities records: We have noted a difference of Birr 1,119,627.67 (US$19.6k) between the PIU’s and the MoF’s record. The finance teams from both entities are currently working to reconcile this difference. We urge the team to finalize the reconciliation as soon as possible and the necessary journal entries should be made to rectify the records including the recording of the PPA balance in PIU’s books. In general, this calls for a close collaboration of the PIU and other entities, especially MoF, regarding FM. d. Designated Account Reconciliation: During the reconciliation of the outstanding DA balance against the client record, we have identified erroneous documentation of a direct payment of USD 876,844.50 against the DA advance. To correct this, an adjustment is required by deducting the amount from future expenditure documentation until the balance is fully settled. To prevent similar errors, the PIU should split and clearly indicate the total expenditure incurred through direct payment and expenditure incurred from DA in upcoming IFRs. Furthermore, after considering the above adjustment, a difference of USD 104,291.89 between the outstanding DA balance in Client Connection (CC) and the ending balance as of January 09, 2024, as per the client record was noted. This higher outstanding DA balance indicates under documentation, possibly due to an incorrect exchange rate used to translate expenditures to USD or the conversion of ending balances denominated in Birr to USD. Therefore, it is recommended to conduct a thorough verification of the exchange rate used in the previous IFRs to identify the difference and take corrective action. e. External audit issues: It is noted that an action plan has been prepared by the PIU to address the audit findings for EFY 2014 & 2015 but the status report on the rectification of the findings has not yet been submitted to the Bank. The status reports should be submitted without further delay. As per the Bank’s policy, publ ic disclosure of project external audit reports is required, which needs to be performed at MInT on an annual basis. In addition, MInT should follow up the entity audit issues and update the Bank on the progress made. Environmental and Social Risk Management (ESRM) 25. The project’s overall environmental and social performance has been upgraded from Moderately Unsatisfactory to Moderately Satisfactory, in light of the recruitment since the last mission of a new team of ESRM specialists comprising an Individual Environmental Consultant, a Social Risk Management Coordinator, and a Gender Specialist. The PIU has submitted a monitoring report on the implementation status of site-specific environmental and social management plans for communication rooms. However, the mission team noted that there is no progress in preparation of the Resettlement Framework, which will be moved to EARDIP, as this is where work on the Universal Service Framework is now concentrated. 26. Moving forwards, the main agreed actions for improving the ESS performance include that MInT/PIU shall: a) submit a quarterly ESHS monitoring report in line with the ESCP; b) ensure that all ESS screening reports for new subprojects are prepared and cleared in a timely manner, and that site-specific ESMPs/ESIAs are prepared and cleared accordingly; c) Develop the Resettlement Framework (RF) as part of the EARDIP project, per the 8 Official Use ESCP and submit for WB review and clearance. It shall also continue to ensure that all bid documents associated with the Project uphold the necessary ESS requirements. D. Next Steps and Timeline for Future Missions 27. Annex A below presents a summary of agreed actions, milestones and next steps arising from the mission. It is proposed that the next implementation support mission be held in September 2024, though it can be held earlier if required. A mission focused on component 3 is planned for early June 2024. List of Annexes Annex A: Action Plan and Next Steps Annex B: People and organizations met during the mission Annex C: Mission schedule Annex D: Procurement management 9 Official Use Annex A: Action Plan and Next Steps Timing Action Responsible Comments entity Component 1: Enabling Environment June 15, 2024 Finalise, and post on STEP, remaining ECA, PIU, WB Most of the preliminary work has been Component 1 procurements, including carried out, but TORs should be SIM card registration, mobile number reviewed in STEP portability, secondary licences etc June 15, 2024 Share with the B a concept note for ECA, Data Around US$2m is available to support support to the Data Protection Protection the operationalization of the Data Commission and TORs for ay planned Commission, PIU, Protection Commission within ECA procurements WB June 30, 2024 Formally close activities under sub- MOF, PIU No new activities are planned, so component 1.1 on partial privatization transaction advisor contract should be of Ethio Telecoms closed and PPA account closed. Component 2: Digital Government, Connectivity and Skills May 15, 2024 Finalise eServices bidding documents MinT, PIU, WB WB sent detailed comments and post in STEP May 15, 2024 Finalise Data Warehouse bidding MinT, PIU, WB WB sent detailed comments documents in STEP May 30, 2024 Finalise program for expanded set of MinT, PIU, WB MinT proposed to expand program digital mapping and addressing system from 4 to 14 cities and post bidding documents online May 30, 2024 Draft remaining bidding documents not MinT, PIU, WB These activities are approved in STEP yet reviewed by WB, including and beneficiaries bit no bidding documents produced international bandwidth, Digital MinT, (eg Supreme court) yet for review (see Annex 2) NOC, Digitalization of manual records, final phase of Comms Rooms etc Component 3: Digital businesses and entrepreneurship June 15, 2024 Complete the sector assessment report MinT, PIU, WB The report is intended to shape the for sub-component 3.1, and submit to subsequent implementation of the WB for revie program by identifying, for instance, target beneficiaries and service providers June 15, 2024 Complete the hiring of an international MinT, PIU WB and client are agreed on the need expert consultant to guide the to provide fresh direction for implementation of the support to digital implementation businesses May 30, 2024 Finalise TORs to hire training firm(s) MinT, PIU, WB Activity of hiring training firms, to undertake targeted training for possibly under a framework contract, women entrepreneurs, marginalized can push ahead without need to wait communities, rural MSMEs etc for completion of the sector assessment Component 4: Program management April 30, 2024 Reconcile accounting differences PIU, MOR, WB Approval of the IFRs will release between MOF and MinT and resubmit funds for withdrawal from the IFRs for approval designated account May 15, 2024 Eliminate all red flags in STEP by PIU, WB Ongoing task updating deadlines and posting contract details May 30, 2024 Address all other items identified in the PIU, WB Ongoing task Financial Management Action Plan in Annex 4 10 Official Use Actions from the previous mission, December 4-15, 2023 Timing Action Responsible Comments entity Component 1: Enabling Environment December 31, ECA to publish results of the ECA Pending. No report shared with the 2023 DETECON study on interconnection World Bank team and significant market power and hold stakeholder consultations January 31, 2024 Advertising in STEP for SIM card ECA, PIU, WB Pending. registration database Activity agreed during May 2023 mission January 31, 2024 Advertising in STEP for Mobile ECA, PIU, WB Activity submitted in STEP and Number Portability System comments send by Bank team December 31, Three new tenders for NIDP to be NIDP, PIU Completed. Evaluation of bids is in 2023 advertised in STEP – New biometric progress. registration kits, development of FaydaEncode and Infrastructure Components for the Authentication Service Modules Component 2: Digital Government, Connectivity and Skills December 31, Finalization and advertising of bidding MinT, PIU, WB Pending. WB team has commented 2023 documents to upgrade of eServices extensively on initial draft and Platform proposed increase in value of procurement. PIU to resubmit January 31, 2024 Finalization and advertising of bidding MinT, PIU, WB Pending. WB team has commented on documents for Data Warehouse initial draft Platform December 31, Finalization and re-advertising of EthERNet, PIU, Completed. 2023 bidding documents for EthERNet Core WB IP Network January 31, 2024 Finalization and re-advertising of MinT, PIU, WB Pending. Scope of project to be bidding documents for Federated reduced to cover only Government System of IXPs needs. Component 3: Digital businesses and entrepreneurship January 31, 2024 Finalization and advertising of new MinT, PIU, WB Pending. Draft TORs to be shared TORs for Component 3 with WB team Component 4: Program management January 31, 2024 Replacement safeguards staff to be PIU. WB Completed recruited January 31, 2023 Contract for FM Ministerial Advisor to PIU, WB Completed. be extended and additional FM specialists recruited December 31, Audit report to be completed and PIU, WB Completed. 2023 submitted for review December 20, The client to support its request for PIU Letter received. HEIS consultant to 2023 HEIS through an official letter to be be identified. submitted to the Bank January 31, 2024 The client to urgently update the PIU Ongoing. As per the contract procurement details in STEP and agreement, the PIU should update the remove red flags. procurement information in STEP before the end of the contract period 11 Official Use Ongoing Provide training on Rated Criteria PIU, WB Completed. But there is need to (online and face to face) to relevant continue the training procurement and technical experts Ongoing Expedite the processing of the PIU, WB Ongoing procurement activities in the pipeline Annex B: List of People Met or Consulted No. Name Position, Organization Key Stakeholders MOF 1. Acting Head of the International Financial Institutions Berhanu Anbesa, Cooperation Division Ministry of Innovation and Technology (MInT) H.E. Dr. Belete Molla Minster 2 H.E. Dr. Yeshurun Alemayehu State Minister 3 Dr. Abiot Sinamo CEO, eGovernment 4 Yonas Hailu CEO, Infrastructure 5 Seyoum Mengesha CEO, Digital Economy 7 Bruhtesfa Taye Desk Head 8 Meklit Twshome Desk Head 10 Daniel Adinew Project Leader 11 Yared Garedew Cybersecurity Head 12. Tessema Geda Project Coordinator 13. Taye Estifanos Monitoring and Evaluation Specialist 14. Ermiyas Yirgu Procurement Management Specialist 15. Mesay H/mariam Digital Business Specialist 16. Ferehiywot Demissie Senior Finance Officer 17 Simret Akalu Finance Officer 18 Hailu Feyera Financial Management Specialist 19 Dr. Abiyot Bayou Senior Advisor/ Director of Digital Transformation Ethiopian Education and Research Network (EthERNet) 20 Dr. Zelalem Assefa CEO, EthERNet 21 Basilyos Tilahun EthERNet 22 Binyam Bayeh EthERNet 23 Samuel Kifle EthERNet Ethiopian Communications Authority (ECA) 24 Engineer Balcha Reba Director General 25 Tadese Getachew Infra Resource Management Specialist 26 Abdu Endrise Software quality assurance Specialist 27 Natenael Tadesse Infra security Division Manager National ID (NIDP) 28 Zayede Chaklu Procurement Management 29 Yoseph Kebede Social and Environment 30 Ephrem Yoseph Infrastructure Team 31 Berehet G/Hiwot Admin & Operation Lead 12 Official Use 32 Betlhem Mergia M&E Lead 33 Sisay Fekadu Net Engineer 34 Blen Gulelat Admin & Operation Manager Annex C: Mission Schedule Internal%20-%20Mis sion%20Schedule%20-%20Digital%20Ethiopia%20%20EARDIP%20SOP-II_April%2015-%2025.docx Annex D: Procurement Management 1. The mission observed better progress in procurement performance since the last mission conducted in December 2023. As per the information in STEP, during the last five months, the aggregate volume of planned procurement activities (in value terms) increased from USD 125 million to US$147 million, an increase of around 18 percent. The aggregate value of the procurement activities under implementation has increased from USD 59 million to USD 75.5 million. Bidding documents were prepared and reviewed or under review for almost all of the planned high value IT related procurements (see also table 2 below). The client has finalized the recruitment of individual consultants and filled the vacant procurement positions in the NIDP. Completed contracts have increased fivefold to over US$7m, and nevertheless the value of contracts under implementation also grew by a quarter. Nevertheless, the overall share of the completed and signed contracts remains less than 13% of the aggregate estimated cost of the planned activities. Likewise, although the share of contracts that are completed has grown fivefold since the last mission, it remains only 5% of the value of the total planned procurement activities without any progress over the lats three consecutive missions. This is partly related to the limitation in updating procurement information in STEP a timely manner. The client is urged to update the procurement information in STEP urgently, to remove red flags. 2. In addition, the quality of the procurement documents submitted to the Bank is not up to the acceptable standards. This has led to multiple back and forth and delays in clearing procurement documents especially the high value IT related procurement that are subjected to application of rated criteria. The mission also shared concerns over deviations in the procurement decisions from the agreed procedures citing a complaint case raised under a prior review contract that was responded by the client before consultation with, and prior clearance from, the Bank. To enhance its procurement capacity, the client requested Bank’s support through Hands -on Extended Implementation Support (HEIS) which the Bank agreed to consider upon receipt of the request through official letter. Summary of the procurement status and progress since the last mission in December 2023 (as per information in STEP) Process status December 2023 April 2024 %age progress Completed contracts $ 1,100,000 $ 7,148,574 550% Signed contracts, under $ 9,400,000 $ 11,873,862 26% implementation Under procurement $ 59,000,000 $ 75,550,000 28% process Planned not initiated $ 56,000,000 $ 50,356,275 -10% Total $ 125,500,000 146,928,712 18% Table 2: Status of major procurements under Component 2 (Digital Government) 13 Official Use Procurement (sub- Estimated Next step Comments component) value (US$) 20 additional communications US$4m Contract awarded in Dec 2023. Tender for final 21 comms rooms (contract for original five Contract amendment planned to rooms to be drafted following sites completed in mid-2023) (sub- add four additional sites safeguards survey, by May 31. component 2.1) Upgrade of national eServices US$13m Initial bidding document returned Value increased in STEP platform (2.1) by Bank with comments, and inputs from NIDP. Revision expected by April 19 Pre-fabricated, green data center US$12.5m Tender documents launched in Technical evaluation report (2.1) Dec 2023. with WB for review. Upgrades and license renewal for US$6m Contracts awarded in Nov 2023 Two separate contracts existing data center (2.1) and implementation completed (US$2.7m and US$3.3m) with only training remaining. Data warehouse (2.1) US$6.5m Initial bidding document returned Equipment purchase separated by Bank with comments. from consultant study Revision expected by April 19, 24 Digitization of manual records at US$4.0, Bidding documents expected by Scanner already acquired. Supreme Court and National May 15, 2024. Cleared in STEP but no bidding Archive. (2.1) documents yet prepared Digital MinT -- Electronic US$1.4m Bidding documents expected by Cleared in STEP but no bidding Document Management System April 25, 2024. documents ye4t prepared. (2.1) Bandwidth gap analysis (2.2) US$0.6m Contract awarded in Feb 2023, Study will create basis for but implementation delayed. expansion of national backbone Vendor will visit in late April. network. Digital addressing system (Phase US$4.5m Initial bidding document returned Government has requested to 1) for Addis Ababa and three other by Bank with comments. increase to 14 cities under cities (2.2) Revision expected by April 24, Phase 2, but may require 2024 additional financing Federated system of national IXPs US$4.5m Bidding document has been Reduction in scope to focus on (2.2) through several rounds of needs of Government only as revision. Activity may be private sector IXP already cancelled. Workshop on IXPs to under development. be orgnised. Developing a Digital roadmap for US$0.5m Under technical review Post-review activity Government office modernization (2.2) Supply of international bandwidth US$12.5m Bidding documents expected by Small activity for bandwidth for Government (2.2) May 31, 2024. for ICT Park completed. Main activity cleared in STEP but bidding documents prepared yet Network Operations Center (NOC) US$6m Bidding documents expected by Activity cleared in STEP but no May 31, 2024. bid document prepared IP Core Networks for EthERNet US$13.5m Advertised and technical Original Bidding completed but (2.3) evaluation report completed and subject to procurement cleared by Bank. Financial complaint which took 6 months proposals to be opened on April to resolve. 24, 2024 Total US$89.5m Legend: 14 Official Use Under implementation US$10.6m Technical evaluation stage US$26.0m Tender documents in STEP US$28.5m Tender documents to be drafted US$24.4m Source: Information in STEP. Does not include activities already completed or small contracts, below US$0.5m ANNEX E: Financial Management Supervision Report KEY INFORMATION ON THE PROGRAM Project Name: Ethiopia Digital Foundations Project (EDFP) Project ID: P171034 Credit/Grant No.: IDA 68560 Implementing Agency: Ministry of Innovation and Technology (MInT) Effectiveness Date: July 23, 2021 Closing Date: October 31, 2026 Application Deadline: February 28, 2027 Credit/Grant Amount: SDR 138,900,000 Program Duration: 5 years and 3 Months Remaining Period to Closing: 2 years and 6 months Disbursed Amount: SDR 34,461,758.49 Cancelled Amount: None Period Covered by Review: November 2023 to April 2024 Previous ISR Rating: MS Current ISR Rating: MS Previous FM Risk Rating: Substantial Current FM Risk Rating: Substantial EXECUTUVE SUMMARY 1. As part of implementation support, a financial management (FM) supervision was conducted for Ethiopia Digital Foundations Project (EDFP) in April 2024. The FM team visited the PIU at MInT, MoF, ECA and MoE/(EthERNet). 2. The supervision mission reviewed the project in the areas of planning and budgeting, fiscal transparency, treasury management and fund flow, accounting and financial reporting, internal control/internal audit, and external audit. The review focused on assessing: (a) the status and continuing adequacy of the project’s financial management arrangements; (b) compliance with the legal covenants related to financial management; (c) the adequacy of the project’s financial management in providing the Bank and other stakeholders with accurate and timely information regarding the project performance; and (d) the progress of actions taken to implement FM actions plan recommended in the previous supervision mission. 3. Based on supervision of the project, it is the conclusion of this mission that the existing system within the project provides reasonable assurance that the project’s fund is used for intended purposes. However, during the mission, the following main points were noted that need management attention, action, and follow up. 15 Official Use a) Budget Utilization: The low budget utilization continues, with the year-to-date utilization at the end of the second quarter of EFY 2016 standing at 8% of the annual budget. The report presents general challenges and a way forward for the low utilization, but it does not specifically address components and implementing entities, which need to be improved in the upcoming reports. Closer monitoring and improvement efforts are crucial to enhance performance in the upcoming quarters. Additionally, budget planning should consider actual capabilities to set a realistic budget. b) Budget monitoring: None of the implementing entities are currently monitoring the project budget at the transaction level using excel sheets or alternative mechanisms. It is essential to improve this practice across all implementing entities. c) Internal control issues: We have observed internal control issues such as incomplete project fixed asset register, absence of monthly bank reconciliation at MoF, late settlement of travel advance and failure to use PAID stamp. It is necessary to address these issues to enhance the overall control environment. d) Unreconciled balances between PIU and implementing entities records: We have noted a difference of Birr 1,119,627.67 between PIU’s and MoF’s record, the PIU’s record being more. The finance team from both entities are currently working to reconcile the difference. We urge the team to finalize the reconciliation as soon as possible and the necessary journal entries should be made to rectify the records including the recording of PPA balance in PIU’s books. In general, this calls for a close collaboration of the PIU and other entities, especially MoF, regarding FM. e) Project internal audit: It is noted that, except for ECA, internal audit reviews of the project were conducted at all implementing entities in EFY 2015, which is commendable. It is a requirement for the project team to liaise with the internal audit units of their respective entities to ensure the continuation of this practice in EFY 2016 and throughout the project's duration. Addressing the issues raised by the auditors is crucial, and we also request that the status report be incorporated into quarterly Interim Financial Reports (IFRs). f) Designated Account Reconciliation: During the reconciliation of the outstanding DA balance against the client record, we have identified erroneous documentation of a direct payment of USD 876,844.50 against the DA advance. To correct this, an adjustment is required by deducting the amount from future expenditure documentation until the balance is fully settled. To prevent similar errors, the PIU should split and clearly indicate the total expenditure incurred through direct payment and expenditure incurred from DA in upcoming IFRs. Furthermore, after considering the above adjustment, a difference of USD 104,291.89 between the outstanding DA balance in Client Connection (CC) and the ending balance as of January 09, 2024, as per the client record was noted. This higher outstanding DA balance indicates under documentation, possibly due to an incorrect exchange rate used to translate expenditures to USD or the conversion of ending balances denominated in Birr to USD. Therefore, it is recommended to conduct a thorough verification of the exchange rate used in the previous IFRs to identify the difference and take corrective action. g) External audit issues: It is noted that an action plan has been prepared by the PIU to address the audit findings for EFY 2014 & 2015 but the status report on the rectification of the findings was not yet submitted to the Bank. The status reports should be submitted without further delay. As per the Bank’s policy, public disclosure of project external audit reports is required, which needs to be performed at MInT on an annual basis. In addition, MInT should follow up the entity audit issues and update the Bank on the progress made. ISR FM RATING 4. Following this supervision mission, the overall financial management rating for the project is retained to be Moderately Satisfactory. The mission acknowledges and appreciates the positive developments and efforts of the PIU in addressing recommended actions during the previous mission. The main ones include timely submission of external audit for the year ended July 7, 2023; timely submission of IFRs; commencement of annual work plan and budget preparation for EFY 2017; finalization of recruitment of FMS for PIU. However, the mission noted the following issues that require management attention and action going forward. Low budget utilization with inadequate explanations provided in the IFR; weak budget monitoring; action plans and implementation status report on project external audit findings for both EFY 2014 & 2015 audit not yet submitted to the Bank; Some internal control weakness; Failure to disclose audit report on MInT website, among others. 16 Official Use FM RISK RATING 5. The overall financial management risk for the project remains Substantial. FM PERFORMANCE BUDGETING 6. Budget Preparation: The project budget preparation procedures adhere to the Government of Ethiopia’s (GoE) budgeting procedure and calendar. The PIU at the MInT, in consultation with the implementing entities, prepares a consolidated Annual Work Plan and Budget (AWPB) based on the project objectives, resources, costing estimates, past trends, and other relevant factors. Once prepared, the AWPB needs to be approved by the Project Steering Committee before being shared with the World Bank for No Objection. The project budget for EFY 2016 was timely prepared and cleared by the Bank. The revised budget was also cleared by the Bank on April 02, 2024. It is also observed that the project budget was proclaimed under MInT. However, the proclaimed budget is less by Birr 846,162,852 (US$14.8m) compared to the working budget. Hence, it is important to note that a supplementary budget needs to be requested if the actual expenditure exceeds the declared budget amount. During the current mission, it has been observed that the AWPB preparation for EFY 2017 has commenced. This process needs to be completed and submitted to the Bank on or before May 31, as stipulated in the Financing Agreement (FA). 7. Budget Monitoring and Controls: Due to the absence of a budget control system in the Peachtree accounting software, it is not possible to track each payment request against the budget balance before payment through the system. To resolve this issue, it was previously agreed with the PIU to maintain a budget control system in excel spreadsheets at all implementing entities. However, this has not yet been implemented. Consequently, we urge all implementing entities to use excel for effective budget control. At the reporting level, the budget is compared with the actual expenditure at both the component and implementing entity levels and reported in the quarterly IFRs. However, the explanation provided in the narrative section are general challenges and a way forward rather than clearly indicating the reasons for the low performance under each component or implementing entity. Therefore, moving forward, the PIU needs to include brief and precise justifications for budget variances at both the component and implementing entity levels in quarterly reports. 8. Budget Utilization: As shown in the tables below, the project's budget utilization remains low, with the year-to-date budget utilization indicating 8% utilization of the annual budget by the end of the second quarter (January 09, 2024). At the component level, all four components show below 20% utilization, with component 2 and 3 revealing particularly low performance at 1% and 8% respectively. When seeing utilization by implementing entities, NIDP, MInT, and MoE show 1%, 2%, and 5% respectively, which is significantly low. Additionally, MoF has not reported any expenditure until the end of the second quarter. In contrast, ECA's performance is relatively better, reporting 46% utilization of the annual budget by the end of the second quarter. As previously mentioned, the explanations provided for such low performance are inadequate. Therefore, efforts should be strengthened to implement activities as planned by identifying and eliminating bottlenecks. Furthermore, we recommend that the project team consider the actual implementation capacity of the entities to set realistic budgets moving forward. Table 1: Budget utilization by component. EFY 2016 EFY 2016 YTD expenditure Util. Component Annual Budget January 9, 2024 ETB ETB % Component 1 993,374,515 191,341,927 19 17 Official Use Component 2 1.874,927,685 19,153,697 1 Component 3 292,687,262 21,986.513 8 Component 4 92,181,782 20,659,217 18 Total 3,253,171,244 253,141,354 8 Table 2: Budget utilization by implementing entities Entity EFY 2016 YTD expenditure Util. Annual Budget January 9, 2024 ETB ETB % MInT 1,945,359,269 29,746,570 2 ECA 406,091,727 186,942,291 46 MoE 226,684,163 11,393,640 5 MoF 102,784,131 - - NID 480,070,172 4,399,637 1 PIU 92,181,782 20,659,217 18 Total 3,253,171,244 253,141,354 8 ACCOUNTING 9. Basis of Accounting: The MInT adheres to the Federal Government of Ethiopia’s accounting policies and procedures for handling day-to-day operations. These procedures are based on a double-entry bookkeeping system and a modified cash basis of accounting. Additionally, the project has developed a financial management manual that closely aligns with the Government accounting procedure, encompassing accounting policies, procedures, internal control issues, financial reporting, fund flow, budgeting, and external audit arrangements. This manual was reviewed by the Bank, and No Objection has been provided. It has been observed that, apart from the MoF, the financial management manual is available to all implementing entities. 10. Accounting Software at PIU: The PIU is currently using IFMIS and Peachtree accounting software in parallel. The chart of accounts in IFMIS is mapped with the one maintained in the Peachtree system. IFMIS is utilized for transactions of the PIU exclusively, while the Peachtree record contains consolidated project financial information, excluding the PPA balance at held the Ministry of Finance (MoF) before the project's responsibility is shifted to MInT. Efforts should be directed towards reconciling and including this balance in the consolidated record. In addition, it has been observed that the Peachtree records do not include a segment for the implementing entity. Therefore, the project should consider incorporating such a segment to facilitate the extraction of financial information based on the implementing entity from the system. 11. Accounting Software at other implementing entities: MoF and MoE (Ethiopia Education and Research Network) are utilizing IFMIS, whereas ECA has implemented the Peachtree accounting system for project transactions. Given that IFMIS is not capable of recording expenditures according to project components and sub-components, implementing entities responsible for more than one component should apply the Peachtree accounting software in accordance with the requirements of the Financial Management Manual. To ensure uniformity in design capable of capturing and reporting on expenditures by component, sub-component, category, and activity of expenditures, the PIU should maintain this standard across all implementing entities. 18 Official Use 12. Staffing: The PIU at MInT has recently hired one full-time FM Specialist and employs two finance officers. MoF on the other hand has assigned staff that work on ESPES to handle the EDFP transactions while the ECA and MoE have one project finance officer each. During the current mission, it has been confirmed that all staff members are on duty, and there are no vacant positions. INTERNAL CONTROL & INTERNAL AUDIT Internal Control 13. Overall Control Procedures: The PAD and PIM require the project to apply government control procedures. In addition, the FM manual provides detailed program specific controls procedures. Proper segregation of duties has been implemented in payment processes. Authorization and approval procedures are in place. Monthly bank reconciliations are consistently performed across all implementing entities, except at the MoF, where reconciliation has not been done since January 9, 2024 as there have been no project transactions. It should be emphasized that monthly reconciliation is mandatory, even in the absence of transactions. Additionally, it has been observed that transaction recording is up to date at the PIU, the MoE, and the ECA. Despite the PIU maintaining a fixed assets register for project assets, the register is not updated with recently acquired assets and lacks essential information such as Asset Identification code, Location, Custodian, and others. This issue requires prompt attention and action. In addition, we have noted that PAID stamp is not being used at PIU, ECA & MoE which needs to be improved going forward. 14. Bank Signatories: In the previous mission, it was recommended that the project assign a cheque signatory in place of the FM Specialist at the PIU, who had been designated after the PIU office relocation. During the current mission, it has been confirmed that the Head of Finance and Procurement of the MInT has been assigned as the signatory for the project. This development is commendable, as it enhances the segregation of duties as previously advised. 15. Advance and Payables: As of March 09, 2024, the advance and payable balances were Birr 170.4 million and Birr 1.4 million, respectively. A significant portion of the receivable balances are related to LC and supplier advances. The supplier’s advance balances are secured with advance guarantees, and strict follow-up is conducted to renew the guarantee upon expiration until the delivery of the goods as agreed. The aging analysis reveals that all receivable balances are aged less than a year, which is commendable. However, it is important to note that a significant amount (Birr 66.7 million) is aged between six months and one year, requiring close follow-up by the project team to ensure timely settlement. Regarding payables, most of the reported balance relates to tax and pension, which were settled in subsequent periods. 16. Travel advances at MoE: A sample of reviewed travel advances at MoE revealed that there is a delay in settling advances after returning from the field mission. According to the FM manual and government internal control procedure, travel advances must be settled within seven days from the date of return. Therefore, improvement is expected in this regard to comply with the control procedure. 17. Unreconciled balances between PIU and implementing entities records: As of January 09, 2024, there is a difference of Birr 1,119,627.67 between PIU's record (advance to MoF) and MoF's record (fund balance), with the PIU's record being higher. The finance staff from both entities are currently working closely to identify and reconcile the difference. So far, it has been identified that the difference is primarily related to exchange gain on the dollar account at MoF, as there are no differences in the amount of funds transferred and the reported expenditures. We recommend that the teams continue their reconciliation efforts until a complete agreement is reached. Once resolved, the necessary journal entries should be made to rectify the records at both entities including the recording of the PPA balance in PIU's books. Similarly, a minor difference with ECA (Birr 400) has been noted, which also needs to be cleared. Internal Audit 19 Official Use 18. Internal Audit at MInT: The PAD and the PIM stipulate that the internal audit units of the implementing entities to include the project in their annual audit plan, regularly review the project’s books, and produce separate audit reports or incorporate them into their consolidated reports. In line with this requirement, the internal audit unit of the MInT conducted a review of the project transactions for the first six-month period in the EFY 2015 and submitted a separate report. During this review, auditors identified an issue related to the procurement of hotel services without a competitive process. Accordingly, we request the PIU to prepare an action plan and implementation status report, which should be included in the 3rd quarter IFR. Additionally, it has been noted that auditors are in the process of commencing a review of the six-month transactions in EFY 2016. This is commendable and should continue throughout the duration of the project. 19. Internal audit at other implementing entities: At the MoE, auditors raised issues regarding the late settlement of travel advances and the absence of a PAID stamp as findings during the EFY 2015 audits. Addressing these issues is essential to enhance the internal control environment. Similarly, the project at MoF has undergone internal audit oversight in EFY 2015 which did not reveal any specific findings related to the project. As for the ECA, it is advisable for the internal audit unit to include the project in their audit plans and conduct regular reviews. Moreover, it is essential for the project team to liaise with the internal audit units of their respective entities to ensure the continuation of this practice in EFY 2016 and throughout the project's duration. FUND FLOW 20. Banking Arrangements: Implementing entities have opened and are operating bank accounts as per the agreed arrangement. MInT and MoF have opened designated bank accounts both in USD and ETB. The other implementing entities are expected to have ETB bank accounts. Accordingly, the MoE and ECA have maintained only ETB bank account for the project. On the other hand, activities of NID and MInT are carried out at the PIU, and they are not required to open separate bank account. 21. Disbursement from Bank to the Project: The EDFP is financed through SDR 138.9 million (US$ 200 million equivalent) IDA credit to the GoE. As of April 06, 2024, the disbursement from the Bank to the project reached 24.8 % showing slight improvement compared to the previous mission rate of 23%. As of April 06, 2024 Table 3: Loan Overview (IDA 68560) Current Mission Previous Mission April 2024 October 2023 Rate (in Rate (in %) SDR %) SDR Signed Amount 138,900,000.00 138,900,000.00 Cancelled - - Disbursed 34,461,758.49 24.81 32,415,527.61 23.34 Undisbursed (Estimated Funds Available) 104,438,241.51 75.19 106,484,472.39 76.66 Table 4: Designated Accounts (IDA 68560) DA-A DA-B Total Transaction List USD USD USD Total Deposits Less Refunds 3,682,777.39 38,469,487.66 42,152,265.05 Documented 3,682,777.39 12,539,383.77 16,222,161.16 Outstanding Balance - 25,930,103.89 25,930,103.89 20 Official Use Waived Documentation Amount 0.00 0.00 0.00 Transactions in Process 0.00 0.00 0.00 Table 5: Category Summary (IDA 68560) Allocated Disbursed Undisbursed Category Category Description SDR SDR SDR Totals 138,900,000.00 34,461,758.49 104,438,241.51 1 Gds, Wks, Ncs, Cs, Oc, Trg (exc C1) 138,630,054.71 14,650,862.93 123,979,191.78 2 Matching Grants (for Gds, Ncs,TrgC1) 0.00 0.00 0.00 3 Refund of Preparation Advance 269,945.29 269,945.29 0.00 4 Emergency Expenditures part E 0.00 0.00 0.00 DA-A IDA V2980 DA-A 0.00 -162,257.88 162,257.88 DA-B IDA 68560-ET DA B - MInT 0.00 19,703,208.15 -19,703,208.15 22. Designated Account Reconciliation: While reconciling the outstanding DA balance against the client record, we have noted the following issues that require the PIU's attention and action. i. It has been noted that a direct payment of USD 876,844.50 dated December 21, 2021, has been incorrectly documented against the DA advance on June 14, 2022. This is for activities implemented by MInT not MoF. Since only expenditures incurred from DA should be documented against the DA advance, the PIU should split and clearly indicate the total expenditure incurred through direct payment and expenditure incurred from DA in upcoming IFRs to avoid the same mistake from reoccurring. Additionally, to correct the above balance, an adjustment is necessary by deducting the amount from future expenditure documentation until the amount is fully cleared. ii. After considering the adjustment under (i) above, the table below indicates a difference of USD 104,291.89 between the outstanding DA balance in Client Connection (CC) and the ending balance as of January 09, 2024, as per the client record. Since the outstanding DA balance is higher, indicating under documentation, this may be due to the application of an incorrect exchange rate to translate expenditures to USD or error in the conversion of ending balances (Cash at bank, receivables, and payables) denominated in Birr to USD. Therefore, we recommend a thorough verification of the exchange rate used in the previous IFRs to confirm accuracy. It should be noted that an official letter must be sent to the Bank no later than May 23, 2024, confirming that this issue has been addressed. Table 6: DA reconciliation (CC data vs client record) As of January 09, 2024 USD Disbursement to DA accounts 42,152,265.05 Cumulative Expenditure as per the IFR 16,222,161.16 Less: Direct payment wrongly documented against DA advance (876,844.50) Documented expenditure after adjustment 15,345,316.66 Adjusted outstanding DA advance balance 26,806,948.39 Ending fund balance in the IFR 26,702.656.50 Difference 104,291.89 FINANCIAL REPORTING 21 Official Use 23. Reporting Arrangement: It is required to submit the quarterly IFR to the Bank within 45 days after the end of the quarter. The project is up to date in submitting IFRs to the Bank. Though reports are submitted on time, there are some quality issues that needs to be improved in the upcoming reports including providing of clear explanation for major budget variances by component and implementing entities, inclusion of action plans/implementation status on external and internal audit findings, application of accurate exchange rate to translate local cash balance to USD among others. The timeliness of reports is improving, while the quality of financial reports needs improvement. The next IFR is for the third quarter of EFY 2016, which ended on April 08, 2024, and due on May 23, 2024. It should address the above-mentioned issues and any concerns raised in the previous review letter. EXTERNAL AUDIT 24. Project External Audit: The project is up to date in external audit and has finalized the audit until EFY 2015 (July 7, 2023). All previous reports are submitted in a timely manner as agreed in the Financing Agreement. Though recommended in the Bank’s audit review letter, the audit reports were not disclosed on the Ministry’s website. It is required to disclose the report without further delay and inform the Bank of the disclosures. 25. Opinion and Findings of External Audit Report: The auditors have issued a qualified audit opinion (except for) on the financial statements of the project for EFY 2015, mainly due to the discrepancy in opening and closing balances between the PIU’s records (Advance to MoF) and the MoF’s records (Fund balance). Efforts are underway to reconcile the difference, and once finalized, appropriate entries will be made to align the recorded balances. Other issues highlighted in the management letter accompanying the audit report include the understatement of foreign exchange gain in the financial statement and the lack of key information in the fixed asset register maintained by PIU. It is noted that PIU has already prepared an action plan to rectify the audit findings. However, the status report on the rectification of the audit finding has not yet been submitted to the Bank. It is also noted that the status report for EFY 2014 audit findings has not been submitted as well. The status report for both EFY 2014 & 2015 should be submitted without further delay. 26. Entity audit: Since its re-establishment, the MInT has undergone three full-year audits by the Office of Federal Audit General (OFAG), from EFY 2013 to 2015 though the audit for EFY 2015 is not yet finalized. The auditors issued adverse opinion for EFY 2013 & 2014 due to material long-outstanding receivables and payables, non-compliance with procurement policies and procedures, and the absence of supporting documents for expenditures among others. The management of MInT is following up on the audit issues by preparing action plans to address each of the audit findings. Additionally, the ministry has submitted a letter to the MoF requesting to write off the long-outstanding receivables and payables. These account balances mainly relate to the former Ministry of Communication and Information Technology before the merger, and it is not possible to trace back to the source documents to recover or settle the balances. MInT must follow up on all audit issues, not only to address the current issues, but also to ensure that these matters do not happen again. This includes implementing the action plans that have been developed and strengthening the internal controls over financial reporting. TRANSACTION REVIEW 27. The supervision mission reviewed sample transactions at PIU/MInT, ECA and MoE. There is no expenditure reported by MoF until the end of third quarter of EFY 2016. The transactions reviewed include procurement of equipment & software license, training & workshop expenses, perdiem and project staff salaries. Generally appropriate levels of review and approval within the internal control systems are in place regarding transactions. Expenditures were also supported with relevant and appropriate supporting documents. ACTION PLAN 22 Official Use (a) Status of Previous Action Plan Action Expected Completion Date Responsible Status 1. Budgeting a) Ensure that transaction level budget a) EFY 2016 a) All a) Not monitoring system is strengthened at all b) EFY 2016 entities addressed implementation level; maintain in excel b) All b) Ongoing spread sheet, entities b) Improve budget utilization. 2. FM Covenants a)Submit IFRs for quarter ended October 11, a) November 25,2023 a) MInT a) Submitted 2023, addressing review notes of earlier IFRs. b)Disclose external audit report on website of b) Immediate b) MInT b) Not MInT. addressed c)Submit status report for rectification of audit c) Immediate c) MInT c) Not findings of EFY 2014 to the Bank. addressed 3. Staffing 2nd quarter of EFY 2016 MInT New FMS is Recruit and assign new FM specialist or recruited extend the contract of the existing one who is working on deliverable bases 4. Internal Audit Share internal audit report along with action November 15, 2023 MInT Not addressed plan 5. Bank Signatories Now To enhance the internal control, withdraw 2nd quarter of EFY 2016 MInT Procurement the FM specialist of the PIU from the role and Finance bank check signatory and delegate to non- Head of MInT finance staff of the project. assigned 6. Withdrawal Application and Signatory Complete submission of WA uploaded on 2nd quarter of EFY 2016 MInT &WB Done client connection to document expenditures of the quarter ended on January 8 and April 8, 2023. 7. Entity Audit Issues Address or resolve the external audit findings Submit with 2nd quarter MInT Ongoing of the MInT and MoSHE; update the WB on IFR of EFY 2016 the status of resolution along with quarterly IFRs. (b) New Action Plan Action Expected Completion Date Responsible Budgeting a) Finalize and submit AWPB for EFY 2017 to the WB. The a) May 31, 2024 a) PIU/MinT budget should consider the actual implementation capabilities. b) Ongoing b) All entities b) Improve budget utilization. c) Immediate c) All entities 23 Official Use c) Ensure that transaction level budget monitoring system is d) As part of 3rd quarter IFR d) PIU/MinT strengthened at all implementing entities; maintain in excel spread sheet, e) June 30, 2024 e) PIU/MInT d) Provide specific explanation for major budget variances by component and implementing entities. e) Consider supplementary budget if actual expenditure exceeds proclaimed budget Accounting a) Share project FM manual to MoF a) Immediate a) PIU/MInT b) Consider incorporating segment reporting representing b) Immediate b) PIU/MInT implementing entity into the Peachtree chart of account to facilitate identification of expenditures and balances of by project implementing entities. Internal control a) MoF a) Perform bank reconciliation monthly at MoF a) Immediate b) All b) All payment supporting documents to be marked as b) Immediate implementing “PAID� c) Immediate entities c) Update fixed asset register to include newly acquired asset d) Ongoing c) PIU/MInT and complete missing key information e) Immediate d) PIU/MInT d) Follow up receivable balances focusing on balances aged f) As part of 3rd quarter IFR e) MoE b/n six months to one year for timely settlement. Follow f) PIU/MoF/EC up supplier advance guarantees for timely renewal. A e) Follow up on travel advance for timely settlement. f) Reconcile the difference b/n PIU’s record and implementing entities record as fund balance. Internal audit a) As part of 3rd quarter IFR a) PIU/Min a) Submit implementation status report for internal audit b) Ongoing b) All findings for the six-months period of EFY 2015. implementing b) Follow up with the internal auditors of all implementing entities entities for review of project transactions of EFY 2016. Financial reporting Submit IFRs for quarter ended April 08, 2024, addressing May 23,2024 PIU/MInT review notes of earlier IFR Designated Account reconciliation a) Adjust wrongly documented direct payment of USD a) 3rd quarter IFR and will PIU/MInT 876,844.50 against the DA advance by deducting from the continue until the upcoming expenditure documentations until the amount is amount is fully cleared. fully cleard. b) As part of 3rd quarter IFR b) Reconcile the difference of USD 104,291.29 b/n the outstanding DA balance and ending balance as per the client record as of January 09, 2024. External Audit Issues Project audit a) Immediate a) PIU/MInT a) Disclose external audit report on website of MInT b) Immediate b) PIU/MInT b) Submit status report for rectification of audit findings of c) Ongoing c) MInT EFY 2014 & 2015 to the Bank. Entity audit c) Address or resolve the external audit findings of the MInT ; update the WB on the status of resolution along with quarterly IFRs. 24 Official Use