The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) Program Information Documents (PID) Appraisal Stage | Date Prepared/Updated: 29-Oct-2020 | Report No: PIDA225299 October 28, 2020 Page 1 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Program Data Country Project ID Program Name Parent Project ID (if any) Nigeria P174042 Nigeria SFTAS Additional P162009 Financing for Covid-19 Response PforR Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) AFRICA WEST 06-Nov-2020 15-Dec-2020 Governance Financing Instrument Borrower(s) Implementing Agency Program-for-Results Financing Federal Republic of Nigeria Federal Ministry of Finance Program Development Objective(s) Strengthen the fiscal transparency, accountability and sustainability in the participating states, including in the context of the COVID-19 response. COST & FINANCING SUMMARY (USD Millions) Government program Cost 626.00 Total Operation Cost 1,965.00 Total Program Cost 1,965.00 Total Financing 1,965.00 Financing Gap 0.00 FINANCING (USD Millions) Total World Bank Group Financing 750.00 World Bank Lending 750.00 Total Government Contribution 1,215.00 October 28, 2020 Page 2 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) B. Introduction and Context – Including the COVID-19 pandemic Country Context 1. Nigeria, Africa’s giant, is critical to the World Bank Group's (WBG) twin goals of eradicating global extreme poverty and promoting shared prosperity. A multi-ethnic and diverse federation of 36 autonomous states, with an abundance of resources, a young population and a dynamic private sector, Nigeria is already Africa’s largest country, with over 200 million people, and Africa’s largest economy, with nominal gross domestic product (GDP) of around US$450 billion (2019), and has the potential to be a giant on the global stage. At the same time, with over 40 percent of its population living in poverty, Nigeria is also home to a substantial share of the global poor. Economic growth, at 2.2 percent in 2019, has been below the rate of population growth for the last five years. The economy and public finances continue to be highly vulnerable to oil shocks, and not enough jobs are being created for the 3.5 million young Nigerians coming of working age every year, adding to the pool of unemployed and under-employed. Fragility, conflict, and insecurity afflict many parts of the country, including insurgency in the north, while social exclusion and corruption and weak capacity in the public sector erode the trust that is the basis of the social contract between citizens and the state. On many human development indicators, Nigeria ranks amongst the lowest in the world (6th lowest in the Human Capital Index). Growth has also not been inclusive, with major regional disparities between the north and south of the country. 2. The economic and human impact of the COVID-19 pandemic on Nigeria will be severe, even if Nigeria manages to contain the outbreak locally. The economy is projected to contract by about 4 percent in 2020, its deepest recession since the 1980s, with severe challenges to regaining growth momentum in 2021-2022 amidst global uncertainty. Even with moderating oil prices, in 2020 consolidated government revenues are projected to fall by over 2 percent of GDP (over US$10 billion) or more. The revenue shock comes at a time when fiscal resources are urgently needed to contain the outbreak and initiate counter-cyclical and pro-poor fiscal measures to protect the lives and livelihoods of the over 80 million Nigerians already in extreme poverty, and millions of others in urban areas who are dependent on the informal economy. Simulations suggest that more than 10 million Nigerians may fall into poverty as a result of the COVID-19 crisis, absent any countervailing measures. The human and economic costs would be amplified with a moderate or severe outbreak in Nigeria. Since the first COVID-19 case was identified in late February 2020, by mid-October 2020 Nigeria had officially recorded over 61,300 cases and over 1,120 related deaths. 3. Nigeria faces significant challenges in responding to the COVID-19 pandemic, but the Government has responded proactively. The immediate response has focused on containing the outbreak and organizing the needed fiscal resources in the face of severe fiscal constraints. Because of Nigeria’s size, population, socioeconomic, and federal administrative structure and longstanding unfinished structural reform agenda, implementation of the crisis response will be challenging and will require response by both Federal and State Governments and strong coordination between them on measures to manage the health aspects of the response, including tracing, testing and isolation of identified cases, and on fiscal management given the system of federation revenue sharing. 4. Nigeria’s Federal and State Governments have taken important steps to marshal the needed fiscal resources and deploy them towards a pro-poor fiscal response to the COVID-19 crisis, starting with amending their 2020 budgets. The Federal Government has adopted an amended budget for 2020 October 28, 2020 Page 3 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) that cuts non-essential expenditures and allows for increased borrowing (from both the market and international financial institutions) to protect critical expenditures and provide for a pro-poor COVID-19 fiscal stimulus package. It has also adopted measures to safeguard and mobilize oil and non-oil revenues including establishment of a market-based gasoline pricing mechanism, timely collection of gas-flaring fees and robust roll-out of new Value-added Tax (VAT) implementation measures. All 36 States have passed Amended Budgets for 2020 to adjust to the significant revenue decline and reprioritize spending in order to protect social expenditures and create fiscal space for COVID-19 response and recovery expenditures, while maintaining fiscal sustainability by having fully financed budget deficits. 5. To mitigate the adverse impacts of the COVID-19 crisis and lay the ground for a robust recovery, the government has formulated an ambitious Economic Sustainability Plan (ESP). Nigeria’s earlier multi- year plan, the 2017-2020 Economic Recovery and Growth Plan (ERGP), was formulated in the aftermath of the 2016-2017 recession. While the successor multi-year plan for 2021-2025 is being developed, and in the context of the COVID-19 crisis, the ESP serves as a bridge. The ESP was launched in July 2020 and lays out policies and programs for the next eighteen months, from fiscal and monetary measures to mobilize revenues and maintain macro-financial stability, to scaling up of social assistance and subsidized credit programs to support households and micro and small enterprises, to large-scale initiatives to stimulate activity and create jobs through investments in agriculture, roads, renewables, and housing. 6. The World Bank Group (WBG) ongoing and planned support for Nigeria’s COVID-19 crisis response spans all pillars of the framework outlined in the Board Approach Paper 1 and covers both adjustments to existing operations and preparation of new operations. Based on the Government’s request, a large multi-pronged package of support is under preparation. The package includes: (i) support of over US$250 million from existing operations and a new program2 to support public health efforts, particularly by the states, to contain the outbreak; (ii) planned policy-based budget support for the Federal Government of Nigeria (FGN) focused on policy measures to maintain macro-financial stability and marshal the fiscal resources needed for the COVID-19 response3; (iii) support for proactive crisis- responsive fiscal measures by the States through the States’ Fiscal Transparency Accountability and Sustainability PforR (this Program through a Program Restructuring and proposed Additional Financing); and (iv) support for States’ efforts to protect livelihoods, food security and local medium, small and micro- enterprise activity4. Adjustments have been made to the existing program (both lending and advisory) at the request of the Federal Ministry of Finance, Budget and National Planning (FMFBNP). This has included partial cancellation of three projects5 with further operations being reviewed for full or partial cancellation to improve value for money in existing operations and increase fiscal space for new operations that help the Government respond to the crisis. Sectoral and Institutional Context 7. State governments in Nigeria account for 40 percent of total government expenditure and 20 percent of total public debt and are provided with a high degree of fiscal autonomy under the country’s 1 "Saving Lives, Scaling-up Impact and Getting Back on Track" WBG COVID-19 Crisis Response Approach Paper, June 8, 2020 2 Nigeria COVID-19 Preparedness and Response Project (P173980) 3 Nigeria COVID-19 Federal Fiscal and Economic Response (P173993) 4 Nigeria COVID-19 Action Recovery and Economic Stimulation (P174114) 5 Nigeria States Health Improvement Project (P120798), Nigeria Third National Urban Water Project (P123513) and Nigeria State Education Investment Program Project (P122124) October 28, 2020 Page 4 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) Constitution. Fiscal management occurs at all three tiers of government: federal, 36 State governments and Federal Capital Territory (FCT), and 774 local governments. The fiscal federalism framework in Nigeria consists of expenditure responsibilities and tax assignments, inter-governmental fiscal transfers, and a fiscal policy framework that seeks to ensure overall macroeconomic stability. Most of the fiscal revenues, including oil and gas and the key non-oil taxes (corporate income tax, excises), are collected by FGN into the federation account to be subsequently shared with different tiers of government as statutory transfers by the Federation Account Allocation Committee (FAAC) according to a formula. 8. The fiscal federalism framework does not compel or require States to be fiscally transparent and accountable to the Federal Government or follow its fiscal responsibility framework. However, some States have chosen to adopt (“domesticate�) fiscal responsibility frameworks and demonstrated commitment to fiscal transparency and accountability. The sharp drop in oil prices and revenues in 2015- 2016 led to two financial assistance packages from the FGN to the States, and the adoption of the 22- point Fiscal Sustainability Plan (FSP) by all the States. The FMFBNP requested a World Bank Program for Results – the parent Program - to support the sustained implementation of the FSP and fiscal elements of the Open Government Partnership (OGP) framework. 9. COVID-19 will severely impact on States fiscal capacity to function and deliver services to citizens. The impact of COVID-19 and the oil price shock on States in 2020 will be severe, worse than in the last fiscal crisis 2015-16, even if only considering the direct revenue impact from the COVID-19 induced economic slowdown and simultaneous oil price shock. As States have limited financing capacity, drops in revenues at the State level will likely result in an equivalent financing gap if States are to preserve their total spending. All 36 States have passed Amended Budgets for 2020 to adjust to the significant revenue decline and reprioritize spending in order to protect social expenditures and create fiscal space for COVID- 19 expenditures, while maintaining fiscal sustainability by having fully financed budget deficits. Two measures have been announced to date to close the gap: 1) suspension on State government debt service from Central Bank of Nigeria (CBN) and Federal Government (FGN) loans i.e. reduce FAAC deductions so that net FAAC distributable to States declines by less and 2) access to national funds. 10. The World Bank’s baseline estimate is that there would still be a total revenue/financing gap of ₦0.6 trillion (US$1.5 billion) at the State level in 20206. The total drop in gross FAAC revenues distributable to States (Oil, customs, corporate income tax and value-added tax (VAT)) and States IGR in 2020 is projected7 at ₦1.1 trillion/US$2.9 billion, representing 32 percent drop in gross FAAC revenues to States and a 25 percent drop in State Government total revenues. The fiscal crisis will be larger than the one in 2015-16, which resulted in States’ total debt stock doubling in 2 years, including accumulation of large salary (civil servants) and contractor arrears. While the decline in revenues will be largest for the oil- producing States, the non-oil producing States will also be severely affected as they have weaker fiscal capacity and buffers to begin with. Oil-producing States are projected to experience the largest decline in revenues per capita but had higher revenue per capita to begin with and post shock still higher revenue per capita than non-oil producing States. 6 The States Amended Budgets 2020 revised fiscal variables significantly compared to the Original 2020 Budgets: total expenditures reduced by 35 percent (by US$ 8.6 billion). Revenue and grants projections reduced by 39 percent (US$ 7.3 billion). While the revenue revisions were substantial, the States projections are still slightly higher compared to the World Bank projections. 7 World Bank projections, 2020 October. October 28, 2020 Page 5 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) PforR Program Scope The Government program 11. The government program supported by the ongoing SFTAS (Parent Program) focuses on strengthening the fiscal sustainability, transparency and accountability of Nigerian States. The government program is comprised of: (1) the Fiscal Sustainability Plan (FSP) actions to be implemented by State governments; and (2) Open Government Partnership (OGP) commitments at the State-level. The government program was expanded to include the State-level fiscal actions in the NEC COVID-19 Plan through the second Program Restructuring completed on October 13, 2020. 12. The Fiscal Sustainability Plan (FSP) consists of 22 actions grouped under five objectives: (1) Improve Accountability and Transparency (2) Increase Public Revenue (3) Rationalize Public Expenditure (4) Improve Public Financial Management and (5) Sustainable Debt Management. Out of the 22 actions, 19 are to be implemented by the State governments and 3 are measures to be undertaken by the federal government. 13. The OGP National Action Plan (NAP), updated in 2019 articulates the government’s continued commitment to anti-corruption and transparency and formal commitments are now being put in place at the sub-national level. Nigeria joined the OGP in July 2016. The multi-stakeholder National Steering Committee for OGP formulated the first NAP covering January 2017 to June 2019 which is supported by the Parent Program. This has been succeeded by NAP II which consolidates and expands the NAP commitments across seven (7) thematic areas of fiscal transparency, extractive transparency, anti- corruption, access to information, citizens’ engagement and empowerment and inclusiveness and service delivery. Since 2018, fifteen (15) States have signed up to the OGP commitments and are at various stages of preparing /implementing State action plans. The SFTAS Program (the Parent Program) and proposed Additional Financing 14. The Parent Program is a hybrid with two components of activities that support Nigerian States: (1) a performance-based financing component for State governments, which is implemented as a PforR; and (2) a capacity building component for States and selected national-level institutions, which is implemented as an IPF. The proposed Additional Financing will enhance the PforR component with no change to the TA component of the Parent Program which will continue to provide essential support to the States in achievement of the performance required to access the financing. 15. The PforR component of the Parent Program provides performance-based grant financing to States over four years: 2018 to 2021. To access the PforR financing, every State must meet the annual eligibility criteria: the publication of annual budgets and audited financial statements. States meeting the annual eligibility criteria will receive performance-based grants based on their achievement of disbursement-linked indicators (DLIs) for that year. As the independent verification agent, the States’ achievement of the DLIs are verified by the Office of the Auditor-General for the Federation supported by a third-party audit firm. October 28, 2020 Page 6 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) 16. The Parent Program supports the full and sustained implementation of a strategic subset of reforms from the FSP, the OGP commitments that are implemented at the State-level and a selected sub-set of the State-level fiscal actions in the NEC COVID-19 Plan. The selected reforms are considered the most critical and impactful for contributing to the achievement of the PDO and form the basis of the eligibility criteria, the disbursement-linked indicators (DLIs) and results (DLRs). The formulation of the DLIs and DLRs were designed to address gaps in the programs identified in the technical assessment and strengthen the impact of the Government programs. 17. The Federal Government requested8 for a restructuring of the Program in response to COVID- 19 and as part of the World Bank package of COVID-19 support. The requested Program Restructuring (i) expanded the PDO to incorporate the COVID-19 context; (ii) expanded the Program with the inclusion of the State-level fiscal measures in the NEC COVID-19 Plan that promote a transparent, accountable and sustainable fiscal response to COVID-19; (iii) added a set of four new 2020-2021 DLIs, one in each of the four result areas, to support and incentivize the implementation of key State-level fiscal measures in the NEC COVID-19 Plan, which are consistent with the Program’s transparency, accountability and sustainability goals, and (iv) adjusted targets of existing 2020 and 2021 DLRs to account for the disruption in government functions and changed fiscal conditions from COVID-19 and the simultaneous oil revenue shocks and downturn. 18. The set of reforms in FSP, OGP and the NEC COVID-19 Plan are relevant to all States which are facing major revenue shortfalls and financing gaps in their original budgets. Fiscal management and performance are weak across the board. Performance-based financing to States linked to improved fiscal management and governance through the Parent Program and the proposed Additional Financing will shore up State budgets for protecting core government fiscal and finance functions in CY2020 and CY2021 and encourage States to establish and maintain transparent, accountable and sustainable fiscal frameworks, which are pre-requisites for the necessary health, social and livelihood interventions during the relief, restructuring and recovery phases over the next 18 months to 2 years. 19. Mid-way through its life, the parent Program has already made significant progress towards strengthening States’ fiscal transparency, accountability and sustainability nationally, including in the context of COVID-19. Starting from a low baseline, notable achievements have been made by a number of States in all four key result areas to achieve (i) increased fiscal transparency and accountability; (ii) strengthened domestic revenue mobilization; (iii) increased efficiency in public expenditure; and (iv) strengthened debt transparency and sustainability. The first of the new DLIs added to the Program in response to COVID-19 required passage of a credible, fiscally responsible, COVID-19 responsive Amended 2020 State Budget by 31 July 2020. Thirty-five States met the DLI with the last State achieving the full requirements by August 3. Under another one of the new DLIs, nearly half the States have already published their monthly Budget Execution Reports for August specifically disclosing COVID-19 expenditures. C. Program Development Objective(s) 20. The Program Development Objective (PDO) is to strengthen the fiscal transparency, accountability and sustainability in the participating States, including in the context of the COVID-19 8 Formal request for a Program Restructuring from the FMFBNP received 27 July 2020. October 28, 2020 Page 7 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) response. The following outcome indicators covering States participating in the PforR are maintained from the Parent Program to measure achievement of the PDO:  PDO Indicator 1: State Budget Transparency Survey score between 2018 and 2021 – improvement in aggregated score for States participating in the PforR  PDO Indicator 2: States that increased internally generated revenue collection by more than 20 percent annually (in nominal terms).  PDO Indicator 3: Average citizens access to procurement information in States publishing contract award data online in OCDS format.  PDO Indicator 4: States with total debt stock as a share of total revenue for the preceding 12 months being less than 100 percent. 21. The proposed Additional Financing seeks to increase the total financing of the PforR Component of the Program so that it can fully cover the disbursements for the projected achievement by States until the end of the Program. The financing gap in the Program is driven by the expanded Program boundary and increased targets coupled with stronger than expected performance demonstrated by the States. The progress on the parent Program is Satisfactory with the performance of States expected to continue as a result of the high awareness and political ownership of the Program and the imperatives of the current fiscal crisis. The expanded Program will support the 36 States of Nigeria to protect core government fiscal and finance functions in CY2020 and CY2021 and to achieve the PDO. 22. The Program Expenditure Framework is maintained but the expenditure parameters are changed with the Government contribution declining and IDA share increasing through the Additional Financing to fill the gap. The higher share of IDA is considered appropriate under the extenuating circumstances. Based on the projected achievement of the DLIs under the Program including both the original and the new results added through the second Program Restructuring, the current PforR financing envelope of US$700 million will be insufficient to fully cover the projected disbursements. 23. No other changes to the parent Program design and implementation arrangements are to be made under this proposed Additional Financing. No changes are proposed either to the TA IPF. 24. The parent Program has demonstrated strong results and is on a positive trajectory given the high level of ownership and buy-in at the political and technical level across all States. Verification and disbursement of grants against DLRs for 2018 was completed in April 2020. A total amount of US$120.6 million was disbursed as performance-based grants to the 24 eligible States. Further US$175 million has recently been disbursed in October 2020 for the 35 States fully meeting the new DLI for Amended 2020 State Budgets. The verification for 2019 DLRs is near completion with 32 States meeting the eligibility criteria and disbursement estimated at US$224 million. In addition, high level of achievement is also anticipated for two of the new DLRs against which States are projected to receive up to US$144 million. Strong results exhibited in budget credibility, payroll management, debt reporting and debt sustainability are an outcome of the high level of ownership, led by the State Governors and facilitated through the Nigeria Governors Forum9. 9 NGF has setup a sub-committee on SFTAS, chaired by Edo State Governor, that meets monthly with the Bank, PCU and implementation agencies/partners to address any implementation bottlenecks and the Program is discussed at the monthly NGF meetings with all the State Governors. October 28, 2020 Page 8 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) D. Environmental and Social Effects 25. No additional safeguard issues have been identified in this operation. No new environment or social risk is expected to be introduced and the Environmental Assessment category rating of the project will remain unchanged. The Program seeks to enhance public accountability and transparency of public finances. The Additional Financing supports the response to mitigate the negative impact of the COVID- 19 pandemic and simultaneous fiscal and financial crisis but does not directly finance health expenditures. The Additional Financing proceeds do not finance any COVID-19 programs and it does not include activities requiring the acquisition of land, funding any IT, construction or rehabilitation work. Hence, these activities are expected to have low probability of serious adverse effects on environment and human health. Therefore, the AF poses no risk to the environment, social and human health because of planned project activities. 26. In terms of environmental and social risks, the Additional Financing does not add any new activities to the Parent Program. The Additional Financing could potentially bring about positive, indirect environmental and social benefits through improved governance and related capacity, i.e. greater transparency or results-based management. Further, the Program emphasizes citizen engagement which is known to increase local ownership, enable greater information sharing and transparency, and should be the basis of beneficiary engagement and trust building. However, citizen engagement needs to be supported by institutional capacity and a vision. The project would require dedicated staff to oversee the social mobilization process and incorporate social concerns in all operational and M&E processes and manuals. 27. In addition, the social management assessment carried out shows that the Additional Financing operates within an adequate legal and regulatory framework which is well suited to address potential social issues that may arise from implementation of planned activities (although none are being envisaged at the time of the assessment). Given that the capacity and incentives to address potential social issues vary across the departments that will be involved in the implementation of Program, such gaps will be addressed through various trainings, as earmarked in the Program Action Plan. 28. Communities and individuals who believe that they are adversely affected as a result of a Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the existing program grievance redress mechanism or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. October 28, 2020 Page 9 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) E. Financing Program Financing Sources Amount % of Total (USD Million) Government 1,215.00 45.59 International Development Association (IDA) 1,450.00 54.41 Total Program Financing 2,665.00 100.00 . CONTACT POINT World Bank Name : Yue Man Lee Designation : Senior Economist Role : Team Leader(ADM Responsible) Telephone No : 5359+442 / 2 Email : ylee8@worldbank.org Name : Saeeda Sabah Rashid Designation : Lead Financial Management Specialist Role : Team Leader Telephone No : 5359+295 / - Email : srashid@worldbank.org Borrower/Client/Recipient Borrower : Federal Republic of Nigeria Contact : Aisha Omar Title : Director IERD Telephone No : 002348033115666 Email : ishay2k2006@yahoo.com Implementing Agencies Implementing Federal Ministry of Finance Agency : Director, Home Finance Contact : Stephen Okon Title : Department Telephone No : 002348065643949 Email : stephenokon117@yahoo.com October 28, 2020 Page 10 of 11 The World Bank Nigeria SFTAS Additional Financing for Covid-19 Response PforR (P174042) FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects October 28, 2020 Page 11 of 11