Nicaragua - Social Investment Fund Project

Docuit of The World Bank FOR OMFICIAL USE ONLY MICP%OFICHE C;OPY Feport No. :P- 5873 NI Tvpe: (PM) Title: SOCIAL INVESTMENT FUtlND PROCJECT Nl>. Author: DE ST. ANTOINE, J.J. R_t P-5873411 Ext. :31898 Room:17076 Dept. :LA2HR A RD EC21DATION OF THE PRESIDENT OF THE ITNATIONAL DEVEWPKENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE MOUNT EQUIVALENT TO SDR 17.3 MILLION TO THE REPUIBLIC OF NICARAGUA FOR A SOCIAL INVES ENT FUND PROJECT OCTOBER 26, 1992 This document bas a restricted ditibution amd may be used by recipients only In the performance of their offical duties. Its cotents may not otei be disclosed without World lank authorizatiL  CURRENCY & EoUIVALENT UNITS Current Unit = C6rdoba (C$) US$1 - 5 C6rdoba (August 1992) SDR1.0 = US$1.451 WEIGHTS & MEASURES 1 Hectare (ha) = 10,000 m2 1 Metric ton (mt) - 1,000 kg 1 Kilometer - 1,000 m FISCAL YEAR July 1 - June 30 ACRONYMS FISE Social Investment Fund GDP Gross Pomeatic Product GNP Gross Nation.il Product GON Governmen. of Nicaragua IDA Internatioual Development Association IDB Inter-American Development Bank INEC National Institute of Statistics and Census ICB International Competitive Bidding IEF International Monetary Fund KfW German Credit Institute for Reconstruction LCB Local Competitive Bidding MIS Management Information System MOE Ministry of Education MOF Ministry of Finance MOB Ministry of Health NGO Non-Governmental Organization SIFs Social Investment Funds UNDP United Nations Development Programme USAID U.S. Agency for International Development  FOR OMCIL USE ONLY SOCIAL INVESTNEIT FUND PROJECT CREDIT AND PROJECT SUNHARY Bop owerst Republic of Nicaragua 3xecutig Amencies: Social Investment Fund (FISH), National Institute of Statistics and Census (INEC), Ministry of Health (MOR), Ministry of Education (MOE), Ministry of Finance (MOP) flneficiaries: Low-income target groups in rural and urban pov,Erty areas through municipalities, NGOs and other entities 4_sunts SDR17.3 milli n (US$25 million equivalent) Terms: Standard IDA terms with (0 years maturity, including 10 years of grace Financina Plan: Local Foreln Total Government of Nicaragua 6.3 0.0 6.3 Beneficiaries 3.1 0.0 3.1 IDA 18.2 6.8 25.0 IDB 10.4 5.6 16.0 Government of Germany (KfW)9.0 4.0 13.0 Government of Switzerland 2.5 1.0 3.5 UtDP 0.3 0.1 0.4 Government of Japan 0.5 0.2 0.7 Total Financing 50.3 17.7 68.0 Economic Rate of Return: Not applicable Staff Avoraisal Resorts Report No. 11108-NI; dated October 26, 1992 go-at I8RD Nos. 23959 and 23960 This document has a restrcted distribution and mQay be used by ecipients onbl in the perfornnce of their offcial duties Its contents may not otherwise be disclosed without Wold Bank authorization.  KMOUN= AIND RCCh TION O1 TOE MRSIDENT OF Tax INTE3&TIONAL DEaVLOWIT ASSOCUTION TO TEE EXECUTrVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF NICARAGUA 101 A SOCIAL INVISTET FUNM PROEWCT 1. I submit for your approval the following memorandum and recommendation on a proposed credit to the Republic of Nicaragua for SDR17.3 million (US$25 million equivalent) to help finnmce a Social Investment Fund (FISE) project. The proposed credit would be repayable on standard IDA terms with a maturity of 40 years, including 10 years of grace. The project would be co-financed by other donors for US$33.6 million equivalent. 2. Backgrud_. Nicaragua, with a population of 3.8 million, is one of the poorest countries in the Western hemisphere. Its 1990 GNP per capita of less than US$400 only exceeds that of Guyana. In 1989, poverty affected 551 of the urban population and over 851 of the rutal population. Infant mortality is 7211,000 live births, due largely to diarrhea and acute respiratory infections. Nutritional deficiencie* are a contributing factor in 70% of infant deaths. Health and nutrition indicators reflect the acute problems facing the Nicaraguan poor: lack of water and sanitation, deficient hygiene and dietary habits, inadequate empiasis on preventive services at the primary level of the health system, and a severe deterioration of primary health care facilities. Education indicators are also critical, with high repetition anc dropout rates, particularly between the first and second grades (451). There is a lack of qualified teachers and the education system suffers from a severe deterioration of existing facilities, particularly in rural areas, lack of school furniture and equipment, and insufficient teaching-learning materials. 3. Nicaragua's economy deteriorated sharply during the 1980s as a result of inappropriate macroeconomic policies and institutional changes toward a centrally planned economy, ten years of continued civil strife, and a crippling U.S. trade embargo. By the end of the decade, production was well below the 1980 level, exports were running at about half of the pre-1980 level, international reserves were depleted, and external debt of US$10 billion, equivalent to seven times GDP; hyperinflation had reached 14,700Z in 1988. The financial system, much of the productive structure, and external marketing of the principal export products were in the hands of an oversized public sector. What was left of the private sector after extensive expropriations, was heavily regulated, and productive capacity diminished for lack of maintenance and spare parts. Moreover, serious damage had been done to the country's infrastructure. 4. Beginning in March 1991, the Govermment of Nicaragua (GON) launched an economic stabilization program, designed to eliminate hyperinflation, arrest the decline in GDP, and strengthen the balance of payments through tight fiscal and monetary policies. The package of economic measures included devaluation of the currency, reduction of the fiscal deficit through cuts in government expenditures and tax increases, and tight monetary policy. In addition, key barriers to private sector participation have been lifted and a trade liberalization program is underway, including the elimination of public sector monopolies on importing and exporting activities, and restored access to foreign exchange by the private sector. Finally, over 100 enterprises have been already privatized, reducing the share of state-owned enterprises' production in GDP from 422 in 1990 to 252 in 1991.  -2- 5 While restoring economic growth will ultimately benefit the poor by increasing per capita incomes, significant reforms are also required to improve services delivery by the Ministries of Health (KOH) and Education (MOE). To develop the social reform program, the GONs (i) presented a policy letter describing its main objectives and broad directions for the sociel sector-; and (ii) will formulate a comprehensive polic, and strategy document, based on the policy letter, detailing priority programs and measures to be pursued over the short and medium term, including an implementation plan. Presentation by the GON of this document to IDA by May 31, 1993 will be a performance indicator of the project and reviewed during the mid-term review (para. 15). 6. The Social Investoent Fund (WISE). Because of the need to take short- term poverty alleviation measures and prevent a deterioration in the already precarious living standards of the poor duzing the adjustment period, the GON created FISE in November 1990. FISE has a limited life of five years. It combines poverty alleviation and employment objectives through the provision of financing for: (i) social infrastructure subprojects such as rehabilitation of health posts, schools, water and sewerage systems; (ii) economic infrastructure subprojects such as public markets, road improvement, retention walls and drainage works; and (iii) social service subprojects in health, nutrition, and education targeted to women and young children. WISE is not an executing, but a financing agency. Subprojects are executed by decentralized entities such as private local contractors, NGOs, municipalities, or other public agencies. There have been consistent efforts to make WISE as effective and efficient as possible, with an independent Chairman of the Board who comes from the private sector, a high quality management and staff, and close vigilance by foreign donors. FISE's operational procedures and practices have been sound and would be strengthened further under the proposed project. A satisfactory audit of PISE's accounts for the period ended June 30, 1992 shows its accounts to be in good order. Under the project, WISE will be audited annually by private external auditors, acceptable to the Association, who will also undertake a quarterly audit combining financial review, physical inspection of works, and verification of procurement for subprojects. The GON has given strong support to WISE through a budgetary allocation of US$10 million in 1991 and 1992, which was complemented by donor resources, but FISE will run out of funds in December 1992 and will need significant additional external financing for its program in 1993 and 1994. During its first 18 months of operations, FISE approved funding for 549 projects totalling US$21 million. For 1993, FISE has already a pipeline of subprojects requiring US$15 million, i.e., about 602 of the total subproject commitments expected for the year. 7. FISE-financed subprojects are clearly targeted to the poor. FISE aims at a nationwide coverage, but more funds are allocated to poorer municipalities based on a poverty index composed of displaced population, child malnutrition, and water supply indicators. Information provided by VISE's monitoring system will allow WISE to strongthen its promotion in municipalities where there is a deficit of subprojects and provide technical assistance for project preparation when necessary. 8. Cost-recovery is one of the important subproject selection criteria and takes distinct forms depending on the type of subproject. In the case of social infrastructure, local comittees will be formed and trained to maintain schools and health facilities financed by FISK. In the case of vater and sewerage, local communities will set up tariffs and administer revolving funds  - 3 - to recorer sufficient resources to cover the costs of operation and maintenance. In the case of social services subprojects, fees would be charged for those services or items where legally possible; for example, modest fees for medicines to replenish stocks. 9. Rationale &or IDA Involvement. The proposed project fits well with IDA's country and social sector assistance strategy, which is to provide technical assistance and financial support for the GON's adjustment and short term safety net programs, as well as for its efforts to introduce sectoral policy reforma over the medium term. The proposed FISE project would complement a possible future IDA Health project and USAID-financed primary health care &nd primary education projects, and would also contribute to the institutional strengthening of the line ministries by sttpporting the MOB and MOR to develop planning and project preparation and implementation capacity. IDA support for FISE is corsidered critical to ensure that: (i) the GON's stabilization and adjustment programs, for which IDA has helped mobilize and coordinate international donor support, are carried out with support by all main segments of the population, especially the poor; (ii) lessons learned by IDA in similar projects in other countries (e.g., Bolivia and Honduras) are properly transferred to FISEK (iii) sufficient concessional funds are mobilized from the international donor community to help the CON continue with its safety net programs; and (iv) the FISE project is defined within an overall social strategy framcwork. 10. Proiect Obiectives. The project would help the GON sustain its poverty alleviation efforts and maintain social cohesion during the period of economic adjustment until line ministries strengthen their institutional capacities and complete policy reform programs. To the extent feasible, the methods of operation, procedures, and experience of FISS would be transferred gradually to social ministries to help them improve their efficiency and equity of service delivery. 11. Proiect Description. The project would have four components: (i) the financing, through FISH, of a range of small-scale subprojects in social and economic infrastructure and social services (US$60.5 million); (ii) technical assistance to the National Institute of Statistics and Census (INEC) to implement a Living Standards Measurement Survey (LSMS) program and impact evaluation of FISE (US$0.9 million); (iii) technical assistance to strengthen the capacity of MOR and NOR to prepare subprojects (US$1.8 million); and (iv) technical assistance to help the Government, through the Ministry of Finance (NOF), to improve budgeting and financial management capacity in the social ministries (US$0.8 million). Operating costs of the executing agencies would be US$4.0 million. The proceeds of the credit would be lent to the Republic of Nicaragua, which would pass on US$23.5 million as a grant to FISE. FISE, in turn, would use the credit proceeds, jointly with funds from other international donors and the National Treasury, to finance subprojects through grants in local communities and implemented by private contractors, NGOs, and public agencies under the technical supervision of appropriate agencies. The GON would allocate the balance of US$1.5 million for the implementation of the technical assistance components of the project. 12. The project cost is estimated at US$68.0 million equivalent with a foreign exchange component of US$17.7 million equivalent (26.02). The proposed IDA credit of US$25.0 million equivalent would finance 36.8S of total project costs. Retroactive financing of up to US$1.5 million equivalent would be allowed for eligible expenditures incurre6 since July I, 1992. Funds would be used for financing a backlog of eligible subprojects approved by FISH in  -4- line with evaluation criteria acceptable to IDA. A breakdown of costs an1 the financing plan are shown in Schedule A. Amounts and methods of procurem.ant and disbursement and the disbursement schedule are shown in Schedule B. A timetable of key project processing evento and the status of Bank Group operations in Nicaragua are given in Schedules C and D, respectively. The Staff Appraisal Report No. 11108-NI, dated October 26, 1992 is also attached. 13. Prolect Imnlementation. The project would be implemented over a period of about two years. The main executing agency would be PISE for subproject financing. FISE's staffing criteria and procedures for the identification, preparation, appraisal, and implementation of subprojects were reviewed by IDA and are satisfactory. FISE's management is satisfactory to IDA. The other executing agencies would be INEC for the LSMS, MOB and MOE for the planning, preparation, and maintenance of subprojects, and MOP for improving budgeting and financial management capacity in the social ministries in line with GON social sector strategy (para. 5). 14. Lessons Prom Previous IDA Involvement. The following lessons learned from IDA's experience with SIFs were taken into consideration in the design of the proposed project. First, FISE was designed as a semi-autonomous organization to: (i) avoid political influence on management; (ii) allow to pay competitive salaries &nd recruit high-quality staff; and (iii) allow simplified procurement procedures which are a necessary condition for fast subproject implementation. Second, to ensure efficiency and transparency of operations, FISE's design includes: (i) the use of a standardized menu of subprojocts resulting in efficient subproject implementation by limiting the range Q specialists to F'e recruited by FISE, providing standard parameters and specifications used by sponsors in subproject preparation, and facilitating appreisal and supervision of subprojects by FISE staff; (ii) an operational Manual with clear eligibility and appraisal criteria; (iii) a targeting mechaaism based on a poverty map using population and poverty criteria, allowing funds to be allocated to each municipality, and providing additional funds to poorer municipalities; (iv) additional promotion and support for subproject preparation to be provided by FISE in poorer municipalities; (v) annual financial audits and quarterly operational audits to show FISE'e transparency, an essential element in attracting external funds; and (vi) a mid-term review to assess project perfonmance and improve implementation. 15. Actions Agreed. During negotiatiogs, agreements were reached as follows: (i) FISE would use its targeting mechanism, satisfactory to IDA, to channel more funds to poorer municipalities and that, without IDA's approval, FISE would not commit more than 181 of funds to Managua and 7X of funds to other medium poverty municipalities; (ii) the Borrower would provide funds as indicated in the project financing plan and as needed to cover the operating costs of the FISE; (iii) any future appointment of the Chairman of the Board and Executive Director of FISE would be subject to prior IDA approval; (iv) quarterly and annual audits would be carried out by external auditors on the basis of acceptable sets of accounts; (v) IDA may refrain from disbursing for new subprojects when: (a) aggregate limits reach SDR4.6 million by June 30, 1993 and SDR9.2 million by February 28, 1994; and (b) in case of unsatisfactory progress in project and/or failure to meet performance indicators; and (vi) the Borrower would carry out a mid-term review of FISE no later than February 28, 1994, prepare a satisfactory action plan by March 31, 1994, and would implement actions agreed upon as a result of this review in accordance with the timetable in the plan.  16. Special Conditions of Effectiveness would be: (i) a signed technical ass:stance contract, satisfactory to IDA, between UNDP and FISE; (ii) a finalized Operational Manual, satisfactory to IDA; (iii) full implementation of the management information system, satisfactory to IDA; (iv) a signed loan agreement of US$16 million between FISE and IDB; and (v) signed funding agreements totalling US$3.5 million equivalent between FISE and other financiers. 17. Prosect Benefits. By providing resources to poor urban and rural communities, FISE would help to: (i) prevent a deterioration in the living standard of the poor during the period of economic adjustment; (ii) improve the social infrastructure so that services can be better delivered and beneficiaries enjoy better sanitation, and less erosion damage in their communities; (iii) reduce the rates of mortality, malnutrition, and illiteracy, particularly among women and children; (iv) strengthen the Government experience with a decentralized mechanism for delivering development assistance to municipalities and small businesses and mobilizing grass-roots efforts, which could subsequently be used by other agencies; aiid (v) provide long-term benefits by contributing to institution building by improving social ministries' capacity to prepare subprojects and their budgeting and financial management capacity. 18. Environmental Asgects. The project has o B rating. The Operational Manual of FISE would ensure that subprojects financed by FISE do not adversely affect the environment. On the basis of this manual, FISE evaluators would undertake a short environmental impact assessment for each subproject and ensure that subproject design would include measures to avoid negativ:e environmental effects. 19. Risks. There is a risk that the GuN may attempt to implement the FISE program with excessive speed, and project funds might be poorly used and diverted to uses outside the 3cope of the project. The risk would be reduced by establishing ceilings ensuring that disbursement of IDA funds before the mid-term review would not exceed about 552 of the total credit amount. A second risk is the inadequate subproject preparation capacity of line ministries, municipalities and NGOs. This will be addressed by FISE making additional promotion efforts and providing subproject preparation assistance and through technical assistance provided under the project to social ministries. A third risk is the lack of maintenance of physical facilities rehabilitated by FISK. This risk will be mitigated by FISe providing assistance to local communities for maintenance of subprojects, and by contractual agreements between FISE, line ministries and agencies, and user committees in charge of maintenance. 20. Recommendation. I am satisfied that the proposed credit would comply vith the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. October 26, 1992  -6- Schedule A Page 1 of 1 SOCIL INVESTHENT PUND PROJECT eSTIMTED COSTS & FIM&NCINf PLAY _STIM&TED COSTS: Local Foreij n Total US$ million - 1. FISE A. Subprojects 45.5 15.0 60.5 B. Operating Costs 3.5 0.5 4.0 Subtotal FISS 49.0 15.5 64.5 II. LSNS and FISE Impact Evaluation 0.7 0.2 0.9 III. Technical Assistance to MNE and MNE 0.4 1.4 1.8 IV. Technical Assistance for Social Sector Reform Management 0.2 0.6 0.8 TOTAL PROJECT COSTY 50.3 17.7 68.0 Financin Plan: Fcal Freiri Total Government of Nicaragua 6.3 0.0 6.3 Beneficiaries 3.1 0.0 3.1 IDA 18.2 6.8 25.0 IDB 10.4 5.6 16.0 Government of Germany (UfW) 9.0 4.0 13.0 Government of Switzerland 2.5 1.0 3.5 UPDP 0.3 0.1 0.4 Government of Japan 0.5 0.2 0.7 TOTAL FINANCING 50.3 17.7 68.0 Y Net of taxes and duties.  -7- Schedule B Page 1 of 2 SOCIALI_INESTMEIT FMUD PROJECT PROCUR[nT METHODS BY CATEGORY (in US$ million) PROCUREMNT METHOD CATEGORY ICB LCD OTHER NIF TOTAL CIVIL WORKS & MATERIALS 17.5 6.911 35.0 59.4 l ___________________________ (15.8) (6.2) (22.0) FURNITURE & EQUIPMENT 0.3 0.1 0.4 l __________________________ _ (0.2) (0.2) CONSULTANTS, TRAINING & 2.8 2.0 4.8 AUDITORS' SEVICES (2.8) (2.8) SALARIES, ALLOWANCES, 3.4 3.4 OPERATING COSTS OF uISE (0.0) TOTALS 0.0 17.5 10.0 40.5 68.0 (0.0) (15.8) (9.2) 0.0) (25.0) Notess Figures in parentheses reflect IDA financing NIP - Not IDA-FinanCed IL Includes local shopping and direct contracting.  Schedule B Page 2 of 2 SOCIAL -INVESMET FUMD PROJECT DISBREMMMT WITHDRAWALS OF THE PROCEEDS OF THE LOAN Amount of the Credit Catejory Allocated % of Expenditures (expressed to be financed in US$ equivalent) _ 1. PISE Subprojects A 21.0 90S of disbursements by (Social Infrastructure, Eco..mic FISE for eligible Infrastructure & Social Services) subprojects approved by LCh & SnaoLin December 1994 2. FISE Subprojects B 0.9 901 of disbursements by (Community Tr4ining for FISE for eligible Maintenance) subprojeacts approved by December 1994 3. Technical Assistance to VISE 0.1 1002 4. LSMS and FISE impact evaluation 0.2 1002 5. Technical Assistance to MOR & MOE 0.4 1002 6. Technical Assistance to MOF 0.7 1002 7. Auditor Services 0.2 1002 8. Vehicles and Equipment for FISS 0.3 1002 of expenditures for imported and locally produced goods; 751 of expenditures for locally procured imported goods 9. Vehicles and Equipment for MOR, 0.2 1001 of expenditures for MOE, and 401 imported and locally produced goods: 752 of expenditures for locally procured imported goods Unal'ocated 1.0 N/A Total 25.0 ESTIMATED DISBURSEMENTS TIMETABLE IBRD Fiscal Year 1993 1994 1995 Annual 5.0- 13.0 7.0 Cumulative 5.0 18.0 25.0 Includes the initial deposit of US$2.5 million to the Special Account and US$1.5 million equivalent of retroactive financing for eligible expenditures in=urred since July 1, 1992.  -9- Schedule C xiAAG SOCIAL INVESIMENT FUND PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare t Six months (b) Prepared by F FISE, MOR, MOE, INEC, and MOP tc) First Bank mission : April 1992 (d) Appra al mission departure s June 1992 (e) Negotiations s October 1992 (g) Planned date of effectiveness : January 1993 (g) List of relevant PCRs and PPARs s Not applicable  - 10 _ Schedule D RIC SOCIAL INVES=hENT FUND PROJECT STATUS OF BAN GROUP OPRtATIONS IN NICARAGUA As of September 30, 1992 Credit Fi1scal I Amount in US$ miltion (less cancellation) Loan No. Year Borrower Purpose n | IDA | Undisbursed 28 loans and 7 credits futly disbursed 229.61 180.91 Cr. 2302-NIC* 1992 Nicaragua Economic Recovery 110.00 Credit Cr. 2302-1-NIC* 1992 Nicai'agua Economic Recovery 10.30 Credit__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Total 229.61 180.91 of which has been repaid 159.32 4.31 Total now held by Bank and IDA 70.29 176.60 Amount Sold : 5.62 of uhich has been repaid : 5.62 Total Undisburted 0.00 0.00 0.00 * SAL, SECAL, or Program Loan STATEMENT OF IFC INVESTMENTS IN NICARAGU As of September 30, 1992 Fiscal Original Gross Approvals (US$ million) Year Obligor Type of Business IFC IFC IFC Partici| Committed I I Loan Equity Net I pants I Total 1968 Textiles Fabricato de Textile till 0.07 1.07 1.14 0.93 2.07 Nicaragua, S.A. (FRABRITEX)3/ 1976 Nicaragua Sugar Estates Sugar Nill 6.50 6.50 6.50 Ltd.Ia 1976 Posada del Sots/ Hotel 0.70 0.20 0.90 0.90 Total Gross Commitments L 7.27 1.27 8.54 0.93 9.47 Less: Cancellatfons, terinations, repayments and sales 7.27 1.27 8.54 0.93 9.47 Total Comitments Now Held g 0.00 0.00 0.00 0.00 0.00 Total Undisbursed Commitments 0.00 0.00 0.00 0.00 o.bo a Investments which have been fully cancelled, terminated, written-off, sold, redeemed or repaid. Gross Comitments consist of apprv d and signed proJects. EL Held Commitments consist of disbursed and undisbursed investments.  NICARAGUA ACCESS TO WATER AND SANITATION BY REGION (1 985) WAq WAGOON %rwM of houe I Xsah *i" -co - sptu b\ &ros iowcter and sanihAIon ____ goboundatis r I% 1- -c20% = 40x - 50 % - >vt ' .-@ = 210%-40% W%.<c60% - Ncma OiizeWtoI Sow; NECM baod on E.cweiao*-D.magr66cc NcaragOn., 19s5. 'Hwbb ld,16 w boul tandtat and hat obtain *%c w$, w &om, takes, oci, not oann.dnd to pubh& wawm -;y.*Cmb.. G U EV 3 J I N O TEGA