Nepal - Poverty Alleviation Fund Project

Initial Project Information Document (PID) Report No: AB410 Project Name NEPAL - Poverty Alleviation Fund Region South Asia Regional Office Sector Other social services (90%); Sub-national government administration (10%) Theme Rural policies and institutions (P); Rural services and infrastructure (P) Project P081968 Borrower(s) GOVERNMENT OF NEPAL Implementing Agency(ies) POVERTY ALLEVIATION FUND PAF Board Address: Contact Person: Mohan Man Sainju, Vice Chancellor, Tel: 011-977-1-2-478930 Fax: Email: Environment Category B (Partial Assessment) Date PID Prepared October 22, 2003 Auth Appr/Negs Date November 3, 2003 Bank Approval Date March 2, 2004 1. Country and Sector Background The challenge in Nepal is to reverse the vicious circle of poverty, inequality and violence, which in part is the result of successive unstable governments. In late January 2003, a cease-fire was agreed upon by His Majesty's Government of Nepal (HMGN) and the Maoists that lasted until August 2003. Conflict has since resumed following a breakdown of talks. While there is substantial political uncertainty, a key recent development in Nepal is the emergence of a broad coalition of like-minded reformers comprising of technocrats, intellectuals, business leaders and civil society representatives who are pushing forward with a change agenda that is likely to stay its course even if the political process falters. In short, this period may turn out to be a positive mid-course correction in the evolution of Nepal as a modern state. Today, the main rural issues in Nepal continue to be: (i) high poverty, social exclusion and lagging human development indicators in rural areas; (ii) limited success of public rural development and anti-poverty programs in reducing poverty; and (iii) the Maoist insurgency that distracts government and limits services and opportunities in conflict areas. Rural Poverty and Social Exclusion. Poverty in Nepal remains pervasive with 42 percent of the population below the national poverty line. In general, the poor live in rural areas (about 88 percent) and engage in subsistence agriculture on small plots of low quality land; have limited access to roads, markets, health and education, often because of remoteness; and rely heavily on seasonal migration and remittances. Further, some ethnic minorities, people living in remote areas, female headed households, and women continue to lag behind in income and asset levels, educational achievements, and other human development indicators. The gender gap in education is not narrowing, and remains at 13 percent at the primary level and an 8 percent at the secondary level. Poor effectiveness of public expenditures in rural areas. HMGN spends close to 6% of GDP on rural development and poverty alleviation programs. While this high level of expenditures shows the commitment to rural poverty alleviation, there are concerns regarding the effectiveness of these expenditures. Key issues include poor targeting; tied funds, and supply driven investments; high administrative costs; complex procedures; and lack of transparency. In addition, it is widely believed that corruption is pervasive, leading to misallocation of public resources, delays in project implementation, and rapid turnover and perverse  2 PID incentives for public servants. Lack of coordination in donor assistance compounds the problem, resulting in projects that are often 'donor driven', work at cross-purposes, and escape government oversight. Finally, Nepal's problems are compounded by its fiscal situation; low growth has led to a short-fall in domestic revenues and the Nepalese estimate a decline of around 25 percent in foreign aid disbursements compared to the 2002/03 Budget. This was because many donor funded projects were not implemented as planned due to security and related issues that have affected implementation. As a result, development expenditures have been far less than what was budgeted - perhaps as much as 20 percent. The Maoist insurgency began in 1996 as a low intensity and mainly rural campaign to replace the present polity with a 'people's republic'. In late January 2003, a cease-fire was agreed upon by HMGN and the Maoists that lasted until August 2003. Conflict has since resumed following a breakdown of talks which in turn is leading to a growing climate of fear and insecurity in rural areas. Key policymakers in Nepal are now acutely aware of the need to make public services and economic growth more inclusive in order to arrive at a lasting peace. Of 75 districts in Nepal, 16 districts are under the insurgents control, and 34 districts under security threat. Significant damage to infrastructure has taken place -- over one-third of the country's 3,900 Village Development Council buildings have been destroyed, thirteen districts have lost their telephone connections, five hydroelectric plants are out of action, 250 post offices have been damaged and six airports have been closed, cutting off people in remote areas from the only means of transportation. Moreover, security concerns led to the postponement of local and national elections creating further political uncertainty. A vicious cycle of social exclusion and poverty breeding conflict, which in turn hampers poverty alleviation, prevails in Nepal. Government Strategy. While Nepal is presently under an interm administration, reform minded civil servants have been moving ahead with important reforms. In an effort to break from the past tendency of HMGN promising many actions and delivering few, the Council of Ministers endorsed an Immediate Action Plan (IAP) in June 2002. The IAP contains three types of reforms: (i) prioritizing public expenditures; (ii) measures for improving local delivery of social services; and (iii) measures for fighting corruption and improving accountability. Most of the 15 specific measures listed in the IAP have been accomplished this year and the government is now setting for itself a new IAP for 2003 (2003 IAP). Also, Nepal is in the final stages of preparing the Poverty Reduction Strategy (PRS) based upon the 10th Plan. The broad thrust of the strategy is on rural development and revolves around four key pillars: (i) generating economic growth; (ii) improving the delivery of local services; (iii) promoting social inclusion; and (iv) improved governance. There is now a broad social and political consensus in Nepal that progress in these areas will be critical to building a lasting peace, speeding up development and catching up. Nepal's poverty alleviation program captures this consensus, and is reflected in the IAP and the PRS. The IAP and the PRS identify the following priorities for poverty alleviation: l deepening decentralization to bring governments closer to the people and remoter areas; l developing partnerships with funding organizations and non-government organizations (NGOs) to reach grassroots level beneficiaries more effectively; l more effective investment in infrastructure to provide amongst other benefits, sustainable employment to the poor; l delivery of more cost effective and inclusive education, health, water and sanitation services; l targeted programs for the dalits, women and other socially excluded groups; and l measures for fighting corruption and improving accountability.  3 PID 2. Objectives The project's development objective is to improve the livelihoods of the rural poor and socially excluded in Nepal by: (i) creating infrastructure, employment and income generating opportunities in the most depressed villages and habitations; (ii) enhancing the capacity of local governments, particularly Village Development Committees (VDCs) to provide and sustain services for poor and socially excluded groups; and (iii) creating an instrument where donors can come together in a coordinated manner and support government programs targeted on the rural poor. 3. Rationale for Bank's Involvement The Bank brings its global experience on social funds, community driven development and decentralization, all of them relevant to today's Nepal. Many evaluations of these types of operations have taken place (Social Funds: Assessing Effectiveness, OED, World Bank 2002). Several operations in South Asia (e.g., India, Pakistan) in fairly similar contexts provide valuable lessons for Nepal. The Bank has also supported similar projects in other post-conflict situations (e.g., Peru) with problems similar to those Nepal faces today. Support by the Bank would make it easier for Nepal to involve other donors as well. Finally, because the Bank is actively supporting the decentralization agenda in Nepal, it would be able to ensure that the Poverty Alleviation Fund (PAF) and decentralization would continue in a complementary and harmonious manner. 4. Description The proposed project would finance the following activities: (a) Administration of the PAF. The project would finance PAF staff, establishment and operating expenses including financial, procurement and environmental management and audits. (b) Income Generating Sub-projects Targeted to the Poorest and Excluded Groups: Examples include micro-irrigation, micro-enterprises, land productivity, animal husbandry, and others. The Credit would provide matching grants for income generating activities to be decided on by the groups in poor communities. Social organizations (such as NGOs) would be recruited to work with these community groups to help them develop sub-project proposals. (c) Small Scale Village and Community Infrastructure: Examples include engineered trails, footbridges, schools, clinics and other public infrastructure of small scale that can be managed by community groups or VDCs. Preference would be given to infrastructure in VDC development plans where they exist and where the VDC is willing to contribute a share from its own resources. Requirements for approval would be that the employment created would benefit the poorest populations, and that a credible operations and maintenance plan has been prepared. (d) Capacity Building: This would include four sub-components: (i) Mobilization of Community Groups: Social Organizations and other organizations would be selected to work in target areas to disseminate information about the project, mobilize the community groups and work with them in developing the subproject proposals. Where local governments are functioning, SOs would also liaise with them to ensure that the proposed infrastructure projects fit into VDC's plan and priorities. (ii) Capacity Building for Local Governments: This would focus on building capacity in financial management, participatory budgeting, social issues, and other relevant topics for  4 PID local development, as well as on the rules of operation of the PAF to enable local governments to assist groups and communities to access PAF resources. (iii) Support to Micro-finance Intermediaries: While PAF would not finance micro-lending, it would finance capacity building for micro-finance intermediaries. (iv) Information, Monitoring and Evaluation: This would include: (a) dissemination of information about the project and other government programs; (b) a standard management information system (MIS); (c) structured field visits to assess impact; (d) beneficiary assessments; and (e) impact assessment surveys starting with a baseline during the project's early phase. 5. Financing Source (Total ( US$m)) BORROWER ($1.22) IDA ($15.00) LOCAL COMMUNITIES ($1.22) Total Project Cost: $17.44 6. Implementation Institutional arrangements. The proposed project would finance the PAF, being established by HMGN as an independent agency under Nepali law. The PAF then would implement the other project components. PAF would be managed by a Board with nine members from the National Planning Commission (member secretary), Association of District Development Committees of Nepal (President), National Dalit Association (President), National Association of Village Development Committees of Nepal (President), National Women's Association (President). The Prime Minister will be the ceremonial chair of the Board, but the Vice-Chairman, to be named from outside the government, will be the functional chair person. Day-to-day operations would be the responsibility of an Executive Director to be competitively recruited. PAF would have a lean structure with a limited number of staff, recruited on competitive salaries, on fixed term contracts, and would use consultants and/or NGOs to help its operations as needed. Project approval, financial management and procurement would be according to acceptable transparent procedures and handled by PAF. . Assessments, project identification and preparation, and capacity building would be contracted out. Regional offices would be established where the volume of work in the area requires a presence, but staffing would be limited. PAF's monitoring and evaluation system would include to the maximum extent possible the following elements: (i) standard MIS; (ii) structured field visits by PAF staff or consultants during and after implementation to assure that projects funded by PAF are having the intended effect; (iii) a system of benchmarks based on global best practice and Nepali experience to enable PAF management to compare various cost-effectiveness and service delivery measures; (iv) beneficiary assessment surveys; and (v) structured impact assessments. The results from this monitoring and evaluation system would be made available to the public in a regular manner to ensure transparency. Phasing. PAF is being designed as a national instrument to reach out to the poor and marginalized groups. However, in the initial phase, the project will focus on a limited number of districts to test approaches for poverty alleviation in different contexts (e.g., areas with different levels of conflict) and using different mechanisms (e.g., NGOs, Village Development Committees (VDC), community organizations (CO)).  5 PID Thus, the project would initially focus on six districts that have been seriously under-served, and allow sub-project submissions from different types of organizations--NGOs, COs and VDCs. By the end of the third year of the project the various approaches would be evaluated to answer the following questions: l does access to PAF delay the development of a fiscal framework for local governments? l does access to PAF reduce incentives for local revenue mobilization by local governments? l Are NGOs able to work with COs and groups of poor people while keeping them in the drivers seat? Once having established its credibility, and institutional capacity, the PAF could move quickly to extend across the country. The PAF would support two types of sub-projects: (i) for income generation; and for village infrastructure. Both would need to follow the same basic rules: l sub-project proposal would be selected by groups of poor people (which could cover a village or several villages); l cash contributions would need to be provided; l a ceiling on the investment per household would be defined; l a ceiling on the size of each sub-project would be defined; l funds would be deposited in community bank accounts; and l decisions regarding the sub-projects would be participatory and inclusive and this would be monitored. The project cycle would comprise: (i) community mobilization; (ii) project preparation including an operations and maintenance plan; (iii) appraisal; (iv) approval; and (vi) implementation. Where operational, local governments would need to approve infrastructure sub-projects. Final appraisal would be the responsibility of PAF staff and approval would be by the Board although this could be delegated for smaller and standard sub-projects and once experience is gained. Financial Management and Disbursements (This section will be completed only after the financial management capacity assessment of the Poverty Alleviation Fund, an autonomous agency responsible to execute the project, and after the draft Operational Manual is ready for review. For the time being, preliminary arrangements are provided.) A Special Account would be established to facilitate payments of various activities under the project. A financial management capacity assessment of the implementing agency, the Poverty Alleviation Fund, would be carried out during appraisal. Project accounts (including statement of expenditures and special account) of the PAF would be maintained and would be audited annually by the Office of the Auditor General of Nepal (OAGN) as required by the Constitution of the Kingdom of Nepal, with audit reports due within six months of the end of each fiscal year. The PAF would also submit financial monitoring reports (FMRs) on a trimester basis. Disbursements would be made against sub-project proposals submitted directly by groups of poor people or villages with facilitation from support organizations for specific sub-projects. Disbursements would also be made for the procurement of various equipment and vehicles required for the Poverty Alleviation Fund, and for incremental operating costs that would be incurred by the Fund. Costs to cover consultancy services and training would also be covered.  6 PID 7. Sustainability In the longer term improved service delivery in particular in the disadvantaged areas would become the responsibility of local governments. Nepal has moved further in this area than other countries in South Asia, with a solid legal framework and aspects of fiscal and administrative decentralization in place. However, the term of local governments expired in July 2002, and elections have not taken place. Meanwhile, Nepal is strengthening the fiscal framework for local governments, with Bank and donor support. The new 'IAP 2003' is a tool to implement key actions on a priority basis this year, in line with the newly developed Tenth Plan (based on which a PRS is being finalized). PRS emphasizes on improved service delivery, and more serious efforts to assist dalits and other disadvantaged groups. The sustainability of community capacity for collective action would be promoted through project's demonstration effect. The sustainability of sub-projects would be promoted by (i) ensuring that villagers want the subprojects and share in their cost; and (ii) ensuring relevant subprojects include an O&M plan proposed and supported by communities. 8. Lessons learned from past operations in the country/sector The project draws on the global lessons from the social fund and community driven development projects and the experience of development projects in Nepal. Key lessons for the design of a mechanism such as PAF are: (i) full autonomy and transparency; (ii) small, results-oriented organization; (iii) distinction from current programs; and (iv) complementarity with the decentralization process. Linkage to the fiscal decentralization process provides a way for PAF to develop an exit (or at least a scope reduction) strategy, unlike most social funds. As the process of fiscal decentralization provides more resources to local governments, and as their capacity increases, PAF would diminish its role to one of focusing on special target groups. The proposed project has also drawn on the Bank's global experience in community driven rural development. Key lessons are: (i) communities need to be in the driver's seat through control over funds and investment decisions to achieve efficiency and sustainability -- at the same time project implementers need to be continuously aware that "communities" themselves contain important social and economic stratifications and it is important to listen to the often more muted voices of those with low social and economic status within the village and ensure that their priorities are also reflected in the interventions PAF supports; (ii) communities can contribute towards investment and operational costs if they are assured of good service; (iii) it is not enough to mobilize communities for social action--they want economic opportunities and need investments to be made in these, alongside social mobilization; (iv) ensure speedy implementation through development of streamlined procurement and disbursement rules and regulations, detailed operational manuals, computerized MIS, standardized financial management procedures, regular and rigorous auditing, and quantitative monitoring and evaluation; and (v) create competitive employment conditions for the project management staff to attract and retain competent and motivated individuals. The large number of donor and NGO-sponsored local development projects implemented in Nepal over the past two decades provides a rich source of lessons for PAF design and operation. Studies financed by the World Bank, IFAD and others, show that the traditional model of public investment and service delivery in which line ministries and central agencies plan, finance and execute local public investments perform less well than participative models centered on community organizations and local government institutions involving also the private sector. In particular, modalities of investment and service provision which combined social mobilization (usually by NGOs), with COs, VDCs and District Development Committees (DDCs) throughout the project cycle results in lower unit costs, better quality, greater transparency, and more long-term sustainability. This was largely the product of greater local ownership of project outputs, greater transparency, more realistic scope and size of projects, and the use of more appropriate technologies.  7 PID 9. Environment Aspects (including any public consultation) Issues : In the context of the PAF, environment and poverty are linked in two ways: (i) poverty alleviation measures should not damage the environment of the poor, as this would only substitute gains in one dimension with losses in another; and (ii) improvements in environmental conditions can help reduce poverty. The PAF has two components that would require an environmental analysis: (i) the support for small scale village and community infrastructure; and (ii) the support for capacity building. Most of the sub-projects to be financed under the village and community infrastructure component are expected to be small, community-driven investments and their possible negative environmental impacts, on terrestrial (land , forests, protected sites, etc.) and aquatic (water sources, water flows, wetlands, etc.) ecosystems are likely to be insignificant and mostly reversible. All sub-project proposals would, however, be subject to an environmental screening exercise in order to: l prevent execution of sub-projects with potentially significant negative environmental impacts; l decrease potential minor negative impacts through modifications in sub-project design, location or execution; l prevent or mitigate cumulative negative impacts as the result of multiple small-scale investments; l enhance the positive impacts of sub-projects; and l prevent additional stress on environmentally sensitive areas. To meet these objectives, the project Operational Manual would include an Environmental Management Framework (EMF) consisting of an Environmental Screening Procedure, Sectoral Environmental Guidelines, and a Negative List of Sub-Projects, that should not be supported by the project. The project's capacity building component would include : (i) a methodology and administrative structure for environmental management; (ii) an environmental capacity building and awareness raising program; and (iii) an environmental supervision and monitoring plan. These elements would also be included in the project's Operational Manual. The PAF Secretariat (Implementation Unit) would include an environmental specialist with experience in environmental impact assessment, mitigation, and monitoring and evaluation, to ensure that environmental concerns are adequately incorporated and addressed in sub-projects supported by PAF. 10. List of factual technical documents: 11. Contact Point: Task Manager Geeta Sethi The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: Fax: 12. For information on other project related documents contact: The InfoShop The World Bank  8 PID 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.