Armenia - Social Investment Fund Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6644-AM MEKORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 8.1 MILLION TO THE REPUBLIC OF ARMENIA FOR A SOCIAL INVESTMENT FUND PROJECT OCTOBER 23, 1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS MAY 1995 Currency Unit = Dram I Dram = US$O.0024 US$1 = 425 DRAMS WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA - ARMENIAN ASSEMBLY OF AMERICA ASIF - ARMENIAN SOCIAL INVESTMENT FUND ASIFPU - ARMENIAN SOCIAL INVESTMENT FUND PREPARATION UNIT FSU - FORMER SOVIET UNION GOA - GOVERNMENT OF ARMENIA ICB - INTERNATIONAL COMPETITIVE BIDDING IDA - INTERNATIONAL DEVELOPMENT ASSOCIATION IMF - INTERNATIONAL MONETARY FUND MC - MICROPROJECT COMMITTEE NGO - NON-GOVERNMENTAL ORGANIZATION NS - NATIONAL SHOPPING TA - TECHNICAL ASSISTANCE USAID - UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT ARMENIA - FISCAL YEAR JANUARY I - DECEMBER 31  FOR OFFICIAL USE ONLY MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ARMENIA TABLE OF CONTENTS Country/Sector Background . ............................................. 1 Health and Education .................................................. 2 Project Objectives .................................................... 2 Project Description . ................................................... 3 Project Implementation . ............................................... 4 Project Sustainability . ................................................. 5 Lessons Learned from Other Social Funds and the Project's Pilot Phase .................. 5 Rationale for Bank Involvement . ........................................... 6 Agreed Actions ..................................................... 7 Poverty Category .................................................... 7 Environmental Aspects . ............................................... 7 Program Objective Categories . ........................................... 8 Participatory Approach . ............................................... 8 Project Benefits ..................................................... 9 Project Risks ...................................................... 9 Recommendation .................................................... 10 This document has a restricted distribution and may be used by recipients only in the performance of their |oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization. l   REPUBLIC OF ARMENIA SOCIAL INVESTMENT FUND Credit and Project Summary Borrower: Republic of Armenia Implementing Agency: Armenian Social Investment Fund (ASIF) Beneficiaries: Unemployed and low-income groups in rural and urban areas, small private contractors, local governments, NGOs and community organizations, State Department of Statistics Poverty Category: Program of Targeted Interventions Amount: SDR 8.1 million (US$12 million equivalent) Terms: Payable in 35 years, including 10 years of grace on standard IDA terms Conmmitment Fee: 0.50 % on undisbursed credit balances, beginning 60 days after signing, less any waiver Financing Plan: See Schedule A Net Present Value: Microprojects financed under the SIF project will be selected according to criteria described in the Operational Manual, integrating basic cost benefit analysis. Staff Appraisal Report: Report No. 14655 AM Map: IBRD 23943R1 Project ID Number: AM-PA-35768 Project Objective: The ASIF would aim to support the lower income groups among the Armenian population through improvement of basic social services and creation of employment opportunities. The primary objectives of the project would be to: (a) rehabilitate basic small-scale infrastructure that can result in immediate improvements of the living conditions of the poorest among the population; (b) strengthen the capacity of private small-scale contractors and other micro-businesses so that they can benefit directly or indirectly from contracts financed by the ASIF; (c) generate employment through financing of labor-intensive public works; and (d) build greater capacity for policy makers to monitor and analyze trends in the level and structure of poverty in Armenia.  - ii - Project Description: The project has four components: (i) Financing ofASIFMicroprojects to Support the Rehabilitation of Small- Scale Infrastructure. Such works could include rehabilitation of local clinics, primary schools, sanitation work and water supply, energy saving repairs, repair of feeder roads, as well as rehabilitation of degraded village and town environments through cleanup and tree planting. The project could also provide furniture and basic equipment for rehabilitated infrastructure. (ii) Institutional Supportfor the ASIF. This component would support the ASIF through provision of equipment, vehicles, salaries, operating costs, training, technical assistance, and financing for monitoring and evaluation. (iii) Capacity Building of Small Contractors, Implementing Agencies and Communities. This component would provide training and technical assistance to contractors and other local private firms, implementing agencies and communities to increase their technical and managerial capacities. Training and technical assistance would focus on competitive bidding, preparing contracts, monitoring work progress and community participation. (iv) Support for Monitoring Living Conditions. This component would cover technical assistance, vehicles, equipment, enumerators' salaries, and supplies of the State Department of Statistics to refine its methods for conducting sampling and household consumption surveys. It would also finance implementation of two household surveys by the State Department of Statistics. Project Benefits & Risks: Benefits - The project would generate substantial benefits for the poor through the provision of basic social infrastructure financed through hundreds of microprojects. The microprojects would deliver immediate benefits in terms of generation of employment and income and improvements in the access and quality of basic services and infrastructure, as well as longer-term benefits in terms of improvements in the living conditions of the population. The project would strengthen the country's ability to target, appraise and monitor efforts to reduce poverty. It would assist the Government in mobilizing additional external financing in support of its reform objectives. The project would also have an important institutional effect by strengthening the capabilities of local government, NGOs, and local organizations, in particular helping to reinforce a sense of ownership and involvement at the community level. The ASIF would demonstrate the importance of beneficiary participation in poverty reduction and provide an efficient and effective model for implementation. Small private contractors and other small entrepreneurs would benefit in the form of increased revenues and improved technical, managerial and institutional capacity through their execution of work contracts. Risks - Risks facing the project arise from possible political factors that could compromise the ASIF's autonomy, credibility and effectiveness; potential problems with microproject quality in the field; and limited managerial, technical and institutional capacity of local organizations responsible both for proposing and implementing microprojects and for financing operation and maintenance after the microproject is completed.  - iii - The capacity of the ASIF to maintain a good and capable working team, maintain transparency, and oversee the implementation of about 125 microprojects a year remains to be tested. To reduce these risks, the ASIF has been granted autonomous status with adequate institutional checks and balances and transparent and efficient operating procedures developed during the pilot phase, incorporated in the Operational Manual, and subject to review during supervision. To reduce risks further, microproject appraisal would examine the capacity of contractors and local organizations to carry out and supervise works, and the ASIF would provide technical assistance and training to fill institutional, technical and management gaps. A participatory approach would be taken for identification and implementation of microprojects to ensure that microprojects respond to an urgent and felt need, thereby increasing the commitment of community members to sustain microprojects and demonstrating the benefits of collective actions surrounding local development.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ARMENIA FOR A SOCIAL INVESTMENT FUND PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed credit to the Republic of Armenia of SDR 8.1 million (US$12 million equivalent) to help finance the Armenian Social Investment Fund (ASIF) Project. The credit would be on standard IDA terms, with a maturity of 35 years including a grace period of 10 years. It is proposed that US$2 million of the IDA credit be set aside for funding ASIF microprojects as matching funds, dollar-for-dollar, with private sector contributions, as a way to encourage private sector transfers to the ASIF, especially from the Armenian Diaspora. An account would be opened in the Central Bank by the ASIF for these contributions. The attractiveness of the ASIF as a channel for funds could be made even stronger by providing potential private donors with the possibilities of targeting their funds to specific geographic areas and types of investments. This would be achieved by providing them with a list of approved microprojects from which they could select microprojects for funding. Donors would contribute US$2.5 million, the private sector would contribute US$2.0 million, the Government would contribute US$1 million, and local communities, US$2.5 million. The total project costs would be US$20 million equivalent over four years, including repayment of the PPF advance. Country/Sector Background 2. Armenia is one of the smallest of the former Soviet republics, with a population officially estimated at 3.65 million, and land area of 29,800 square kilometers. It is struggling to recover from the devastating effects inherent in the dismantling of the Soviet economy and adjustment from a centrally- planned to a market-based economy. It is also struggling with the effects of the 1988 earthquake, which destroyed 40% of the country's manufacturing capacity, and of the conflict with Azerbaijan. Since independence in 1991, Armenia has experienced very sharp falls in output. GDP fell by 52% in 1992 and a further 15% in 1993. Living standards have plummeted and the levels of real wages and benefits are now among the lowest in the FSU, resulting in a sharp increase in the numbers of people living in poverty. In general, both wages and household incomes show relatively little disparity, suggesting that it is the sharp drop in income rather than a deterioration of distribution that has driven the rise in poverty. More than two-thirds of average household expenditures were spent on food in 1992-94, peaking at 71 percent in the fourth quarter of 1993. Consumer subsidies which in the past helped to maintain the affordability of a wide variety of consumer items have been or are being cut to decrease the fiscal deficit, while compensation mechanisms are being put in place to assist those with the greatest needs. 3. The Government's reform efforts have focused on price liberalization, privatization of agricultural land, tax reform and liberalization of the exchange and trade systems and had resulted in very encouraging results. Inflation has declined from an average of 46 % per month in the first quarter of 1994 to about 4% per month in the first 6 months of 1995. In 1994, real GDP is estimated to have grown by 5.4%. The overall state budget deficit is estimated to have been reduced from 56% in 1993 to 16% of GDP in 1994. It is projected to fall to 8.5% in 1995. 4. Despite continuing efforts to achieve peace and implement economic reforms, the Government has been less able to provide tangible support for the poor, for earthquake victims, for refugees and for vulnerable groups hurt by the economic disruptions. It is estimated that the share of Government social expenditure (Health and Education) in GDP fell from 15.2% in 1992 to 11 % in 1993, and to an estimated 8.6% in 1994. This, compounded by the lack of heating fuel and fall of living standards, has resulted in declining health and nutrition for the population. The tightening of fiscal and monetary policy will put  further strain on social protection programs even though these programs already fall short in providing even the most basic needs. Ultimately, the poor and other vulnerable groups will benefit from restored growth, but measures are needed to support these groups during the transition. Health and Education 5. Health indicators in Armenia are comparable to those in other republics of the FSU despite a major deterioration in health service delivery since the beginning of 1992 and neglect of maintenance of facilities. The infant mortality rate was estimated at 17.7 in 1993, down from 18.6 in 1992. According to the U.S. Centers for Disease Control, this decline is explained by the effectiveness of humanitarian assistance and government efforts to redirect programs toward primary health care. While the health care delivery system is characterized by widely distributed facilities, beds and medical personnel, these are often excessive in number and lack maintenance. Furthermore, the health system lacks basic equipment, drugs and other supplies and is inefficient due to a highly centralized management. Health services are funded almost entirely by government revenues with no official cost recovery system. In 1993, health expenditures accounted for 3.5% of GDP, down from 4.5% in 1992. Considering the rapid fall in real health expenditures in the last three years, it is important to avoid any further decline in order to sustain the provision of basic health services while the Government implements its health care reform program. These reforms include introduction of cost recovery, decentralization, reform of health care budgeting, privatization of some facilities, and establishment of a comprehensive primary health care system. Winterization and other rehabilitation of basic health infrastructure, as well as provision of basic equipment, drugs and supplies, are needed in the short-term to avoid further deterioration of facilities and service provision. 6. Armenia's education sector is characterized by an over abundance of facilities and teachers, but most schools are in dire need of rehabilitation after earthquake damage and years of little or no maintenance. Few new textbooks or supplies have been provided over the last four years due to tight budget constraints. Education is funded almost entirely from government resources with fees for higher education introduced only recently. Because of the drastic decrease in available education resources, the education budget is largely absorbed by salaries and other staff costs, yet teachers' real incomes have fallen sharply. Greater efficiency may be realized in the medium-term by rationalizing the supply of teachers and improving education management. Furthermore, cost recovery mechanisms and development of private schools are potential avenues to strengthen the financial base of the educational system. However, to avoid a collapse of the existing system, improved heating, winterization and maintenance of facilities is needed. 7. Local level actors playing prominent roles in social infrastructure and service delivery include local government, NGOs and development agencies. Local government retains some responsibilities for maintenance of basic infrastructure, while NGOs and development agencies are contributing to humanitarian relief, service delivery and reconstruction. Project Objectives 8. The ASIF would aim to support the lower income groups among the Armenian population through improvement of basic social services and creation of employment opportunities. The primary objectives of the project would be to: (a) rehabilitate basic small-scale infrastructure that can result in immediate improvements of the living conditions of the poorest among the population; (b) strengthen the capacity of private small-scale contractors and other micro-businesses so that they can benefit directly or indirectly from contracts financed by the ASIF; (c) generate employment through financing of labor-intensive public  - 3 - works; and (d) build greater capacity for policy makers to monitor and analyze trends in the level and structure of poverty in Armenia. Project Description 9. The project would support the Armenian Social Investment Fund (ASIF) which would be established as an autonomous agency reporting to the Ministry of Economy. The ASIF would fund rehabilitation of basic social and economic infrastructure on a grant basis in response to requests from local organizations, including local governments, NGOs, and existing or newly created community-based organizations. Considering the present weakness of existing govermental structure at the local level and the lack of incentive existing in this structure to implement rapidly and efficiently small-scale projects, establishing the Social Investment Fund was considered the most effective way in the short- and medium- term to manage such a project. The project has four components: (i) Financing of ASIF Microprojects to Support the Rehabilitation of Small-Scale Infrastructure. Such works could include rehabilitation of local clinics, primary schools, sanitation work and water supply, energy saving repairs, repair of feeder roads, as well as rehabilitation of degraded village and town environments through cleanup and tree planting. The project could also provide furniture and basic equipment for rehabilitated infrastructure. The maximum size of a microproject would be US$150,000 though most would not exceed US$50,000. The average microproject size is expected to be US$32,000. When a proposed microproject is approved by the ASIF, the local organization (local government or local community) proposing the activity would become the "implementing agency" and would enter into a framework agreement with the ASIF. Most works would be carried out by small private contractors using labor-intensive construction techniques in order to stimulate employment. Over the life of the project, an estimated 500 microprojects would be implemented. The total cost of this component is estimated at US$15.7 million. Microprojects will be funded as grants. (ii) Institutional Supportfor the ASIF. This component, totaling US$1.9 million, would support the ASIF through provision of equipment, vehicles, salaries, operating costs, training, technical assistance, and financing for monitoring and evaluation. Staff development would be conducted via local and international training courses and study tours tailored to the needs of the ASIF staff. Technical assistance in the form of an international Technical Advisor to the ASIF Microprojects Department is budgeted for the first 12 months. Short term technical support by a Finance and Administration Advisor, MIS Specialist, and Beneficiary Assessment Specialist is also budgeted. Many of these expenses are considered as necessary investments to strengthen the capacity of the ASIF and to achieve a quick start-up of the project. Benefits from these investments will also accrue after the project ends, such as trained staff who will be available to serve other projects and the government. (iii) Capacity Building of Small Contractors, Implementing Agencies and Communities. This component would total US$0.4 million, and would provide training and technical assistance to contractors and other local private firms, implementing agencies and communities to increase their technical and managerial capacities. Training and technical assistance would focus on competitive bidding, preparing contracts, monitoring work progress and community participation. The benefits of this component would be increased capacity of contractors, implementing agencies and communities to be responsible for conducting and participating in a competitive bidding process for rehabilitation of works, and filling in technical and managerial gaps that might jeopardize the successful execution of work contracts.  - 4 - (iv) Support for Monitoring Living Conditions. This component, totaling US$0.4 million, would cover technical assistance, vehicles, equipment, enumerators' salaries, and supplies of the State Department of Statistics to refine its methods for conducting sampling and household consumption surveys. It would also finance implementation of two household surveys by the State Department of Statistics. The benefits of this component would be improved capability to analyze poverty and design programs to reduce it. This component would result in improved sampling techniques, survey design and organization, data processing and analysis by the State Department of Statistics; collection of more reliable data on the living standards of the Armenian people; and greater understanding of the diverse characteristics of poverty. Project Implementation 10. The implementing agency would be the Armenian Social Investment Fund (ASIF) which has been established by a government declaration with financial and administrative autonomy and authority to enter into contracts, recruit staff from outside the civil service, and establish its own operating procedures, including those for procurement and disbursement. The ASIF structure includes a Board of Directors comprising government and non-governmental representatives, chaired by the Ministry of Economy. The Board of Directors would approve policies and operating procedures designated in the Operational Manual of the ASIF, its annual work programs and budgets and its quarterly and annual reports. The ASIF would be headed by a General Manager who would oversee the internal, day-to-day administration of the ASIF. The ASIF structure would comprise two departments and three units: Finance and Administration Department, Microprojects Department, Information and Monitoring Unit, Institutions Support Unit and Legal Unit. The ASIF would be guided by the Operational Manual, which would contain the criteria and procedures for appraising, approving, contracting and monitoring microprojects. The ASIF Operational Manual has been reviewed prior to negotiations and is satisfactory to the Bank. The ASIF would take a progressive, regional approach to operations, beginning in two or three target zones and would expand throughout the country as experience is gained and the capacity of the ASIF staff is built up. The initial target zones would be selected by the Board of Directors and ASIF Executive Committee, comprising the General Manager and key department heads. The MIS would enable the ASIF to track the geographic distribution of resources so as to ensure that a regional balance is achieved. Communities would be asked to contribute at least 15% of the microprojects costs in cash or in kind. 11. The major vehicle of support for filling institutional and managerial gaps of contractors, implementing agencies and communities would be through training and technical assistance by linking them with local qualified training institutions, such as NGOs, consulting firms and training institutes. The ASIF would enter into a contract with one or more qualified institutions, based on a competitive bidding process. 12. The State Department of Statistics would implement the monitoring of living standards component, including conducting two household surveys. In order for the ASIF to benefit to the utmost from this component, the Head of the Promotions Unit of the Microprojects Department would be responsible for acting as the ASIF liaison with the State Department of Statistics in order to avoid duplication of effort. 13. Total project costs are estimated at US$20 million equivalent. IDA would finance US$12 million. Of this amount, US$2 million would be disbursed as a matching grant to private donors' contributions, most of which are expected to be from abroad. The Government's contribution would be US$1 million, and communities would contribute US$2.5 million for a total national contribution of US$3.5 million (29% of IDA). Other possible cofinanciers would contribute US$2.5 million. An absence of private  -5 - contributions or cofinanciers would be reflected in a reduced number of microprojects financed and would not jeopardize implementation of the project overall. 14. In determining procurement methods for microprojects, the ASIF would be guided by the Operational Manual. All ASIF procurement methods would be in compliance with the "Guidelines for Procurement under IBRD Loans and IDA Credit" (January 1995). Procurement arrangements for microprojects would be stipulated in a Framework Agreement to be signed by the ASIF and the implementing agency for each approved microproject, and will conform to the Operational Manual. ASIF engineers would be responsible for ensuring that procurement arrangements for microprojects are in compliance with the Operational Manual and would assist implementing agencies in meeting procurement requirements as and when required. Procurement training would be provided for ASIF staff and implementing agencies involved in procurement. All contracts above US$50,000 would be subject to the Bank's prior review procedures. 15. It is expected that the US$12 million IDA credit be disbursed over four years. In the case that disbursement takes place at a more rapid pace, a follow-up project may be justified to build on the momentum and experience of the ASIF. To expedite disbursements, the ASIF would open a Special Account for the project in a commercial bank acceptable to IDA. Initial deposits by the Government for its share of project expenses for the first year into such local account would be a condition of credit effectiveness. For disbursements for microprojects, the ASIF would transfer the funds directly to the accounts of the supplier and the contractor, upon authorization from the implementing agency. The ASIF would maintain accounts in accordance with the required financial standards which would be audited annually by independent auditors acceptable to IDA. The ASIF would provide IDA with copies of reports submitted to the Board of Directors, including quarterly progress reports, and annual plans, budgets and reports. Project Sustainability 16. The ASIF would introduce a number of mechanisms and safeguards to help achieve microproject sustainability. First, the ASIF would finance only repairs and reconstruction of facilities that are currently operating and for which salaries of service personnel are already budgeted. Second, communities would be required to develop a strategy for covering costs for operation and maintenance as part of their microproject proposal, including possible community contribution and cost recovery. Third, a simple Memorandum of Understanding between the ASIF and local authorities would be required which would stipulate the responsibility of local government for operation and maintenance. Fourth, the involvement of the respective community in microproject design, implementation and follow-up should increase microproject sustainability through an increased sense of ownership. Community participation would be reflected in training modules for ASIF staff and implementing agencies. Fifth, impact studies would be focused on aspects of sustainability so that feedback could be generated for ASIF management. Finally, arrangements would be made with UN organizations and NGOs to concentrate efforts in a complimentary way to increase sustainability of facilities that are rehabilitated. Lessons Learned from Other Social Funds and the Project's Pilot Phase 17. Small infrastructure microprojects have generally been the most successful type of social fund initiative in terms of quality, sustainability, and beneficiary impact, providing communities with assets that contribute to increased income and production. The experience accumulated by other social funds demonstrates that social funds have been successful when they have: (i) support and commitment from the highest political level to preserve the integrity and respect the objectives of the fund; (ii) autonomous  - 6 - status enabling them to respond rapidly and directly to community demands but with transparent and accountable features; (iii) participation of beneficiaries; (iv) qualified and motivated staff; (v) a rigorous accounting and Management Information System (MIS); (vi) flexible financing mechanisms subject to a rigorous appraisal process; (vii) effective coordination with line ministries; and (viii) an intensive and thorough process of supervision and audit. 18. The project to support the ASIF was prepared in parallel with a one-year pilot phase during which 15 microprojects in three target zones were implemented with the support of an NGO, the Armenian Assembly of America, funded for this purpose by USAID. The experience gained from the implementation of these microprojects has generated information to develop the Operational Manual and other documents that would guide the ASIF. It has been found that the participatory and demand driven approach is workable, although with stronger and easier response in rural areas than in urban areas. The pilot experience also demonstrated that Microproject Committees with representatives of the community could be set up and take responsibility for tendering bids. Private contractors proved to be numerous in the pilot regions and capable of carrying out works. National shopping and national competitive bidding were used successfully to procure civil works. Other notable lessons that emerged from the pilot experience are that the ASIF should be prepared to establish logistical bases for efficient operations in the North and South; and that due to the severe winter in Armenia, strict rules on working under freezing conditions would have to be developed and activities scaled down during the winter to avoid deterioration of quality of works. Rationale for Bank Involvement 19. The key objectives of the Bank's country assistance strategy are to raise the living standards of the people by deepening structural reforms to complete the transition to a market economy and by reducing the large pockets of poverty that have emerged over the last few years. The restoration of sustained growth is essential for this strategy. In addition, the World Bank plans to support the restructuring of the social sectors and social protection programs through advice and financing aimed at improving efficiency, sustainability and service delivery, but the process for social sector reform will take time. Meanwhile, rapid and visible actions, such as those supported in this project, are needed to protect vulnerable groups. This project is consistent with the Country Assistance Strategy as discussed by the Board of Directors during the presentation of the Rehabilitation Credit (C-2683) on February 28, 1995. 20. The Armenian Social Investment Fund project is being designed as a short- to medium-term program to reverse the deterioration of basic social services infrastructure and stimulate some employment, thereby generating a positive, visible impact on people's lives and reducing hardship during economic transition. Medium-term objectives for the project are to orient and build the capacity of local governments, NGOs, and private contractors to undertake rehabilitation in a market economy, preparing them for an economy of restored growth. The project would target primarily local communities and local governments, which would be closely associated with project implementation so that they can learn from the ASIF approach. Future World Bank supported interventions in the area of social sector development could build on the achievements of the ASIF project by institutionalizing implementation arrangements tested under the ASIF. The project would also generate additional external financing for urgently needed investments in the social sectors essential for human resource development, would complement other government efforts to reduce poverty, and would ease the transition to a market economy at the local level.  -7- Agreed Actions 21. Prior to Negotiations, the Government had taken the following actions: (a) issued the decree establishing the ASIF; (b) provided IDA with the final draft of the Operational Manual; (c) established an accounting system acceptable to IDA; (d) established a Management Information System for testing; and (e) identified regions of concentration for the first year of the project. The Government has also met the conditions of Board presentation agreed at negotiations. The Government has (a) established the ASIF Board of Directors; (b) provided IDA with full appraisal documentation for ten microprojects; and (c) provided evidence that the draft Credit Agreement has been approved by the Government. Before Credit Effectiveness, it was agreed the ASIF would have: (a) made the Management Information System fully operational; (b) selected and appointed a resident Technical Advisor to the Microprojects Department based on terms of reference acceptable to IDA; (c) selected and appraised at least twenty-five microprojects, for a total cost of at least US$500,000, in accordance with the norms and procedures stated in the ASIF Operational Manual; and (d) opened a Project Account in a commercial bank on terms and conditions acceptable to the Association with an initial deposit in local currency equivalent to US$80,000. 22. Assurances have been obtained during Negotiations on the following: (a) the project would be implemented in accordance with the Operational Manual; (b) the GOA would conduct an independent technical and procurement review of microproject implementation annually; (c) the GOA would conduct a mid-term review of project implementation and impact with IDA before the end of the first 24 months of project operation; (d) the GOA would promote an easy-access policy with regard to data generated under the "Monitoring of Living Standards" component of the project with a view to promoting wide use of the information by interested users and analysts; (e) prior to approval of any Microproject estimated to cost more than US$50,000 equivalent, SIF shall furnish to the Association a summary, project costs and other information about such Microprojects as may be reasonably requested by IDA for IDA's review and approval; and (f) the disbursement of IDA matching funds (US$2 million) for microprojects, would be made on a pari passu basis with the counterpart funds from private donors. Poverty Category 23. One of the principal objectives of the ASIF is to reach the poor and vulnerable groups through rehabilitation of basic social and economic infrastructure which they utilize and through employment generation in their communities. To increase the likelihood that benefits reach the intended population, the ASIF would adopt a three-pronged targeting strategy. First, the type of microprojects eligible for ASIF financing, including primary health and education facilities and basic infrastructure, by their nature tend to be oriented to the needs of the poor. Studies carried out for the preparation of the poverty assessment showed that in the absence of a credible Governmental Safety Net improving access to and quality of basic health services, general education and water supply is essential to protect lower income groups during transition. Second, the ASIF would utilize data and major findings on poverty and unemployment gathered from a poverty ranking exercise, a needs and capacity study and the poverty assessment to identify and focus activities in regions where the needs are the strongest. Third, most of the works would be carried out by small local contractors which would hire locally unemployed workers. Enviromnental Aspects 24. The proposed project is expected to have a positive impact on the physical and social environment, especially by rehabilitating latrines, sanitation and water-supply facilities. To safeguard physical resources, the ASIF would incorporate environmental criteria into microproject appraisal and  - 8 - selection. Use of environmental criteria would be monitored during Bank supervision. The project has been rated Category C. Program Objective Categories 25. The main program objective categories this project would serve are poverty reduction and private sector development. These classifications reflect the ASIF objectives. The rehabilitation of basic social infrastructure that is used by the poor and vulnerable groups would generate immediate benefits in terms of access and quality of basic services and infrastructure. Through labor-intensive works, immediate employment would also be generated. In addition, the project would strengthen the country's ability to target, appraise and monitor efforts to reduce poverty. The potential strengthening of contractors and other small entrepreneurs would take place through their bidding on and execution of work contracts which would generate revenues and improve their technical, managerial and institutional capacity. They would also benefit through training and technical assistance under the component to support contractors, implementing agencies and communities. Participatory Approach 26. A wide range of stakeholders have been involved in project preparation at the national and local level. At the national level, NGOs and donors are sitting on the Steering Committee for the pilot or preparation phase. An NGO, the Armenian Assembly of America (AAA), has worked with the Government's ASIF Preparation Unit (ASIFPU) to prepare the ASIF. Together they have implemented 15 microprojects that have been identified, implemented and monitored by communities. For most microprojects, broad consultations within communities have taken place to identify priorities, followed by the formation of a Microproject Committee comprised of representatives of local governments, key staff of facilities under rehabilitation (e.g. headmaster, head doctor), and other members of the benefiting communities. Microproject Committees have taken responsibility for tendering bids with assistance from the ASIFPU and the AAA and have assisted in supervision of works. In most microprojects, communities have also contributed 10% of microproject costs in kind and cash. 27. During implementation of the project, communities would be encouraged to hold village assemblies to decide priorities in their communities, agree on proposed targets, and elect local leaders to sit on a Microproject Committee. Facilitating and helping to organize these meetings would be among the responsibilities of ASIF promotion teams. Attendees would be asked to sign in and minutes of the assembly would be kept and attached to the formal proposal to the ASIF. Microproject Committees would be encouraged to take implementing responsibilities, such as tendering bids and assisting with monitoring of works, and would receive training and technical assistance to do so. Communities would also be required to reach an understanding with local governments to help maintain and operate rehabilitated services. Furthermore, the entire community would be asked to meet at least 15% of microproject costs (in kind or cash) and to realize cost recovery where applicable. 28. NGOs would be able to work with communities in organizing themselves and preparing microproject proposals. They could also be contracted by the community to serve as the implementing agency of a microproject. NGOs as well as some local research institutes are also expected to be among those who would be contracted to provide training to contractors, implementing agencies and communities, and to undertake targeting and monitoring exercises. 29. The extent of community participation in microprojects would be monitored through annual beneficiary assessments. The ASIF would also monitor on a regular basis the number of people (by  - 9 - gender) that sit on Microproject Committees and attend training or receive technical assistance. The number of women and children who are among beneficiaries would also be monitored. Project Benefits 30. The project would generate substantial benefits for the poor through the provision of basic social infrastructure financed through hundreds of microprojects. The microprojects would deliver immediate benefits in terms of generation of employment and income and improvements in the access and quality of basic services and infrastructure, as well as longer-term benefits in terms of improvements in the living conditions of the population. The project would strengthen the country's ability to target, appraise and monitor efforts to reduce poverty. It would assist the Government in mobilizing additional external financing in support of its reform objectives. The project would also have an important institutional effect by strengthening the capabilities of local government, NGOs, and local organizations, in particular helping to reinforce a sense of ownership and involvement at the community level. The ASIF would demonstrate the importance of beneficiary participation in poverty reduction and provide an efficient and effective model for implementation. Small private contractors and other small entrepreneurs would benefit in the form of increased revenues and improved technical, managerial and institutional capacity through their execution of work contracts. Estimated Impact of Microproiects Number of microprojects 480 Number of beneficiaries 480,000 (20% of Armenian Population) Number of short-term jobs created for unskilled workers 8,400 Number of short-term jobs created for skilled workers 500 Number of civil works contracts issued for small contractors 450 Wages distributed to unskilled workers US$3.4 million Project Risks 31. Risks facing the project arise from possible political factors that could compromise the ASIF's autonomy, credibility and effectiveness; potential problems with microproject quality in the field; and limited managerial, technical and institutional capacity of local organizations responsible both for proposing and implementing microprojects and for financing operation and maintenance after the microproject is completed. The capacity of the ASIF to maintain a good and capable working team, maintain transparency, and oversee the implementation of about 125 microprojects a year remains to be tested. 32. To reduce these risks, the ASIF has been granted autonomous status with adequate institutional checks and balances and transparent and efficient operating procedures developed during the  - 10- pilot phase, incorporated in the Operational Manual, and subject to review during supervision. To reduce risks further, microproject appraisal would examine the capacity of contractors and local organizations to carry out and supervise works, and the ASIF would provide technical assistance and training to fill institutional, technical and management gaps. A participatory approach would be taken for identification and implementation of microprojects to ensure that microprojects respond to an urgent and felt need, thereby increasing the commitment of community members to sustain microprojects and demonstrating the benefits of collective actions surrounding local development. Recommendation 33. I am satisfied that the proposed credit would comply with IDA's Articles of Agreement and I recommend that the Executive Directors approve it. James D. Wolfensohn President Attachments: Schedules A - D Washington, D.C. October 23, 1995  - 11 - SCHEDULE A REPUBLIC OF ARMENIA SOCIAL INVESTMENT FUND ESTIMATED COSTS AND FINANCING PLAN lable A Project Cost Sunmmary (in US$ million): LocAL FoREIGN TOTAL ASIF Microprojects 15.7 15.7 Institutional Support to ASIF 1.3 0.6 1.9 Support to Contractors, lAs, Communities 0.3 0.1 0.4 Living Standards Monitoring 0.1 0.4 0.5 Total Base Cost 17.4 1.1 18.5 Contingencies: Physical 0.6 0.3 0.9 Price 0.1 0.0 0.1 Reimburse PPF 0.1 0.3 0.4 Total Project Cost 18.3 1.7 20.0 * (Numbers may not add up due to rounding) Table B Proposed Financing Plan (in US$ million): LOcAL FOREIGN TOTAL % OF TOTAL IDA 10.3 1.7 12.0 60% Donors 2.5 2.5 12% Private Sector 2.0 2.0 10% Local Communities 2.5 2.5 12% Government 1.0 1.0 5% Total 18.3 1.7 20.0 100% * Includes US$0.4 million PPF  - 12 - SCHEDULE B Page 1 of 2 REPUBLIC OF ARMDENIA SOCIAL INVESTMENT FUND SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS Table C Procurement Arrangements: Category ICB NCB OTHER* NIF Total Works Civil Works for 11.9 2.3 14.2 Microprojects (5.9) (1.0) (6.9) Goods Vehicles and 0.5 0.5 Equipment (0.5) (0.5) Goods/Materials for 0.6 0.6 Microprojects (0.3) (0.3) Consultancies TA and Training 1.8 1.8 (1.8) (1.8) Service Contracts for 1.0 1.0 Microprojects (0.6) (0.6) Operating Costs 1.5 1.5 (1.5) (1.5) Reirnburse PPF 0.4 0.4 (0.4) (0.4) Total 11.9 8.1 20.0 IDA 5.9 6.1 12.0 *'Other" under Civil Works for Microprojects refers to National Shopping 1.5 (IDA 0.6) and Special Procedures (IDA 0.4). "Other" under Vehicles and Equipment refers to International Shopping 0.5 (IDA 0.5). 'Other" under Goods/Materials for Microprojects refers to Natioial Shopping 0.6 (IDA 0.3). "Other' under TA and Training refers to Consulting Services 1.8 (IDA 1.8). Under Service Contracts for Microprojects it refers to Consulting Services 1.0 (IDA 0.6) for supervision.  - 13 - SCHEDULE B Page 2 of 2 REPUBLIC OF ARMENIA SOCIAL INVESTMENT FUND SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS TableD Allocation of IDA Credit by Disbursement Category Category of Total % To Be Financed Expenditure usS million By IDA 1. Microprojects a. Part 1 5.8 90% of total expenditures b. Part II 2.0 50% of total expenditures 2. Goods a. Vehicles and Equipment 0.5 100% of foreign expenditures 100% local expenditure (ex factory) 80% of other items procured locally 3. Consultancies a. Technical Assistance and Training 1.2 100% of total expenditures 4. Miscellaneous a. Operating Costs 1.2 100% of total expenditures b. Unallocated 1.0 c. Reimbursement of PPF 0.4 TOTAL 12.0 Table E Estimated IDA Disbursements (in US$ million): IDA FY 1996 1997 1998 1999 Annual 3.4* 3.2 3.2 2.2 Cumulative 3.4* 6.6 9.8 12.0 * includes US$0.4 PPF  - 14 - SCHEDULE C REPUBLIC OF ARMENIA SOCIAL INVESTMENT FUND TIMETABLE OF KEY PROJECT PROCESSING EVENTS Time taken to prepare the Project 12 months Prepared by Government of Armenia and AAA with IDA Assistance First IDA Mission June 7, 1994 Appraisal Mission Departure April 25, 1995 Negotiations September 1995 Planned Date of Effectiveness December 1995  - 15 - SCHEDULE D REPUBLIC OF ARMENIA SOCIAL INVESTMENT FUND STATUS OF BANK GROUP OPERATIONS IBRD LOANS AND IDA CREDITS IN THE OPERATIONS PORTFOLIO (AS OF OCTOBER 17, 1995) Amount in USS million (Less cancellations) Loan or FiscaL Undis- Closing Credit No. Year Borrower Purpose Bank IDA bursed Date Credits 1 Credits(s) closed 60.00 C25620-AM 1994 ARMENIA EARTHQUAKE RECONSTRU 28.00 13.06 06/30/96 C26660-AM 1995 ARMENIA POWER MAINTENANCE 13.70 13.55 07/31/98 C26670-AM 1995 ARMENIA IRRIGATION REHAB. 43.00 38.15 06/30/99 C27760-AM 1996 ARMENIA HIGHWAY 16.00 15.39 12/31/99 TOTAL number Credits = 4 100.70 80.15 Loans 0 Loans(s) cLosed L35850-AM 1993 ARMENIA INSTITUTION BUILDING 12.00 8.04 11/30/96 TOTAL number Loans = 1 12.00 8.04 TOTAL*** 12.00 160.70 of which repaid TOTAL heLd by Bank & IDA 12.00 160.70 Amount sold of which repaid TOTAL undisbursed 88.19 Notes: * Not yet effective ** Not yet signed * Total Approved, Repayments, and Outstanding balance represent both active and inactive Loans and Credits. (R) indicates formalLy revised Closing Date. (S) indicates SAL/SECAL Loans and Credits. The Net Approved and Bank Repayments are historicaL value, aLl others are market vaLue. The Signing, Effective, and Closing dates are based upon the Loan Department offical data and are not taken from the Task Budget file. There are currently no IFC investments in Armenia.   MAP SECTION   FBRD 23943RI GEORGIA i TODonis Oo holo5"rl Tooi SyvkhAVT.ro ,>y5 46