The Kingdom of Cambodia - Social Fund Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6620-KH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 13.4 MILLION TO THE KINGDOM OF CAMBODIA FOR A SOCIAL FUND PROJECT MAY 11, 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 Currency unit = Riel 1 US dollar = 2,613 riels (as of February, 1995) WEIGHTS AND MEASURES Metric System ABBREVIATIONS CAS Country Assistance Strategy GDP Gross Domestic Product FDA International Development Association NGO Non-Governmental Organization SDR Special Drawing Rights SFKC The Social Fund of the Kingdom of Cambodia TA Technical Assistance UN United Nations GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY KINGDOM OF CAMBODIA SOCIAL FUND PROJECT Credit and Project Summary Borrower: Kingdom of Cambodia Implementing Agency: Social Fund of the Kingdom of Cambodia Beneficiary: Not applicable Poverty: Program of Targeted Interventions Amount: SDR 13.4 million (US$20 million equivalent) Terms: Standard IDA, with 40 years maturity and 10 years grace Commitment Fee: 0.5% on undisbursed credit balances, beginning 60 days after signing, less any waiver Onlending Terms: Not applicable Financing Plan: See Schedule A Staff Appraisal Report: No. 14010-KH Map: Not applicable Project ID Number: KH-PA-37088 This document has a restricted distribution and may be used by recipients only in the performance of their |ofricial duties. Its contents may not otherwise be disclosed without World BNank authorization.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF CAMBODIA FOR A SOCIAL FUND PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Kingdom of Cambodia for SDR 13.4 million, the equivalent of US$20 million, on standard IDA terms, with a maturity of 40 years and 10 years grace, to help finance a Social Fund Project. 2. Country/Sector Background. Cambodia's recent political and economic history have taken an enormous toll on the country's people, the physical infrastructure and its economy. During the period 1970-79, between one and three million people lost their lives and another half a million people became refugees. Virtually all infrastructure was destroyed, as were many of the country's institutions. And, until the early 1990s, the economy was cut off from foreign trade, capital and technical assistance, outside of that received from the Soviet Union, some eastern European countries, Viet Nam and from NGOs. 3. Today, the consequences of the country's past are still apparent. Cambodia is one of the poorest countries in the world, with an estimated per capita GDP of US$200. Most of the poor are concentrated in the rural areas, where over 80% of the population lives, though the exact number and location of people living below the poverty line are yet to be determined. A Poverty Assessment for Cambodia is scheduled for FY96. A large proportion of the adult population are women -- 25% of households are estimated to be headed by women, and these households are generally among the poorest. In addition, there is a large number of orphans and people who have been physically disabled during the war; one out of every 236 people in Cambodia is an amputee, injured by landmines, the highest national proportion of disabled people in the world. 4. Today, following a UN brokered peace agreement and subsequent elections in May 1993, a coalition government is in power which has embarked on a rehabilitation and reconstruction program, combined with reforms to make the transition to a market economy. Already the Government has made impressive progress on the macroeconomic front; high inflation has been brought under control, the exchange rate stabilized and growth has been relatively strong -- official data show real GDP growth of 4.1% in 1993 and 4.0% in 1994. Budget support from donors, however, has been necessary at substantial levels, as the revenue base remains low. Furthermore, the growth in the economy has stemmed largely from the construction and services sectors in urban areas, not from agriculture and the rural economy on which the majority of the population depends. 5. The lack of investment in Cambodia for the last two decades is clearly visible. Much of the country's infrastructure is in a state of disrepair or totally destroyed, with many areas lacking adequate schools, clinics, water supply and local roads. The opportunity to address these needs coincides, unfortunately, with a lack of experience and capacity in the central ministries to organize and deliver such investments on a national scale. Developing such capacity will take  2 time, and in the interim, the rural poor must depend on their own meager resources and the limited budgets of provincial governments to rebuild infrastructure and restore basic services. 6. These circumstances have forced communities and local governments to operate autonomously of the central government for many years. Communities, working with small contractors, have managed to undertake some local projects, especially if foreign financial assistance was available. The local construction industry is, therefore, represented throughout much of the country and a relatively large number of NGOs are operating on a local level and have developed considerable expertise in service provision and community development. Overall, therefore, there is widespread local capacity to undertake small, relatively simple construction projects. However, financing remains a major constraint to carrying out such projects in any large numbers. 7. In response to this situation, in March 1994, the Government expressed its interest in creating a social fund, regarding such a mechanism as being well-suited to fill the urgent need for additional financing of infrastructure and employment generating activities in the poor and underserved areas of the Kingdom. A Social Fund Project Preparation Unit (PPU) was established in July 1994 to carry out preparation activities. By the end of December 1994, the Government had enacted a Royal Decree creating the Social Fund of the Kingdom of Cambodia (SFKC) as an autonomous government institution and appointed its General Director. 8. Project Objectives. The objectives of this project are to support the Government's efforts to reduce poverty through: (a) financing small-scale projects for the rehabilitation and reconstruction of social and economic infrastructure, and other socially productive activities; (b) creating short-term employment opportunities; (c) expanding community opportunities to identify local development needs and manage small-scale development projects; and (d) increasing line ministry experience and capacity in developing investment criteria for local infrastructure construction. 9. Project Description. The project would have two components. Under the first component, financing would be provided for seed capital (US$18.9 million or 85% of total project cost) for SFKC to provide grant financing for small-scale projects, up to a maximum cost of US$250,000 each, in the areas of (a) social infrastructure, including the rehabilitation and reconstruction of operating health and education facilities, social welfare facilities and communal sanitation systems; (b) economic infrastructure, including the rehabilitation of community water supply systems, rural roads, and small-scale irrigation and drainage works; and (c) social services, including training programs in the areas of small enterprise development and public health. 10. The second component would consist of institutional support (US$2.3 million or 10% of total project cost) for SFKC's establishment and operations including financing of (a) SFKC staff salaries, vehicles, office equipment and operating expenses (US$1.8 million). To ensure administrative efficiency, overhead costs over the five year period would not exceed 8% of the total amount of resources expended during the same period; and (b) technical assistance and training (US$0.5 million) to help improve the SFKC's operational capacity and internal procedures. This would include TA to assess and help improve the SFKC's appraisal and supervision procedures, carry out physical audits, impact evaluations and beneficiary assessments,  3 and financing of study trips abroad for SFKC staff to visit other social funds and learn from their experience. Most of the TA budget is expected to be spent on local consultants. 11. Project Cost and Financing. The project cost is estimated at US$22.2 million equivalent net of taxes and duties, with a foreign exchange component of US$6.3 million equivalent (28% of total project cost). Based on the experience of other social funds, if SFKC is successful in its operations, it is expected that the demand for its services will exceed this budget and it will be able to attract additional financing for a program totaling at least $40 million equivalent. Several donors have already expressed interest in providing such financing. The proposed credit of US$20 million equivalent would finance about 90% of the total project costs over the five year period. Out of the proposed credit, up to a maximum of US$1 million equivalent (or 5% of the total credit) will be available for retroactive financing to allow SFKC to finance trial sub-projects prior to credit effectiveness. This trial implementation period would allow SFKC to test and improve its operational and administrative procedures. A special account would be established at the National Bank of Cambodia with an authorized allocation of US$2 million equivalent. A breakdown of the project costs and the financing plan are shown in Schedule A. Procurement amounts and methods and the disbursement table are presented in Schedule B. A timetable of the project's key processing steps and the status of the Bank Group operations in Cambodia are provided in Schedules C and D, respectively. The Staff Appraisal Report (SAR No. 140 10-KH), dated May 11, 1995, is being distributed separately. 12. Project Implementation. The Social Fund of the Kingdom of Cambodia (SFKC), which was created by Royal Decree as an autonomous public institution in December 1994, would be responsible for implementing the project. The SFKC is already a functioning institution with four operational departments -- finance and administration, promotions, appraisal and supervision -- as well as two executive support units -- internal audit and operations advisory unit. At the height of its operations, SFKC would have an estimated 40 staff. The General Director is responsible for the day-to-day operations of SFKC. He is accountable to the Board of Directors who also approve SFKC's policies, procedures and budget. An Executive Committee, made up of five members of the Board plus the General Director, are responsible for reviewing and approving all sub-project applications. The two co-Prime Ministers are the co-Presidents of SFKC. 13. SFKC will act as a financial intermediary. It will not be involved directly in project identification, preparation and implementation, but will accept and appraise applications for sub- project financing from eligible applicants, which include community groups, local governments, and local and international NGOs, and will supervise sub-project implementation. Applicant eligibility is defined separately for each sub-project type depending on its nature. For example, a local water user group would be the eligible applicant for a water supply project, while a district authority would be eligible to apply for a rural roads project. Applications to SFKC may be sponsored by an entity other than the eligible applicant. A "sponsor" would play the role of a facilitator, assisting applicants which lack the capacity and resources to prepare or design the project, and assuming the responsibility for procuring the works or equipment for project implementation. For example, a line ministry might sponsor an application for a district hospital, or an NGO might sponsor an application for a communal water project. SFKC-financed projects would be implemented by an "implementing agency" (a private contractor in the case of civil  4 works), which would be selected by the applicant or sponsor. SFKC would disburse funds directly to the implementing agency on a work done basis. 14. Line ministries would play a key role in the project. Their main function would be to define sectoral policy guidelines and standards for infrastructure construction within which SFKC would operate. In addition, prior to appraisal, SFKC would submit all eligible sub-projects to the relevant line ministry for their non-objection. So as to avoid bureaucratic delays, ministries would be given five working days within which to provide their clearance. 15. Project Sustainability. Several measures have been incorporated into the project design to ensure the sustainability of investments under this project. First, applicants and/or sponsors will be required to contribute at least 5% of the sub-project cost. This can take the form of project preparation, materials and equipment, or other contributions defined in the eligibility criteria. Such cost-sharing should help ensure local commitment and ownership of the project. Labor costs, however, would be fully eligible for SFKC financing consistent with its overall development objective of employment generation. Second, for all infrastructure projects, during appraisal, SFKC staff would verify that the applicant or appropriate entity has the capacity and budgetary resources to cover the operation and maintenance of the facility after project completion. Third, applicant eligibility criteria are designed to limit applications to only those entities with a direct and local role in the management of the asset or facility. Fourth, each year an ex-post review of recurrent cost and maintenance coverage would be carried out on a sample of projects as part of the annual review exercise. 16. Lessons from Previous Bank Experience. The Bank has financed over 30 social fund type operations since 1987, mainly in Latin America and Africa, accumulating considerable experience in the process. The design of the proposed project incorporates the lessons from these operations. In particular, to ensure the transfer of knowledge to the Cambodian Social Fund team, during the preparation phase, the Bank provided the Government with substantial technical assistance and advice from current and former staff of the Bolivia and Ecuador social funds and from Bank staff involved in the design of other social fund projects. At a conceptual level, the most relevant lessons learned from prior experience are: a) a social fund should be considered as only one element of a much broader poverty reduction strategy; it should not been seen as a panacea for reducing poverty. b) experience shows that social funds can serve a number of purposes simultaneously, including contributing to the decentralization of service delivery, strengthening private sector development within the construction industry, and bringing NGOs into a more cooperative and coordinated relationship with the Government. c) the lesson from experience as to whether social funds should be purely temporary, short-term mechanisms is not yet conclusive. In general, flexibility and regardfor the country context are calledfor in determining the filture direction of a socialfund. In this regard, the Statutes of the SFKC provide for optional renewal of the SFKC's five year mandate by Royal Decree.  5 17. At an operational level, the main lessons which have influenced project design are: a) the importance of institUtional auttonomy and freedom from political interference for the SFKC. b) the need for transparency and accountability. c) the need to attract high caliber, motivated staff by maintaining a non-bureaucratic environment and paying competitive salaries. d) the need for community "own2ership " of the sub-projects to ensure sustainability. e) the importance of simplified procurement procedutres and rapid and timely payment of contractors for efficient and rapid sub-project implementation. f) the need for strong supervision mechanisms at both managerial and sub-project levels. g) the need to establish a rigorous cost database against which to judge the costs of project proposals. 18. Rationale for Bank Involvement. For social, political and economic reasons it is imperative to increase public investment and employment opportunities in the poor areas of Cambodia quickly. A social fund provides a financing mechanism that is well-suited to such a task and to current conditions and capacities in Cambodia. It is a flexible, demand-driven mechanism that can respond rapidly to local needs. As such, it is a productive interim measure to put Government resources to work for the benefit of the poor and enable the Government to deliver tangible project assistance to under-served areas at this crucial early stage of its tenure in power. 19. The project is a key element of the Bank's Country Assistance Strategy (CAS), which is being discussed by the Board along with this operation. In particular, it supports one of the main objectives of the CAS which is to support critical rehabiliation and reconstruction activities that will have a significant impact quickly. In line with the thrust of the CAS, the Social Fund Project is designed to take advantage of available opportunities and capacities to channel investment effectively to the poor. Thus, it aims to increase household incomes while contributing to the rehabilitation of social services needed for longer-term human resource development. 20. The interest and commitment of the Royal Government to the Social Fund project is high, as clearly demonstrated by the speed with which the Government created the SFKC and carried out preparation and appraisal activities. Political support for the project is strong at all levels of government, from the Prime Ministers, to line ministries to local government officials. Donors and NGOs have also expressed strong support for the Social Fund Project. 21. Agreed Actions. During negotiations, the following principal agreements were reached with the Government on the implementation of the project: (i) the SFKC will approve only those sub-projects for which there are eligibility criteria in an Operational Manual satisfactory to IDA; (ii) no change to the menu of eligible sub-project types, the eligibility criteria, the $250,000 maximum sub-project cost limit, or the $300,000 ceiling amount which can be awarded to any one contractor through direct contracting would be made without prior IDA approval; (iii) SFKC management level positions (i.e. department chief level and above) would be staffed satisfactorily to IDA; (iv) the SFKC would review and update the unit cost database at least every six months and submit the updated information to IDA for ex-post review; (v) selected performance indicators would be used to monitor the SFKC's performance; and (vi) sub-project  6 applicants/sponsors will be obligated by SFKC to contribute the 5% minimum counterpart contribution. 22. As conditions of credit effectiveness, the Government and IDA agreed that: (a) a Fund Agreement shall have been signed and entered into effect between the Government and SFKC containing the obligations of both parties under the credit agreement for the successful implementation of the project; (b) the Operational and Administrative Manuals shall have been finalized, satisfactory to IDA, and approved by SFKC's Board of Directors, and (c) the Management Information System shall be operational. 23. Poverty Category. The project is poverty-focused and falls under the category "Program of Targeted Interventions". It is a demand-driven project in that the types of sub-projects and their location will depend on the applications the SFKC receives. However, efforts will be made to orient demand so that it is consistent with the SFKC's goal of ensuring that sub-projects benefit the poor. Three simple targeting mechanisms will be used to target the poor and vulnerable groups based on prioritizing first for appraisal those special social service projects whose intended beneficiaries are poor and vulnlerable groups, such as female-headed households and the handicapped; second, the type of suab-projects eligible for SFKC financing would be ranked according to their likely impact on the poor; and third, the SFKC will establishprovincial limits on the portfolio share going to each province based on the province's relative access to basic social services and its population. Underserved provinces that are relatively inactive will receive focused project promotion activities from SFKC. 24. Environmental Aspects. The proposed project, which has been assigned a "B" environmental classification, is unlikely to have any adverse environmental impacts given the size and nature of the sub-projects to be financed. The environmental impact of sub-projects will be evaluated, however, as part of the appraisal process. Technical assistance will be provided to SFKC to develop environmental assessment policies and procedures. If adverse impacts are identified, necessary mitigating measures, if not already planned, would be incorporated into the sub-project design at appraisal. The SFKC may also reject sub-project proposals on the grounds that they involve excessive environmental risk. The adequacy of SFKC's environmental procedures would be assessed by IDA as part of the annual review. 25. Program Objective Categories. By providing a mechanism to channel investments to poor, underserved areas of Cambodia, the project supports the objective of poverty reduction. The project will also have an impact on private sector development by providing the local construction industry with increased opportunities to construct local public facilities and by involving NGOs and community groups in sub-project design, preparation and implementation. 26. Participatory Approach. This project establishes an institutional mechanism and a process for channelling public investment that is by its nature participatory. Applications for sub- projects will come from local governmental, non-governmental and community entities who will have full responsibility for project design and preparation. Applicants, to be eligible, must be a local entity which will assume responsibility for the operation and maintenance of the project. As such, the applicant would generally represent the intended beneficiaries of the project. The project thereby allows locally representative entities to participate in decision-making about local  7 investments and provides them with the responsibility to supervise implementation and then maintain and operate the facilities. 27. Project Benefits. The major benefits of the project are: (i) reconstruction and rehabilitation of public infrastructure and services with the associated health, educational and economic benefits for the poor; (ii) creation of short-term employment opportunities; (iii) the development of the local private construction industry; (iv) increased participation of communities in local decision-making and management of small-scale development projects; and (v) increased line ministry experience and capacity to develop investment criteria and designs for local infrastructure investment. The project would also assist donor coordination by providing a mechanism through which donors may wish to channel their resources to quality sub-projects. 28. Risks. The main risks associated with this project are: (i) political interference in SFKC's operations; (ii) misallocation of financial resources; (iii) shortage of qualified staff, and (iv) lack of sustainability, particularly the risk that maintenance and recurrent costs will not be covered. An added risk in Cambodia is continued insecurity which could make travel and project implementation within parts of the country difficult. Preparation of the project has incorporated the lessons from other social funds so as to minimize these risks. In particular, the risks of political interference and financial misallocation will be mitigated by incorporating procedures that ensure autonomy and transparency of SFKC's operations, including rigorous eligibility and appraisal criteria, provisions for prior Bank approval, adherence to strict unit cost ceilings for sub- projects, and internal and external auditing. Lack of qualified staff is being addressed successfully by setting competitive salaries and advertising positions widely. The problem of sustainability is being addressed by encouraging local and community involvement and commitment throughout the project cycle, requiring a minimum beneficiary contribution, obtaining written assurances of the coverage of recurrent/maintenance costs from the appropriate entities, and through external audit procedures. Under present conditions, the security risk is not considered a major constraint to the implementation of the project as large areas of the country remain secure. Given the flexible, demand-driven nature of SFKC, applications from secure areas should provide sufficient demand to fully utilize its resources. 29. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Richard H. Frank President ad ioterim Washington, D.C. May 11, 1995 Attachments   Schedule A KINGDOM OF CAMBODIA SOCIAL FUND PROJECT Estimated Costs and Financing Plan (US$ million) Local Foreign Total Estimated Proiect Cost Institutional Support Salaries and Fees 1.11 0.00 1.11 Vehicles and Equipment 0.02 0.22 0.24 Operating Expenses 0.37 0.08 0.45 Technical Assistance and Training 0.35 0.15 0.50 Sub-total Institutional Support 1.85 0.45 2.30 SFKC Sub-projects Social Infrastructure 6.95 3.20 10.15 Economic Infrastructure 2.72 1.43 4.15 Equipment 2.83 0.67 3.50 Social Services 0.88 0.22 1.10 Sub-total Sub-Projects 13.38 5.52 18.90 Base Cost 15.23 5.97 21.20 Unallocated 0.70 0.30 1.00 Total Project Cost 15.93 6.27 22.20 Financing Plan Government 1.20 0.00 1.20 Applicant/sponsor 1.00 0.00 1.00 IDA 13.73 6.27 20.00 Total 1293 627 22120   Schedule B Page 1 of 2 KINGDOM OF CAMBODIA SOCIAL FUND PROJECT Procurement and Disbursement A. Summary of Proposed Procurement Arrangements (US$ million) 1/ LCB Local Direct Other2/ Total Shopping Contracts SFKC Institutional Support Salaries and Fees 1.11 1.11 Vehicles and Equipment 0.13 0.11 0.24 (0.13) (0.11) (0.24) Operating Costs 0.45 0.45 (0.36) (0.36) TechnicalAssistance and Training 0.50 0.50 (0.50) (0.50) Sub-total Institutional Support 0.13 0.11 2.06 2.3 (0.13) (0.11) (1.97) (2.21) Sub-Projects Infrastructure Sub-projects 4.00 3.35 6.35 0.60 14.30 (3.60) (3.01) (5.52) (0.52) (12.65) Services Sub-projects 1.10 1.10 (0.99) (0.99) Equipment Sub-projects 3.50 3.50 (3.15) (3.15) Sub-total Sub-projects 4.00 6.85 6.35 1.70 18.90 (3.60) (6.16) (5.52) (1.51) (16.79) Unallocated 1.00 (1.00) TOTAL PROJECT COST 4.13 6.96 6.35 3.76 22.20 (3.73) (6.27) (5.52) (3.48) (20.00) 1/ Figures in parentheses are the estimated amounts to be financed by IDA. 2/ Under the "other" category, SFKC Institutional Support includes consulting services procured following Bank guidelines for the Use of Consultants, and salaries, fees and other operating costs (travel, utilities, and minor office supplies), for which procurement procedures would not be applicable. Services sub-projects ($1.1 million) and small NGO-run community implemented social infrastructure projects ($0.6 million), such as latrines, would not be governed by Bank procurement guidelines. The unallocated amount ($1 million) is also included under the "other" category until it is allocated.  Schedule B Page 2 of 2 B. Disbursement Arrangements Disbursement Amount Expenditures to be financed Category ($ million) 1. Sub-grants 16.8 100% of amounts disbursed by SFKC 2. Consultants' services and 0.5 100% training 3. Goods (including vehicles) 0.24 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) and 90% of local expenditures for other items procured locally. 4. SFKC Operational Costs (a) operation and maintenance 0.36 80% (b) salaries 1.1 100% Unallocated 1.0 TOTAL 20.0 Estimated Disbursement Schedule Bank FY FY96 FY97 FY98 FY99 Annual 1.5 4.5 10.5 3.5 Cumulative 1.5 6.0 16.5 20.0  Schedule C KINGDOM OF CAMBODIA SOCIAL FUND PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare the project: 9 months (July 94 - March 95) (b) Prepared by: Government with assistance from IDA (including consultant services financed by a PHRD Grant) (c) First IDA mission: March, 1994 (d) Appraisal mission departure: March, 1995 (e) Negotiations: March, 1995 (f) Planned date of effectiveness: August, 1995 (g) List of relevant PCRs and PPARs: Credit No. Project PCR Date PPAR No. 1829 Emergency Social Fund Project - Bolivia 03/90 8449 1882 Second Emergency Social Fund Project - Bolivia 12/92 11471 2212 Social Investment Fund Project - Honduras 09/94 13573  Schedule D STATUS OF BANK GROUP OPERATIONS IN CAMBODIA A. STATEMENT OF BANK LOANS AND IDA CREDITS a (US$ million) (as of March 31, 1995) Amount (US$ million) (less cancellations) Project Fiscal ID Year Borrower Purpose IDA Undisbursed 2250 1994 Cambodia Emergency Rehabilitation 62.70 15.47 2664 1995 Cambodia Technical Assistance 17.00 18.05 Total 79.70 33.52 Of which has been repaid -QQ Total Now Held by Bank 22.U Amount sold 0.00 Of which repaid 0.00 Total Undisbursedi 'a The status of the projects listed in Part A is described in a separate report on all IBRD/IDA-financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. B. STATEMENT OF IFC INVESTMENTS (As of March 31,1995) None   IMAGING Report No; E- 6f626 KH Type: MOP