Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN TO THE ISLAMIC REPUBLIC OF IRAN FOR THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$80 MILLION TO THE ISLAMIC REPUBLIC OF IRAN FOR THE IRAN URBAN UPGRADING AND HOUSING REFORM PROJECT IN SUPPORT OF THE FIRST PHASE OF THE IRAN URBAN UPGRADING AND HOUSING REFORM PROGRAM May 3,2004 Finance, Private Sector and Infrastructure Department Middle East and North Africa Region Report No: IRN 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.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective March 17, 2003) Currency Unit = Iranian Rials (IRR) 1.00 IRR = US$.OOO1 US$l.OO = IRR FISCAL YEAR March March 20 ABBREVIATIONS AND ACRONYMS APL CAS CBI CBOs DOE DM EGM EMP EUC FMR FOM GDP GO1 HUDO IBRD ICB ICT ISC LDF LG MEAF MHUD MPO MOI NCB NGO NHC NLHO NS OM O&M PA PMU PVO QBS QCBS RPF Adaptable Program Loan Country Assistance Strategy Central Bank of Iran Community-Based Organizations Department of Environment Supreme Audit (Dowan Mouhassaba) Environmental Guidelines Manual Environmental Management Plan Executive Upgrading Committees (at the local level) Financial Management Reporting Financial Operations Manual Gross Domestic Product Government of Iran Housing and Urban Development Organization International Bank for Reconstruction and Development International Competitive Bidding Information and Communication Technology Inter-Ministerial Steering Committee (at the central level) Local Development Fund Local Government Ministry of Economic Affairs and Finance Ministry of Housing and Urban Development Management and Pladng Organization Ministry of Interior National Competitive Bidding Non-Governmental Organizations National Habitat Committee National Land and Housing Organization National Shopping Operations Manual Operations and Maintenance Project Account Project Management Unit Private Voluntary Organization Quality Based Selection Quality and Cost Based Selection Resettlement Policy Framework

3 FOR OFFICIAL USE ONLY SA SOE TUA TUB UDRO UUHRP WA Special Account Statement of Expenses Technical Unit for Component-A Technical Unit for Component-B Urban Development and Rehabilitation Organization Urban Upgrading and Housing Reform Program Withdrawal Application Vice President: Country Director: Sector Director: Task Team Leader: Chnstiaan Poortman Joseph Saba Emmanuel Forestier Sateh Chafic El-Amaout'Omar Razzaz This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 ISLAMIC REPUBLIC OF IRAN IRAN URBAN UPGRADING AND HOUSING REFORM PROJECT CONTENTS A. Program Purpose and Project Development Objective Page 1. Program purpose and program phasing 2. Project development objective 3. Key performance indicators B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Main sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices 4. Program description and performance triggers for subsequent loans C. Program and Project Description Summary 1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements D. Project Rationale 1. Project altematives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons leamed and reflected in the project design 4. Indications of borrower commitment and ownership 5. Value added of Bank support in this project E. Summary Project Analysis 1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

6 F. Sustainability and Risks 1. Sustainability 2. Critical risks 3. Possible controversial aspects G. Main Loan Conditions 1. Effectiveness Condition 2. Other H. Readiness for Implementation I. Compliance with Bank Policies Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements (B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement of Loans and Credits Annex 10: Country at a Glance Annex 11 : Institutional Arrangements Annex 12: Job Description of Key Project Management Staff Annex 13: Project Cycle for Urban Upgrading (Component A) MAP( S) IRN

7 Date: April 7, 2004 Sector Director: Emmanuel Forestier Zountry ManagerDirector: Joseph P. Saba Project ID: PO73433 Lending Instrument: Adaptable Program Loan (APL) ISLAMIC REPUBLIC OF IRAN Iran Urban Upgrading and Housing Reform Project Project Appraisal Document Middle East and North Africa Region MNSIF Team Leader: Sateh Chafic El-Amaout Sector(s): Housing construction (40%), Housing finance and real estate markets (20%), Central government administration (20%), Roads and highways (1 O%), General water, sanitation and flood Protection sector (10%) Personal and property rights (P), Access to urban services for the poor (P), Municipal governance and institution building (S), Participation and civic engagement (S), Gender (S) Program Financing Data APL Indicative Financing Plan Estimated Implementation Period Borrower (Bank FY) I IBRD I Others I Total I Commitment Closing I US$ m YO US$ m US$ m Date Date- 4PL /25/ /30/2009 Islamic Republic of Iran Loanl For LoanslCreditslOthers: Loan Currency: United States Dollar Amount (US$m): 80 Borrower Rationale for Choice of Loan Terms Available on File: [7 Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 17 Borrower: ISLAMIC REPUBLIC OF IRAN Responsible agency: MINISTRY OF HOUSING AND URBAN DEVELOPMENT (MHUD) Contact Person: Dr. Ali Abdolali-Zadeh, Minister of Housing and Urban Development Tel: Fax:

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9 A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: The overall purpose of the proposed Iran Urban Upgrading and Housing Reform Project (UUHRP) is to facilitate the transition to a market-led housing sector in Iran while improving current living conditions for low and moderate income households. To achieve the above, a three phase Adaptable Program Loan was prepared and is spread over a period of twelve years as detailed below: The purpose of APLl (US$ 100 million over afive year period) is to: i) institute an integrated approach to upgrading informal settlements, and ii) lay the foundations (of systems, capacity, framework) and initiate housing sector reforms. The APL2 (US$ 80 million over a four year period) envisions: (i) up-scaling urban upgrading to the national level; and (ii) launching housing sector reforms with a focus on deepening the housing finance sector and streamlining the subsidies system. The APL3 (US$150 million over a three year period) will aim to: (i) increase the amount of long term resources for housing finance channeled through the financial markets; (ii) address the more complex problems of the revitalization of run down historic city centers and the preservation of historic sites and cultural heritage; and (iii) build capacity of local governments in urban management in a decentralized context. 2. Project development objective: (see Annex 1) The key development objectives of the Project (APL1) are to (i) improve the living conditions in under-serviced neighborhoods in up to five provincial capital cities and; (ii) prepare the systems, capacity, and regulatory foundation and initiate market based housing sector reforms. To ensure that investments in upgrading are of high priority to their ultimate beneficiaries, municipalities are expected to undertake a strategic planning process with significant community participation. 3. Key performance indicators: (see Annex 1) The performance of the Project will be measured against two categories of indicators (one for each Development Objective), which are described in Annex 1. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: Iran Interim CAS, R Date of latest CAS discussion: 05/10/2001 The program supports the main priorities of the interim CAS, namely: (a) support for reforms and economic management; (b) support for the social protection agenda; (c) support for environment and natural resources management. The program is also consistent with the interim CAS focus on priority areas such as low-income housing, water and sanitation, and urban upgrading and community based infrastructure. -3-

10 2. Main sector issues and Government strategy: The 3rd Five Year Development Plan (1999/0-2003/4) gave a prominent role to the housing sector and the 3rd Housing Development Plan set out four strategic objectives that aim at (i) increasing the flow of long term domestic and foreign resources for housing finance in tandem with the adoption of adequate building technologies and the development of a professional and efficient construction industry, (ii) promoting financing for and mass production of small housing units adapted to the needs and affordability of low-income and vulnerable households, (iii) improving the efficiency of taxation and subsidies in the housing sector and to promote housing insurance, and (iv) reducing government controls and devolve responsibilities to local authorities (Provincial agencies and municipalities) for housing, urban land management (including government owned land) and promotion of rental housing and housing cooperatives. While some progress has been achieved in the implementation of the 3rd Housing Development Plan, the Government will need to pursue and accelerate the reforms in several areas as outlined in the Bank Housing Sector Strategy Note of June 2002 and the ensuing Action Plan. (a) Physical Infrastructure Constraints. During the last decade Iran has experienced a rapid urban growth that has exceeded the capacity of the state and municipalities to extend urban infrastructure and services. It has resulted in a significant proliferation of under-serviced settlements. Many of these settlements are outside the official city limits and, therefore, not legally recognized by municipalities. Others are within the dilapidated historic center of cities that offer tremendous wealth of cultural heritage. Such settlements are estimated to constitute 20-30% of the urban fabric and are home to the poorest segments of the urban population. (b) Natural Constraints. Iran is one of the most seismically active regions of the world. Earthquakes are considered to be the most destructive of all natural catastrophes that could happen in Iran. Destructive earthquakes occur regularly resulting in significant economic and human losses. Housing losses due to earthquake amount to an average of 1 percent of existing housing stock per year. The Iranian territory is frequently reminded of this by occurrences of disastrous earthquakes such as the most recent devastating Bam earthquake on December 26, 2003 (Ms=6.3). (c) Demand Constraints. Underdeveloped housing finance: Following the nationalization of the banking system in 1358 (1979), Iran has been operating for two decades under a financial policy of directed credit that includes a specialized circuit for housing finance. However, the supply of housing loans remains small (3% of GDP) when compared to Tunisia (6%) or Malaysia (22%). It is also below the objectives set by the current development plan for affordable housing. Presently, Bank Maskan (the Housing Bank), which is a specialized state-owned bank, is the dominant provider of long-term housing finance to households. Public commercial banks limit lending to shorter-term construction finance and savings mobilization proved to be difficult. Under pressure from the rapidly rising demand for housing, increasing numbers of subsidized or state-hded housing finance programs have been sponsored by several ministries or agencies and delivered by public -4-

11 banks to provide some relief to targeted social groups. InefJicient system of housing subsidies: Preliminary estimates suggest that housing subsidies in Iran are significant and may reach 4.5% of GDP. Taking into account utility subsidies amounting to 3% of GDP, housing-related subsidies become excessive and may exceed annual housing investment (4.7% of GDP in 1996/7). These subsidies are: (i) mostly non-transparent and unaccounted for in any budget, (ii) inefficiently delivered, (iii) regressive in the form of interest rate and energy subsidies, and (iv) provided through a highly fragmented system. As such, their benefits accrue largely to households in higher income brackets. Furthermore, subsidies are granted to developers, financing institutions and buyers, leading to inefficiencies, speculation and deviation of subsidies from their intended beneficiaries. With very few exceptions, such as the Imam Khomeini Foundation, the intended population groups are not receiving the full benefits of government assistance. For many, such assistance is inaccessible. (d) Supply Constraints. InsufJicient supply of undeveloped and serviced land. As urban land at the periphery of many cities is government owned, this leaves little room for the development of an active land market. The MHUD, which controls much of the public land, has initiated a new urban land development policy with the intention to increase the availability of developable land substantially. The focus of the ministry s strategy concerning land management has been to provide infrastructure for new residential areas (including the development of newhatellite towns) and to supply developed land to individuals, construction companies and developers. Most of the land remains un-serviced and un-titled. Withholding such significant amounts of land stifles private sector contribution to urban development and seriously restricts the efficient operation of land markets. Rigid Urban planning and management: Urban planning in Iran is directive and hierarchical in terms of both coverage and nature. The constraints created by the rigidity of urban plans and legal zoning have contributed to the proliferation of informal settlements in and around major cities. In response, the Government has started the rehabilitation of these under-serviced neighborhoods as part of a comprehensive review of current urban planning and management process. (e) Institutional Constraints. Lack of empowerment and engagement of local government: Although article 7 of the Constitution assigns major roles in the government structure to elected local councils, it was not until the 3rd Development Plan that appropriate actions to promote decentralization were given high priority. Decentralization has become the main thrust of the upcoming 4th development plan. A draft decentralization law that is expected to be enacted by the Parliament soon will reinforce the role of the city councils by transferring allocations of the corresponding budgetary resources and creating elected regional councils and inter-communal councils. Overall, it is envisaged that local authorities and other stakeholders will ultimately be empowered to make decisions on planning, budgeting, execution and management of city policy in response to the local needs and in line with national development plans and policy guidelines. This devolution of responsibilities will require, among other things, considerable training and institutional capacity building at the local level. -5-

12 Fragmentation of policy decision-making and responsibilities: Numerous government institutions and organizations are involved in setting and implementing housing and urban policies and programs in Iran. The Ministry of Housing and Urban Development (MHUD) must deal not only with other central government bodies but also with the Housing Foundation, the Housing Bank and six affiliated organizations. This has resulted in multiple and disjointed housing programs, difficult development of a coherent and well coordinated housing sector policy. Consequently, housing markets in Iran are highly heterogeneous, precise knowledge of real housing needs is lacking (despite the wealth of housing information available) and access to subsidies has less to do with income than with location/ employment affiliation. These constraints have resulted in: (i) a highly volatile private housing market; (ii) an unbalanced output in favor of large units; and (iii) a very fragmented financing through numerous small public housing programs. 3. Sector issues to be addressed by the project and strategic choices: To assist the Government of Iran realize its vision for the housing sector as described in the 3rd Five Year Plan, the Project addresses the key issues mentioned below: (a) Infrastructure Constraints: the Project will address peripheral urban settlements in up to 5 provincial capital cities and instigate a national community enabling and urban upgrading program. It will also prepare a pipeline of urban upgrading and enabling sub-projects in up to 10 provincial capital cities. APL2 will scale-up interventions to the national level. It will also include socio-economic and technical studies on upgrading inner city residential areas, preserving their cultural heritage, and infrastructure needs for city extension, to be implemented under APL3. (b) Supply Constraints: The Project seeks to explicitly address regulatory and planning barriers to the supply of land such as constraints in planning, development, and regularization of urban land in a number of pilot cities with the view to scale up these reforms during the following phases. It also attempts to introduce a more demand driven and transparent system for allocation of public land. (c) Demand Constraints: these are mostly related to regulatory and institutional barriers in the areas of housing finance and subsidies: (i) The Project seeks to introduce reforms to 1) reduce credit rationing, 2) address the imminent liquidity risk associated with the existing credit linked contractual housing savings schemes, which entails, inter-alia, maturity mismatches between sources of funding and loans extended, and 3) enable mobilization of capital markets for housing finance in the medium to long term. (ii) The Project seeks to introduce more efficient and better targeted demand-side subsidy instruments that do not undermine the development of market based housing sector. It also seeks to develop an information system to allow for the identification of the costs, transparency, impact (economic efficiency) of housing subsidies and the characteristics of the beneficiaries (social impact). -6-

13 (d) Institutional Constraints: (i) Empowerment of local governments: The Project will assist participating local authorities to assume their full responsibilities through capacity building and investments. Following phases will attempt to scale up these efforts to all local governments. (ii) Establishing a single housing information system for policy and decision-making: The Project will assist in developing an information system that provides timely data and analysis for policy makers, financial intermediaries and investors. The Project will also assist in capacity building and establishing the proper coordinating mechanisms between MHUD, MPO and CBI. As the above issues cannot be tackled all at once, strategic choices had to be made to balance primacy of intervention versus difficulty/gestation period needed to cany out reforms. 4. Program description and performance triggers for subsequent loans: Given the long tradition of a centrally planned and managed economy in Iran, the reforms would be comprehensive requiring medium and long term gestation periods. Hence the need for an Adjustable Program Lending with specific triggers for each phase confirming commitment and readiness and ensuring the feasibility of the ensuing phase (Annex lb). The Program is divided into three phases over a twelve year period and a total cost of US$330 million. APLl (US$lOO million over a 5 year period) will i) institute an integrated approach to upgrading informal settlements, and ii) lay the foundation (systems, capacity, framework) for and initiate housing sector reforms (see project description). APL2 (US$SO million over a 4 year period) will cover two components: scaling-up urban upgrading to another 15 provincial capital cities and launching housing sector reforms. These reforms will focus on deepening the housing finance sector through eliminating regulatory preferences for public banks and ensuring a level playing field and competitive environment for all banks providing housing finance. It will also attempt to support government s efforts to streamline the housing subsidies system by moving towards a more transparent and direct subsidies that rely on demand-side instruments targeted to the poor households. APL3 (US$150 million over a 3 year period) will build on the foundations laid during the previous phases. It will cover three components. The first will further scale-up upgrading to all remaining provincial capital cities and address the more complex problems of the revitalization of run down historic city centers. The second component will focus on building municipal management capacity in a decentralized context. The third component will aim at increasing the amount of long-term resources for the housing finance channeled through the financial markets. Appraisal during APL2 will determine the status of housing finance and the most appropriate form of assistance, including technical assistance, guarantees, and/or capitalization of a secondary mortgage facility. Specific triggers for APL2 and APL3 are listed in Annex 1 b. -7-

14 C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The Project objectives will be achieved through three main components: (i) urban upgrading and community enabling programs in up to 5 selected cities; (ii) technical assistance for housing sector reforms; and (iii) technical assistance and capacity building for Project implementation. Component A - Urban Upgrading (US$89.62 million) This Component lays the foundation for launching a sustainable country-wide urban upgrading program through the implementation of the following sub-components: A-1: Design and supervision of upgrading programs in APLI cities. A-2: Implementation of upgrading programs in APLI cities: A-3: Design of upgrading programs for APL2 cities A-4: Design offinancing arrangements for upgrading under APL2 and APL3 Component B - Housing Reforms (US$3 million) Component-B aims at enhancing housing affordability and efficiency of the housing sector in Iran in the long term. It will consist of foreign and local technical assistance, training and equipment for implementing the specific priority actions in reforming the housing sector as outlined in the Housing Sector Strategy and the ensuing Action Plan: B-I: Housing and land management B-2: Housing finance B-3: Housing subsidies B-4: Housing in formation Component C - Project Management (US$2 million) This Component will finance: (i) the cost of office and ICT equipment required for Project management and implementation; and (ii) technical assistance for Project management and implementation, including hiring of individual consultants and consulting firms in areas of Project management, financial management and procurement, Project monitoring and evaluation including the documentation of the Project experience and study tours, training to key policy-makers and other. The Project costs are summarized in the table below: 2. Housing Sector Reforms 3. Project Management O I 2.00 I I -8- t

15 2. Key policy and institutional reforms supported by the project: Policy Area Urban upgrading National: Unifying national urban upgrading policy and developing instruments for integrated (cross-sectoral) upgrading. Housing and land management National: Addressing safety and affordability concerns of formal housing. National / Local: Introducing market responsive city planning and land supply. Housing finance National: Developing primary housing finance market. Housing subsidies National: Streamlining housing subsidies and establishing a unified system for collection and analysis of subsidy data. Housing information National: Developing national housing and land market information system. Policy and Institutional Reform - Urban upgrading budget line established at a provincial level allowing MPO to disburse funds for integrated upgrading at the local level instead oi allocations to separate line ministries. National: - Revise building codes and standards for housing construction. National / Local: - Carry out participatory City Development Strategies at the local level to better reflect local priorities and development needs. - Reflect CDSs outputs in the future master plans in participating cities; - Develop a transparent system for releasing public land systematically and in response to market demand for urban expansion in participating cities. - Establish a system for assessing, monitoring and managing liquidity risk associated with loan linked housing savings schemes and ensure positive net treasury position. - Establish a level playing field for housing finance for all banking institutions. - Establish a system for tracking and evaluating costs, efficiency, transparency and impact (social and that on the market) of housing subsidies. - Introduce demand side housing subsidy instruments that are explicit, transparent and well targeted. - Establish a system for collecting data on and monitoring of national housing and land markets that can be used by the policy makers, financial intermediaries and investors. 3. Benefits and target population: The primary beneficiaries of the Project are low-income households living in and around the participating cities. These groups experience much lower housing and service standards than the rest of the city, higher vulnerability to the risk of evictions and earthquakes, and have virtually no access to serviced plots at affordable costs. Another group of beneficiaries is the private construction and other industries and services with strong linkages to the housing sector. -9-

16 4. Institutional and implementation arrangements: Project implementation is aligned with current institutional responsibilities in Iran and each Project component will be implemented by the relevant agency under the MHUD: Component-A - by the Urban Development and Rehabilitation Organization (UDRO), the main agency responsible for urban upgrading projects in historic cities; Component-B - by the National Land and Housing Organization (NLHO). An Inter-ministerial Steering Committee (ISC) with representatives of the MOI, MEAF, the Central Bank (CBI), MPO, the High Commission for Architecture and Urban Development, and UDRO was established during Project preparation. Its main role is to provide guidance to the reform strategy and to the design of the Program. During the implementation, the ISC will be in charge of Program oversight. It will meet at least quarterly to review progress, coordinate decisions and remove impediments to the timely implementation of the Program. Annexes 11 to 13 provide a detailed description of the institutional arrangement for the Project. Overall Project Management The following is a summary of the Project s implementation cycle (for details see Annex 13). The MHUD will have an overall responsibility for the Project implementation under the oversight of the ISC, including Project monitoring and auditing. It will rely on a Project Management Unit (PMU) and two Technical Units - TUA and TUB - to be established and housed at MHUD, UDRO, and NLHO respectively. Each unit will have a lean core staff complemented as necessary by specialized short-term consultants to meet peak loads andor to provide specialized expertise. Training of the core staff in the various program specialties and Bank procedures will be provided under Component C of the Project. The PMU at the MHUD will be responsible for the procurement and financial management of the Project on behalf of MHUD and, hence, for maintaining accounting records, preparing Financial Monitoring Reports (FMRs) and submitting them to the Bank on quarterly basis. The financial management procedures, including internal control mechanisms, flow of funds, accounting procedures, procurement and disbursement procedures and reporting will be implemented according to the requirements summarized below and stipulated in Annex 6. The PMU will also submit to the Bank biannual investment programs and quarterly Project progress reports. Financial Management Arranaements The loan proceeds and counterpart funds will be disbursed only after two budget lines are opened within the government budget and a framework agreement is signed between the MPO and the MHUD detailing the Project duration and activities. All payments under the Project will be subject to the government controls and will be audited by an external independent auditor acceptable to the Bank. Funds for Project implementation will be advanced by the MHUD to its provincial offices and will be deposited into the Project Account at a local bank (PA Sub-account). The hnds will be advanced upon receiving a request from the Provincial Financial Controller (PFC) specifying the amount of funds needed for each quarter, accompanied by a cash-flow forecast based on the budgeted activities. Within 25 days from the end of each month, the PFC will submit to the PMU a summary of all payments incurred during -10-

17 the previous month along with all the supportive documentation, the PA Sub-account bank statement and an estimation of the amounts needed for the next quarter. The PA will be replenished from the SA accordingly. The PMU will maintain and operate an accounting system to record and follow all Project's financial transactions, generate the Project monitoring reports and prepare Project financial reports in aggregated and disaggregated forms. The Financial Officer (FO) will work closely with the MHUD Financial Controller, train and supervise the Project and provincial accountants. The FO will also be responsible for the implementation of the accounting system and preparation of a fmancial operations manual (FOM) documenting the required procedures for the flow of funds, auditing and reporting requirements at the different implementation levels and other financial management procedures satisfactory to the Bank. The Project financial management and cash flow arrangements are detailed in Annex 6. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Two separate projects, (covering housing reform and upgrading respectively) were considered. This alternative was mutually rejected by GO1 and the Bank at this time for the following reasons: (a) housing sector reform and urban development are closely inter-related; and (b) both sectors are the responsibility of the same ministry - MHUD. Preparing two separate projects would have been time consuming and costly to the ministry. A Specific Investment Loan (SIL): Unlike an APL, this approach appeared too rigid, limiting opportunities for learning to guide sequencing and roll-out to other localities in support of the government's broad national decentralization agenda. The flexibility and longer time-frame offered by an APL, by contrast, would allow to gradually internalize policy reforms and consolidate institutional settings, approaches and procedures. For example, the pilot urban upgrading and community enabling sub-projects during the first phase will be followed by an expansion and diversification on a national scale; a secondary mortgage facility, which MHUD is keen to get assistance on, can only be realized after a series of reforms are enacted and relevant financial and institutional infrastructure are in place. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). 9 Bank-financed Water Urban Development Urban Development Water supply and sanitation 3ther development agencies Implementation Progress (IP) Development Objective (DO) Tehran Sewerage Project (on S S going) Tehran Drainage (closed) Earthquake Recovery (closed) Sistan Flood Control (closed)

18 3. Lessons learned and reflected in the project design: (a) Piloting, phasing, and sequencing of reforms: While the objective of freeing up housing markets and devolving housing sector responsibilities to local governments and the private sector is clear, the Bank s experience shows that the means to realize this objective has to be carefully thought through in terms of building the necessary capacity, information systems, and the regulatory framework. In some cases such as subsidy instruments or land management, programs have to be piloted to test their effectiveness before they are scaled up. In others such as building codes, there is considerable local experience to allow for moving forward at the legislative level early on. (b) Ensuring Readiness of the Borrower for Implementation: The common lesson in the past Bank-financed projects is that ensuring / building an adequate capacity for carrying out Bank Project specific activities such as procurement and disbursement are important. During Project preparation, intensive advisory support on the Bank s fiduciary procedures has been provided, the Bank will organize a seminar on procurement and disbursement during the Project s launch paying particular attention to the training needs of Project implementation teams at the local level. (c) Early Involvement of Main Stakeholders: MOI, MPO, participating municipalities and CBI are the key stakeholders in municipal management, budget allocation and banking regulations. These stakeholders have been fully involved in the program preparation and are fully committed to the Project. The Project Team also consulted local communities in the under-serviced areas in the three pilot cities and initiated contacts with participating provincial governments and coordinated with them during Project preparation. The early participation of the stakeholders proved to be important for ensuring acceptance and commitment and securing availability of counterpart funds and indicating priority investments in urban upgrading. (d) Sustainability of Upgrading Component: Projects that tend to focus on surgically upgrading a neighborhood in the absence of a citywide strategy and adequate capacity building are not likely to be sustainable as demonstrated by Bank s prior experience in other projects. Therefore, the Program focuses on training and capacity building of city officials and takes a citywide approach to upgrading. (e) Ensuring Appropriate Procurement Environment in Iran: during implementation of other Bank Projects in Iran it emerged that Loan Agreements are often not fully understood and accepted by the concerned officials and precedence is usually given to the local rules, particularly, at the level of local governments. In addition, the Iranian authorities have restrictive rules in regards of contracting foreign consultants, suppliers and contractors, which is contrary to the Bank s recommended procedures. Country procurement issues, which may be in conflict with the Bank s recommended procedures, are presently being addressed by the Bank with the government in order to arrive at an acceptable solution to be applicable to all Bank projects in Iran. -12-

19 4. Indications of borrower commitment and ownership: The GOI's commitment to housing sector reforms is strongly indicated in the 3rd Five Year Development Plan and a number of actual reforms undertaken in the last two years. Various inter-ministerial and expert committees have been established to conduct required studies and take appropriate decisions. A Policy Reform Action Plan and the National Upgrading Policy Declaration have been submitted to the Bank and are available in the project files. Provincial authorities, city councils and communities in interested cities are actively participating in the preparation of the community enabling and upgrading components in their cities. The'y all have expressed commitment to share the costs. An inter-ministerial steering committee has also been established to oversee the preparation and implementation of the program. A pipeline of first year investment projects has been prepared. This was found to be satisfactorily and according to the eligibility criteria detailed in Section E. 5. 'Value added of Bank support in this project: The Bank has acquired international experience in supporting housing reforms and urban development. Throughout the MNA Region, the Bank has assisted borrowers on housing finance (Jordan, WBG, Algeria, Egypt) and slum upgrading (Morocco, Tunisia, Algeria, Jordan). In recent years, the Bank has been also renewing and strengthening its involvement in Iran through several on-going lending and grant operations in sectors such as banking regulation, sewerage, primary health care and local development. The proposed Project will build on the Bank international experience in housing reforms and incorporate lessons learnt from on going and passed lending operations in Iran. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): Cost benefit NPV=US$ million; ERR = % (see Annex 4) 0 Cost effectiveness 0 Other (specify) The demand-driven nature of the Project implies that communities will determine the nature and scope of each sub-project. Therefore, the costs and benefits of individual sub-projects can not be completely identified and, hence, the economic rate of return for the whole Project estimated ex-ante. The cost-benefit analysis will be carried out for each upgrading sub-project with total costs of US$ 100,000 and above, except sub-projects with non-quantifiable benefits. Such cost and benefit analysis for the individual sub-projects shall demonstrate a positive NPV and an ERR equal or above the appropriate opportunity cost of capital estimated at 12%. This is consistent with recently Bank approved projects and is above the current real interest on long-term deposits. The Project Team will review on a no-objection basis all sub-projects with total costs of US$ 500,000 and above for works and US$250,000 and above for goods and a sample of sub-projects below this threshold at its discretion. This procedure will be reviewed as needed to ensure adequate quality of the investment analysis. The detailed methodology for economic analysis for typical sub-projects is included in Annex

20 International experience suggests that urban upgrading investments have broad positive economic benefits such as: (1) Investments in local infrastructure will create jobs for local contractors and develop local technical skills and raise demand for local inputs by small local contractors. (2) Investments in power infrastructure and street lighting will, among other things, increase security and extend potential hours for education and economic activities. (3) Improved water supply services will result in substantial direct and indirect benefits such as better health and reduced household costs o f fetching water. (4) Rehabilitation of access roads, sidewalks and street drainage will improve mobility of the population and develop trade and local service activities in previously inaccessible neighborhoods. Direct benefits from the above improvements are expected to greatly contribute to an increase in property values and wealth of those living in currently under-serviced neighborhoods. The negative effects of the increase in property values on the low income households such as increase in rents will be addressed indirectly through reforms of the system of subsidies under Component B of the Project and sub-sequent phases of the Program. While the impact of technical assistance for institutional development and capacity building of LGs and communities in planning and management infrastructure investments is very hard to quantify, Bank assistance in this area is expected to result in significant benefits. In particular, the Project will empower communities and establish a partnership between communities and LGs. It will lay the basis for more participatory development planning, more responsive local services and better accountability of the LGs towards communities. In addition, it will facilitate: (1) Better city planning and management processes that are more responsive to the local needs and conducive to local economic development. (2) Improved financial management capacity of LGs to implement and operate infrastructure projects. (3) Incorporation of the currently substandard neighborhoods into the municipal revenue base. 2. Financial (see Annex 4 and Annex 5): NPV=USS million; FRR = % (see Annex 4) As indicated above, the Project is demand-driven and, thus, it is impossible to carry out an ex-ante financial analysis of sub-projects. Proven financial viability of each sub-project will have to be provided prior to committing any funding under the Project. Therefore, financial analysis will be carried out: (i) to ensure the municipality s or responsible agency s ability to cover operating and maintenance expenses of the additional infrastructure sub-projects; and (ii) to ensure that the fiscal impact of the additional investment funding on their budget is small (4.5%-5% of annual capital expenditure). Similarly to the procedure for the economic analysis, the Project Team will review on a no-objection basis all sub-projects with total costs of US$ 200,000 and above and a sample of sub-projects below this threshold at its discretion. This procedure will be reviewed as needed to ensure adequate quality of the investment analysis. The detailed methodology for financial analysis for typical sub-projects is included in Annex 5. Financial analysis will be required for investments that are: (i) under the direct responsibility of the municipality; and (ii) in health, education and water & sewage. These investments are expected to -14-

21 constitute majority of the works financed under the Project. For all other infrastructure investments, the responsibility for operating and maintenance (O&M) will be transferred to cognizant utilities or ministries, for which a formal letter of hand-over and O&M acceptance would be requested. Whenever direct beneficiaries of the sub-projects will be identifiable on an individual basis (Le. the corresponding households) the recovery of recurrent costs must in principle be adopted. This would be the case primarily for those sub-projects that are revenue generating such as water provision. Financial sustainability of sub-projects that are not revenue generating such as access roads, storm drainage and public lighting will be ensured by municipalities either through local revenues or state transfers. As the upgraded neighborhoods will be incorporated in the municipal revenue base it is expected that the additional revenues from these neighborhoods such as garbage collection fees and construction permits will offset the additional operating and maintenance costs resulting from the Project investments. Fiscal Impact: (i) At the national level: The fiscal impact at the national level will be negligible as the loan amount composes a small share of the total GO1 annual budget. Positive fiscal effects will be achieved through housing sector reforms due to reduced burden on the government s budget as the private sector will be able to gradually replace at least part of the govemment s role in housing supply and subsidies will be streamlined. (ii) At the local level: No negative impact on the local budgets is expected as most of the funding will be provided to the local governments in the form of grants and Project activities. Rather, the project is expected to result in increased revenues and improved management efficiency. The required co-financing of investment costs by the local governments will be rather small (about 5%) and will not create excessive demands on reallocation of budgets. Thus, the main fiscal impact will be in the form of annual O&M for the undertaken investment sub-projects. Assuming that an average grant to a municipality will be US$ 15 million, 33% of which will be invested in infrastructure under the municipal mandate, the additional annual O&M costs resulting from the Project will be US$150,000 assuming a 3% O&M ratio. Due to the fact that each municipal revenue source is allocated to a specific expense item based on centrally mandated ratios, the current allocation of expenses allows for adequate maintenance and there appears to be no need to create separate O&M funds for the Project. The expected benefits of the Project, particularly, technical assistance to the local governments will be allocation of public resources more in line with local needs and increased capacity and expertise in efficient implementation of investment projects. In addition, due to expected appreciation of property values and increase in formal housing through regularization of land tenure in the previously informal areas, the Project is likely to broaden the local property tax base which will have a significant positive impact on the municipal revenue in participating cities In addition, the Project will stimulate local economic development generating additional income and other tax revenues to the LGs. Thus, the net fiscal impact of these improvements is expected to substantially outweigh costs associated with the implementation of the Project. -15-

22 3. Technical: Most of the infrastructure sub-projects are expected to be simple. Ample local capacity exists for construction, civil works and engineering and main construction materials are readily available. Some o f the smaller civil works could be designed as labor-intensive operations such as use o f self-locking blocks for street pavement, to promote employment and encourage the participation of small local construction f ms. 4. Institutional: (i) The Project and the subsequent phases of the Program will provide technical assistance and training to strengthen management capacity of participating municipalities in accordance with their newly acquired responsibilities and with the additional requirements resulting from the program. The Project will pilot community-based initiatives to raise local capacity in this area. This experience will be documented and widely disseminated. (ii) Coordination of investments at the local level: Investments at the local level are carried out by some 26 local organizations, all regional antenna s of either ministries or national utilities, with little or no coordination. The Project will seek to place participating municipalities at the hub of urban development in their respective jurisdiction through the introduction of the new participatory planning tools. (iii) Regularization of land titles: to address the issue of social exclusion in urban areas and lack of property titles in informal settlements the Project will attempt to develop a mechanism to facilitate the regularization of these informal settlements. For more details, see Annexes 6 and Executing agencies: MHUD will be responsible for the overall execution, procurement, financial management and coordination of the program. At the local level, an Executive Officer (EO) will be nominated by the MHUD and the local Executive Upgrading Committee (EUC). He/she will be responsible for the Project implementation at the local level and will be located at the MHUD provincial office. EO will act as contract manager for the specialized regional organizations and will operate under the umbrella of the local EUC. The Project Management Unit (PMU) will be located at and will report to the MHUD and will solely serve the proposed Project. The PMU will rely on two Technical Units TUA and TUB to be established at UDRO and NLHO respectively. The Government has hired highly qualified managerial staff - the Project Director and Managers of the TUA and TUB. The units will each have a core staff complemented as necessary by specialized short-term consultants to meet peak workloads and/or to provide specialized expertise. The Project Team carried out a detailed analysis of the local capacity to implement the project. There is significant supply of highly qualified technical specialists. However, there is very limited experience with the management of Bank financed projects and Bank s procedures. Therefore, training of the core staff in the various - 16-

23 program specialties and in Bank procedures will be provided for under the Project. 4.2 Project management: An Inter-ministerial Steering Committee with representatives from the Ministry of Interior, Ministry of Finance, the Central Bank, the Planning and Management Organization, the High Commission for Architecture and Urban Development, and the Urban Development and Rehabilitation Organization has been established during Project preparation. Its main role is to provide guidance to the reform strategy and to the design of the Program. During the implementation of Phase I of the program, the ISC will be in charge of Program oversight. It will meet quarterly to review progress, coordinate decisions and remove impediments to the timely implementation of the Program. 4.3 Procurement issues: The Bank conducted a h blic Expenditure Review (PER) mission in 2003 which had shed lights on the public procurement environment in Iran. As a result, main issues that Bank-financed projects encounter were identified and dialogue between the Bank and GO1 to resolve them was initiated in end of The Bank agreed with GOI, represented by MEAF to formulate a Memorandum of Understanding (MOU) that will set the steps towards reaching a framework agreement to ensure adequate procurement and implementation arrangements for Bank financed projects in Iran. In the interim, and until finalizing the MOU, arrangement set forth in Annex 6 will be followed. The capacity of MHUD, UDRO, and NLHO to carry out procurement according to World Bank Guidelines is limited. Therefore, as various bidding documents need to be prepared and launched in the first year, it is essential for competent procurement officers to be recruited by the end of June Financial management issues: The financial management risks are considered moderate. This rating is due to the lack of a ready available accounting system capable to generate periodical project reports. The risk will be mitigated by hiring a qualified financial officer to follow up on and operate a ring fenced accounting system whose development contract is in the process of being awarded. The hiring of the financial officer is a condition for the project board presentation. Also, the Bank will perform intensive supervision and assist the MHUD to generate on timely basis the project financial reports. The flow of finds risk is considered as low. The loan proceeds and counterpart finds channeled in the form of grants to the MHUD may only be disbursed after two budget lines are opened within the government budget and a framework agreement is signed between the MPO and the ministry detailing the project duration and activities. Accordingly, the MPO committed to the opening of the project budget accounts, within the government budget law, and to the signing of the framework agreement detailing the implementation arrangements for the FY commencing on March 2 1, (Financial Management arrangements are detailed in Annex 6). 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The Project has been classified as Category B as per the Bank s Operational Policy 4.01 Annex C on Environmental Assessment, indicating that there are reversible environmental issues that can be -17-

24 mitigated. Due to the fact that the Project has a participatory approach and specific sub-projects will only be defined during the course of the Program, it is not possible to cany out environmental analysis ex-ante. The UUHRP is expected to bring significant environmental and health benefits and no major environmental issues are anticipated. A number of potential investment sub-projects have been received from the interested cities. A Bank consultant conducted a desk screening of these proposals and no irreversible impacts that could arise from these sub-projects were identified. EMP for the Project was prepared in conjunction with the feasibility studies in Bandar-Abbas, Kermanshah and Zahedan and approved by the Bank. During the first year, environmental screening and assessment will be reviewed by the Project Team on a no-objection basis. During the second year, an evaluation of national capacities for approving environmental assessment will be carried out and a decision on the further set up will be taken. The environmental category and requirements for APL2 and 3 will be re-assessed during the appraisal of both subsequent phases. 5.2 What are the main features of the EMP and are they adequate? The EMP includes: (i) description of institutional and regulatory framework with regards to environmental protection, (ii) assessment of the capacity of implementing and executing agencies in environmental assessments and identification of mitigation measures, (iii) procedures for proper screening, environmental assessment and monitoring, and (iv) description of the capacity building activities to be implemented to raise environmental awareness and to strengthen capacity of municipalities. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: March 2003 The EMP was disclosed in the MHUD, Department of Environment (DOE), and the Bank s InfoShop prior to appraisal. The draft environmental guidelines will be finalized and incorporated into the Operations Manual prior to negotiations. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draf? EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Throughout the preparation of the Project, the technical, financial, environmental and social issues associated with the Project were discussed in meetings attended by consultants, representatives of municipalities and various other concerned stakeholders. The EMP was developed in close coordination with concerned institutional stakeholders, MHUD and was reviewed and approved by the DOE. Consultation at the level of sub-project will be conducted as part of the preparation of the city-wide upgrading and community enabling program. Provisions to ensure appropriate public consultation at the subproject level will be integrated in the procedural guidelines to be integrated in the Operations Manual. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During the first year, environmental screening and assessment will be reviewed by the Project Team on a no-objection basis. During the second year, an evaluation of national capacities for approving environmental assessment will be camed out and a decision on the hrther set up will -18-

25 be taken. The environmental category and requirements for APL2 and 3 will be re-assessed during the appraisal of both subsequent phases. Each investment sub-project presented under the UUHRP will be subject to environmental screening and assessment. An EMP and the Environmental Guidelines Manual (EGM) have been developed during Project preparation and will compose an integral part of the Program's Operations Manual. The EGM describe how subprojects shall be evaluated to ensure that environmental and social safeguards are enforced and World Bank policies are complied with. If a subproject is found to include substantial environmental impacts, both the EMP and the EGM provide Wher procedures for addressing them or altering the design of the subproject are also provided. The EMP includes adequate guidance for proper supervision and monitoring, including the identification of the responsible organizations. Potential indicators for assessing the performance of the program have also been developed. The Bank will receive regular reports from the PMU on the progress of the Project, including environmental status. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. A rapid social assessment was carried-out during Project preparation. The results were used to identify target neighborhoods and stakeholders and were key to formulating priority investments. Initial information was collected for the baseline assessments on access to urban services in the three pilot cities. As part of the Project implementation more in-depth baseline social assessments will be conducted in all participating cities, including assessment of needs of the population potentially benefiting from the Project. This will include household surveys and thematidfocused group discussions. The outcomes of the above assessments, particularly, the expressed needs and the willingness to participate financially (for cost-recovery), will be reflected in upgrading sub-projects and other community-based schemes. Identification and design of individual sub-projects will involve potential beneficiaries using participatory methods in assessment, CBO formation and strengthening. 6.2 Participatory Approach: How are key stakeholders participating in the project? a. Primary beneficiaries and other affected groups: The rapid social assessment carried-out during Project preparation included series of focus groups in the under-serviced areas of Bandar-Abbas, Kermansh and Zahedan. Based on the results, target neighborhoods were identified and priority investments formulated. Based on the initial consultations it is also expected that households will be willing to contribute to the financing O&M costs o f investments as focus groups revealed that they are willing to pay for rehabilitation and upgrading of their neighborhoods. The Project also emphasizes community involvement in the monitoring of the implementation of sub-projects in their neighborhoods. In line with the methodology being piloted in Zahedan for subsequent adoption by other cities, inclusive city-wide upgrading and community enabling strategies will be prepared through a participatory approach. Participants will include target populatiodresidents, various stakeholders such as representatives of national government (sector ministry representatives at the provincial level), participating municipalities, local NGOs and professional associations. TA and capacity building will be provided as appropriate to strengthen existing CBOs and local NGOs, diversify their services and increase their contributions to Project implementation. All the key stakeholders - 19-

26 of the housing sector reforms - MPO, MHUD, MEAF, CBI, Bank Maskan - were involved andor consulted throughout the preparation of the Project. Specific reforms, Project triggers, outputs and outcome indicators were discussed. A number of key stakeholders such as CBI and MHUD will be directly involved in the implementation of specific reforms under the Project. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Physical Upgrading Programs will be developed in a participatory manner with broad consultations with the main stakeholders, including communities. Furthermore, the Project includes Community Enabling Programs aimed at improving access to specialized social services and satisfying the needs of vulnerable groups. The component will build on the existing local initiatives, social networks and spontaneous mutual support systems in the major cities of Iran. It will involve Participatory implementation of socio-economic programs in the informal settlements of the participating cities. This will be implemented through joint ventures of international and national NGOs and CBOs in collaboration with local governments. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? A specialized division in the TUA and the coordinators of community initiatives in each participating municipality will monitor and evaluate the social impact of sub-projects throughout the implementation of the Project. For this purpose a number of impact indicators will be monitored at the central and local levels to ensure that subprojects are achieving their social development outcomes. In addition, the Project envisages a Capacity building program in community enabling for NGOs, CBOs and participating municipalities. Particular attention will be paid to institutionalizing the mechanisms for community participation in urban upgrading and socio-economic development programs in informal settlements and at the city level. The specific programs will be identified, designed and implemented by local NGOs, CBOs, PVOs, national and international universities and municipalities with close participation of the local beneficiary communities and local governments. 6.5 How will the project monitor performance in terms of social development outcomes? It has been agreed with the Borrower that the TUA staffing will include social development specialists that would concentrate on the monitoring and evaluation of the Project, including social development areas. The project also envisages carrying out beneficiary impact assessments through surveys, focus groups and/or other methods as needed

27 7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. The EGM describes how sub-projects shall be evaluated to ensure that environmental and social safeguards are enforced and World Bank policies are complied with. If a subproject is found to include substantial environmental impacts its provides further procedures for addressing them or altering the design of the subproject are also provided. During the first year, environmental screening and assessment will be reviewed by the Project Team on a no-objection basis. During the second year, an evaluation of national capacities for approving environmental assessment will be carried out and a decision on the fiuther set up will be taken. The environmental category and requirements for APL2 and 3 will be re-assessed during the appraisal of both subsequent phases. Sub-projects involving resettlement and squatter displacement will not be eligible for funding under the APL1. If any resettlements will be required in APL2 and/or APL 3, they would follow the Resettlement Policy Framework (RPF) and guidelines for the preparation of resettlement action plans developed during preparation. Appropriate measures for squatter compensation have been agreed upon with the Borrower and are included in the RPF (available in the project files). F. Sustainability and Risks 1. Sustainability: The benefits of the Program are expected to be sustainable due to the strong emphasis on sequencing of reforms, capacity building and institutional development. There is also clear commitment by important stakeholders at the national and local government levels and considerable participation of communities in the design of the Project at all stages. The housing sector reform will reduce the budgetary burden of the government following the streamlining of housing subsidies (Annex 1 b) and as the private sector plays a greater role in housing supply

28 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk From Outputs to Objective - Lack of sustained commitment to financial sector reforms. - Lack of sustained commitment to housing sector reforms and slow decision making process. - Different approaches within GO1 to urban upgrading. From Components to Outputs - Capacity of participating municipalities to implement the program and coordinate the various organizations operating at city level. - Capacity of MHUD to coordinate the Project at the national (with MOI, CBI, MPO) and the local levels (municipalities, provinces, service agencies). I - Incompatible GO1 and Bank procurement procedures. Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Ri: Risk Rating I Risk Mitigation Measure S - Continuing dialogue with Bank and IMF on financial sector reforms. S - Housing reforms are set as triggers for APL2 and APL3. N H S S - Formalization of a national upgrading policy developed through a participatory process. - Technical assistance and contract staff will be provided to strengthen capacities. - Executive Upgrading Committees already established at the provincial level have so far contributed to a better coordination. - Inter-ministerial Steering Committee already active at the national level headed by MOI. Executive Upgrading Committee at the local level headed by Provincial Deputy Governor. - Commitment from MHUD and MPO to appoint qualified staff at adequate compensation to manage the Project. - Funds provided under the Project for the training of Project management staff. - This issue is currently being addressed by the Bank with the government. During the interim period and until the agreement is reached with the GOI, satisfactory procurement arrangements have been agreed (Annex 6a). S, M (Modest Risk), N(Negligib1e or Low Risk) 3. Possible Controversial Aspects: NIA. G. Main Loan Conditions 1. Effectiveness Condition None

29 /*-I ~- 2. Other [classify according to covenant types used in the Legal Agreements.] Board conditions Nominate a qtialifiedjinancia1 ofleer at the MHUD in Tehran (met). Dated covenants Technical Unit A and Technical Unit B to be established not later than July 31, 2004 to assist the PMU (Section E. 4.). Financial covenants None. H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Kl 1. b) Not applicable The procurement documents for the first year's activities are complete and ready for the start of project implementation. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality The following items are lacking and are discussed under loan conditions (Section G): The procurement documentation for ICB has been agreed. Documentation for NCB shall be prepared and submitted to the Bank for its approval by the end of June I. Compliance with Bank Policies ixi 1. This project complies with all applicable Bank policies The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. 4. #Atnwd- ' A " Sateh Chafic El-Amaout Emmanuel Forestier Joseph P. Saba Team Leader Sector Director Country ManagerlDirector

30 Annex 1: Project Design Summary ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Key Performance Data Collection Strategy Hierarchy of Objectives Sector-related CAS Goal: Support for reforms and xonomic management, the social protection agenda and nanagement of environment md natural resources as iefmed in the Interim CAS. sector Indicators: 3reat role of the market in :he housing sector and -educed vulnerability due to lousing conditions (housing iffordability, security of :enure, and access to services). jectorl country reports: Jousing survey, Household )urvey, Poverty reports, ghlo (National Housing md Land Organization) eports. Critical Assumptions from Goal to Bank Mission) mproving housing :onditions is an important :lement in reducing overall rulnerability, and hence )overty. Jrogram Purpose: Facilitate the transition to a narket led housing sector while improving living :onditions for low and noderate income iouseholds in Iran. Snd-of-Program Indicators: House price to income ratio: 4.5 (base line: - Tehran: Esfahan: Shiraz: Mashad: Tabriz: 5 - Ahvaz:4.8) 'rogram reports: CR, PAD for the APL 2, dhud reports, CBI eports, Social Assessment, 3eneficiary Impact lssessments. from Purpose to Goal) lccess to affordable and iecure housing is central to 3overnment's social irotection agenda in Iran. Percentage of insecure settlements: less than 1C percent (base line: 25%) Housing credit/gdp: 9 percent (base line: 2.8%) 0 Demand-side housing subsidies: at least 30 percent of the total budgeted housing subsidies. (baseline: 0% of budgeted housing subsidies.) 4PL1 (5 years):. Institute an integrated tpproach to upgrading nformal settlements;. Lay the foundation :systems, capacity, jpecific triggers for APL! and 3 are indicated in innex lb. Xegulatory and macro :nvironment is ready for a narket-based housing sector. rhere is a political support

31 framework) for and initiate housing sector reforms. APL2 (4 vears): - Up-scaling urban upgrading to the national level. - Launching housing sector reforms with a focus on deepening the housing finance sector and streamlining the subsidies system. APL3 (3 vears): - Increase the amount of long-term resources for housing finance channeled through the financial markets. - Address the more complex problems of the revitalization of run down historic city centers and the preservation of historic sites and cultural heritage. - Build local government capacity in urban management in a decentralized context. to reforms. The decentralization process has evolved so as to allow land use decisions and municipal management /investment decisions to be made at the local level

32 'roject Development )bjective: ipl 1:. Improve living onditions in under serviced ieighborhoods in up to 5 irovincial capital cities. Key Performance Indicators P Outcome I Impact Indicators: 1.1. Increase in service coverage and improved access to basic infrastructure services in upgraded settlements. Baseline: to be established by a survey of targeted settlements. 'roject reports:..l. Surveys of targeted iettlements, Project )regress reports, Social issessment, Beneficiary mpact Assessments. Critical Assumptions from Objective to Purpose). 1. Sustained commitment o alleviate poverty and mprove living conditions of he population on part of 301 and provincial ;overnments Increase in the level of satisfaction of households in upgraded settlements with their living conditions. Baseline: to be established by a survey of households in the targeted settlements. I.2. Surveys of households n targeted settlements, 'roject progress reports, social assessment, 3eneficiary Impact Issessments...2. Timely enactment and nforcement of the law on lecentralization and ;ovemance Improved municipal capacity to plan development, coordinate investments and community initiatives in participating municipalities Capacity assessment of iarticipating municipalities, 3eneficiary Impact \ssessments, Project irogress reports.!. Prepare the systems, :apacity and regulatory oundation for and initiate narket based housing sector eforms Public land in jurisdictions of participating municipalities allocated in a transparent manner and in response to demand in participating areas Established system for introducing demand side housing subsidies Reduced liquidity risk associated with loan linked housing savings schemes - maintained positive net treasury position Increased efficiency of primary housing finance markets with active participation of the private banks as demonstrated by mortgage loans issued by at least 6 banks, 3 of which?. 1. MHUD documentation, 'roject progress reports, MTR and ICR Project progress -eports, MTR and ICR and 2.4. CBI reports,?roject progress reports, MTR and ICR. 1. Continuous Government :o"itment to reforming :he housing sector

33 are private. Output from each Component: Component A. Urban Upgrading 1. Studies for the preparation of community enabling and urban & institutional upgrading programs. Output Indicators: 1. Prepared studies for the preparation of community enabling and urban & institutional upgrading programs. 'roject reports:.. Study reports, Project )regress reports. 'from Outputs to Objective) 1. Studies identify aspects :hat are important for :ffective community :nabling and urban and.nstitutional upgrading?rograms in targeted areas. 2. Urban upgrading in participating municipalities. 2. Actual upgrading investments carried out per tender documents in poor neighborhoods such as rehabilitation and upgrading of preschool, school and health facilities, roads, sidewalks, drainage and street lighting, public markets, community and cultural centers, improvements of water and sewerage services and other.!. Project Progress reports, VITR, ICR, Social Issessments, Beneficiary mpact Assessments. 2. Adequate capacity of?articipating municipalities :o implement the program md coordinate the various xganizations operating at :ity level. 3. Institutional building in participating municipalities. 4. Community enabling in participating municipalities Completed CDS with broad participation in at least 3 participating cities Number of municipal employees trained. 4. Pilot community led projects completed, documented and disseminated in the participating municipalities. I. Same as above. 1. Same as above. 3. Continued commitment tc Decentralization Timely mobilization of social intermediation Continuing commitmen to decentralization. 5. Prepared pipeline of enabling and upgrading sub-projects for APL 2, if any. 5. Prepared feasibility studies for sub-projects to 3e implemented during 4PL2, if any. i. Same as above. 5. Continuing commitment to enabling and upgrading

34 Component B. Housing Sector Reform Housing and land management: 1. Revised building codes and standards for housing construction that address earthquake and affordability concerns. 2. Introduced system for market responsive supply of public land. I. Formally adopted revised building codes and standards. 2. Established and operating transparent system for releasing public land systematically and in response to market demand for urban expansion in participating cities. 1. Adopted revised legal locuments. 2. Documentation by MHUD of all public land leveloped within municipal ioundary or future levelopment zone, with narket analysis justifying he timing, size and.ocation... Revised building codes will improve safety against :arthquake.!. Land management system will provide information and ncentives to policy makers.espond to market demand. Housing finance: 3. Completed reform of the existing loan linked housing savings products to reduce liquidity risk and future state contingent liabilities. 3. Adopted necessary framework and developed asset-liability management model for assessing and monitoring liquidity risk and contingent liabilities of existing housing savings products (Bank Maskan). 3. Documents, reports irepared by CBI based on he computer models and mditor opinions. 3. CBI will effectively use he developed system and nodels for assessing iquidity risk and jupervising its management 3y banking institutions. 4. Establishing the basis for fair competition for housing finance operations for all banking institutions. Housing subsidies: 5. Established system for monitoring and evaluating housing subsidies - costs, efficiency, transparency and their impact. 4. Eliminated the preferential regulatory treatment for the Bank Maskan for all market based transactions. 5. Established information system and data on housing subsidies collected on a regular basis and reports are produced and publicly disseminated annually. 1. Reports prepared by ZBI, Quarterly reports, PSRs, MTR, ICR. 5. Yearly public reports by :he NLHO outlining costs, : fficiency, transparency anc impact of the subsidy system. 1. Overall environment will 3e conducive for the levelopment of private 2anks. 5. Subsidy tracking system will reveal deficiencies in :xisting framework and will De used by the policy makers to address them. 6. Development instruments for demand side housing 5. Formally approved nstruments for demand side i. Adopted legal documents. i. The designed subsidy nstruments will improve

35 " subsidies that are explicit, transparent and well targeted. Housing information: 7. Established effective system for monitoring national housing markets available to policy makers and investors. [Component c. Project anagement and Technical Assistance. 1. Support to the 1. establishment of the PMU, TUA and TUB. 2. Technical Assistance. lhousing subsidies. 7. System for collecting data and monitoring national housing and land markets operational. PMU, TUA and TUB established, and fully staffed and equipped. 2. National and intemational consultants hired to provide technical support to the PMU, TUA and TUB. housing affordability for low income households.. Actual reports On national 7. Housing information ousing and land markets system will result in better ~~duced and Publicly decision making by policy LsseminatedbY the NHLo makers and investors. Supervision missions. Supervision missions and :ocurement plan. I

36 'roject Components I iu b-components: - URBAN UPGRADING :- HOUSING SECTOR LEFORM 8- PROJECT danagement & 'ECHNICAL ASSISTANCE Inputs: (budget for each component) US$89.62 million US$3.0 million US$ 2.0 million )reject reports: 'roject progress reports, 'SRs, MTR, ICR, Social lssessments, Beneficiary mpact Assessments. - Critical Assumptions [from Components to Outputs) Adequate capacity of MHUD to coordinate the Project. Counterpart funds are mobilized in a timely manner. Staff of implementing agencies hired in a timely manner and is well-trained in Bank procurement and disbursement procedures. 1- NON-ALLOCATED US$4.58 million MHUD, MPO, and CBI coordinate studies effectively

37 Annex lb: Triggers for APL2 and APL3 ISLAMIC REPUBLIC OF IRAN - Urban Upgrading and Housing Reform I Policy Area COMPONENT A 1. Unified national urban upgrading policy and instruments COMPONENT B 2. Housing and land management I 3. Developing primary housing finance market 4. Establishing the necessary market information system and streamlining housing subsidies Triggers for APL2 (year 5) Trigger (a) Established an integrated urban upgrading budget at national level. (a) Established transparent system for releasing public land systematically and in response to market demand in place for urban expansion in at least 3 participating cities. (a) Established basis for fair competition for commercial housing finance operations for all banking institutions in terms of legal, regulatory and subsidy framework. (b) Established regulation and supervision of new and/or restructured housing savings products. (a) Established public information system for land and housing markets, including housing subsidies. (b) Adopted direct, well targeted and explicitly budgeted demand side housing subsidv instruments. Indicator (a) upgrading sub-chapter established under the Urban Development Chapter of the Budget. (a) Documentation by MHUD on all public land developed within the municipal boundary or future development zone of the participating cities as per results of market analysis that justifies the timing, size and location. (a) Removed the preferential treatment for the Bank Maskan as per results of relevant studies under Phase I carried out by international experts. (b) Promulgated regulation for new and/or restructured housing savings scheme and assigned supervision cadacitv. (a) Yearly public reports by the Govemmenl outlining cost, efficiency, and social impact of current housing subsidy system. (b) Adopted legal documents for introductioi of demand side housing subsidies

38 Policv Area 1. Housing and land management 2. Developing primary housing finance market 3. Streamlining housing subsidies Triggers for APL3 (year 9) Trigger (a) City Development Strategies (CDS) completed with broad participation and incorporated in master plans of participating cities. (b) Established an operating system for releasing public land systematically and in response to market demand for urban expansion in all provincial capital cities. (a) Unified mortgage market, including full range of products, market determined interest rates and expanded access to mortgage loans. I) Introduced direct demand side housing ubsidies that are targeted at low income ouseholds. Indicator (a) Letters of endorsement of the CDS results by the office of the Vice Minister of Urban Planning and Architecture and evidence of integration of CDS outputs into future master plans as reflected in respective TORS for the preparation of such master plans. (b) Documentation by MHUD of all public land developed within municipal boundary or future development zone of the participating cities as per results of market analysis that justifies the timing, size, and location. (a) Mortgage lenders charging rates reflecting cost of capital and operations and housing finance subsidies, if any, are explicitly budgeted by the government. (b) Portfolio of mortgage loans issued by non-specialized commercial banks increased by 50% from its level at the beginning of APL 1, if the average annual inflation during the period rate is below 10 YO. (c) The national average loan-to-value ratio for new housing loans reaches at least 50 YO. (a) Demand side housing subsidies represent at last 30% of the total budgeted housing subsidies. (b) Yearly housing subsidy reports generated by NLHO on the new housing subsidies and evaluation of their impact on low income households and market

39 Annex 2: Detailed Project Description ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project The Urban Upgrading and Housing Reform Program aims at supporting the Government s effort in the housing sector in (a) providing secure affordable housing to low to moderate income households; and (b) further developing the market institutions of the housing sector (finance, construction, real estate). The Program objectives will be achieved through a three-phase Adaptable Program Lending over a period of twelve years. The Program would address the issues identified in the strategic context of the main PAD. APL2 and APL3 will be triggered by meeting specific milestones (triggers). These triggers have been selected from the list of triggers suggested in the Housing Strategy action plans. APLl is divided into three main components that focus on: (i) urban upgrading, community enabling and capacity building, (ii) institutional development and capacity building for Housing sector reforms and, (iii) Project management. By Component: Project Component A: Urban Upgrading - US$90.00 million This Component lays the foundations for launching and sustaining country-wide urban upgrading programs in Iran. The Program will be implemented in pre-identified cities and neighborhoods that meet specific criteria in terms of income and level of services. The city of Zahedan, the capital of Sistan-Balushetan, the province having the worst housing and employment conditions, has been identified as the first city with four categories of neighborhoods for upgrading. An operating model will be developed in Zahedan for adaptation and generalization to other cities. Participating cities will be selected by the Inter-ministerial Steering Committee among the 28 provincial capitals based on their housing and employment conditions and readiness criteria such as: (i) adopting the government s national upgrading strategy; (ii) agreeing to the technical assistance and capacity building program, (iii) prepare a demand driven city upgrading and enabling program through a participatory and inclusive process, and; (iv) agreeing to sign a performance contract specifling the commitments and obligations of the State, the Municipality, participating communities, and relevant organizations operating at city level. The Table below provides a classification of the provincial capitals in terms of quality of housing and employment. Participating cities under APLl are likely to be cities in the lower right side of the table

40 I I I 0 Y N T C 0 N D. I Housing conditions Best condition I Proper I Acceptable condition I Improper - - condition I Critical I Teheran Markazi 1 Yazd I condition 1 1 condition I Harmadan Isfahan Semnan Khorasan I Ghom Bakhtiyan Azarbayjan Gharbi Ardabil I Azarbaydjan Sharghi I Oazvin I Fars I ZanianMazandaran I Golestan I Kurdistan Booshehr Khoozeztan Gilan Kohgilooye va booyer Worst Hormozogan Lorestan Eelam Kermanshahan Sistan va I I I The regions are classified according to a relative standard score showing how different the performance of the region is compared to the average performance of all regions. The four indicators used are household density, percentage of durable housing, average housing production in the last five years, and the ratio of housing stock growth rate to family growth rate. Source: Rafiei, Minoo, Housing, Employment and Sustainable Development, October 2001 Component-A will consist of four sub-components that address the implementation of APLl and the preparation of APL2: Sub-Component-Al: Design and supervision of upgrading programs in APLl cities involving the financing of city development strategies, feasibility and design studies for the upgrading programs including environmental and social assessments. Sub-Component-A2: Implementation of upgrading programs in APLl cities through: (a) Phvsical Upgrading Programs which consist of: (i) improving access to basic education, health and social services through the rehabilitation and service upgrading of preschool, schools and health facilities in poor neighborhoods; (ii) the rehabilitation and construction of: roads, sidewalks, drainage and street lighting; (iii) provision of small community water tanks and limited extension of water and sewerage infrastructure within existing public rights of way and approved land use plans; (iii) public markets, community centers, youth, cultural, recreation centers, childcare facilities and playgrounds for children. There will be no land expropriation or involuntary resettlement within this component and for the latter type of projects, securing the proper management and the sustainability of the built facilities would be a prerequisite for project financing. (a) Communitv Enabling Programs will focus on mobilizing communities, municipalities, CBOs and NGOs and in building their capacities to participate in urban upgrading, community development and poverty programs. This involves managing small socio-economic programs at settlement level and creating lasting partnerships with local governments. This component will build on the wealth of local initiatives, social networks and spontaneous mutual support systems

41 that exist in the major cities of Iran. It will aim at improving access to specialized social services and on satisfying the needs of vulnerable groups such as the disabled, children, youth, women head of households and elderly at risk. Two key activities are identified under this component: These will be identified, designed and implemented by local NGOs, CBOs, PVOs, national and international universities and municipalities with close participation of the local beneficiary communities and local governments. They include: (i) Participatov implementation of socio-economic programs in the informal settlements of participating cities. This will be implemented through joint ventures of international and national NGOs, CBOs and municipalities which will be recruited competitively according to World Bank procedures. Activities will involve the design and implementation of demand-driven programs that include among others: training of trainers for adult literacy and post-literacy ; revolving school textbooks, primary health care; campaigns against drug addiction, urban violence and safe neighborhoods, social networks for working mothers, clean neighborhood campaigns, educational and integration support for children with learning difficulties; public health awareness campaigns; handicraft training; vocational and skill training for self-employment; promotion of mutual support groups; small businesses and IT training; micro-credit training, etc.). (ii) Capacity building program in community enabling for NGOs, CBOs and participating Municipalities. Particular attention will be paid to institutionalize the mechanisms for community participation in urban upgrading and in socio-economic development programs in informal settlements and at the city level. (c) Municipal Cauaciv Building Programs involving the provision of technical assistance and institutional strengthening to participating municipalities aiming at strengthening the role of municipalities to plan and implement physical upgrading and community enabling programs. Based on information gathered during the field visits and after discussions with the Municipalities Organization at the MOI, this sub-component will focus on the following areas: (i) Urban management, to prepare municipalities to operate in the context of decentralized urban, land and housing management through: (i) TA, training and equipment to strengthen land management and urban planning capacities. Building capacity in this area of urban management will be particularly relevant also to the upcoming CDS strategic planning process; (ii) TA and training to strengthen the municipality s role in participatory urban planning, investment planning, coordination of community initiatives and integrated urban development. (ii) Financial management, to improve fiscal management and to strengthen capital and recurrent budgeting and revenue collection. This will consist of TA, training and equipment to improve revenue collection, with a focus on incorporating newly regularized neighborhoods in the municipal revenue base, improving cost recovery of infrastructure and improving returns on municipal assets with a high potential for revenue generation

42 Sub-ComponenGA3: Design of upgrading programs in APL2 cities involving the financing of feasibility studies for the upgrading programs in five (5) provincial capital cities including environmental and social assessments in the participating cities. Sub-Component-A4: Design of upgrading financing arrangements for APL2 and APL3 involving supporting the MHUD, the MOI and the MPO establish a sustainable financing mechanism for urban upgrading in Iran. This will be achieved through added exposure of Iranian policy-makers to best international practices in the financing of urban upgrading. This sub-component will involve the use of local and international experts and the scheduling of training courses and study tours. Project Component B: Housing Sector Reform - US$3.00 million Component-B aims at enhancing housing affordability and the efficient functioning of the housing market. It will consist of foreign and local technical assistance, training and equipment for further defining and implementing the priority actions identified in the Housing Sector Strategy and the ensuing Action Plan. These priority actions can be grouped into four areas of focus: land markets, housing finance, housing subsidies, and housing information. The specific activities comprised in each area summarized below: Sub-component B-1: Housing and Land Management - This sub-component aims to develop the methodology, systems, procedures, and institutional design for monitoring land market activity at the city level and, estimating demand for land and triggering a supply response through rezoning, changing density, or supply of new land for development. Sub-component B-2: Housing finance - Provision of technical assistance, equipment, training and fimding for studies to the Central Bank of Iran (CBI) andor the Ministry of Finance and Economic Affairs to strengthen their capacities to: (i) analyze and manage the liquidity risks inherent to the various Savings Funds for Housing, (ii) manage the transition to liberalized mortgage credit, improve capacities to monitor and insure the safety and soundness of increasing number of banks participating in housing finance, expand housing finance services (iii) create, sustain and strengthen capital market capacity to provide access to suitable long term financing for housing, and (iv) develop funding mechanisms for low income housing such as micro-finance instruments. In addition, technical assistance, training and funding for studies would be provided to prepare Bank Maskan to operate in the context of liberalized financial market with particular attention to streamlining operations, lowering the spreads and improving its capacity to evaluate and manage risks. Sub-component B-3: Housing subsidies - Technical assistance to MHUD and studies for reforming the housing subsidy system towards a more direct, targeted, and unified system and the creation of a more manageable monitoring, and implementation mechanism. Sub-component B-4: Housing Information - Technical assistance to streamline the housing information system and reduce the fragmentation of databases and output formats

43 Project Component C: Project Management and Technical Assistance - US$ 2.00 million This Component will finance: (i) the cost of office and ICT equipment that are required for Project management and implementation and; (ii) the cost of technical assistance for Project management and implementation that includes the hiring of individual consultants and consulting firms consultants in areas such as Project management, Project monitoring and evaluation including the documentation of the Project experience, study tours and training to key policy-makers, financial management and procurement

44 ~ Annex 2b: Sub-project Eligibility and Design Criteria ISLAMIC REPUBLIC OF IRAN - Urban Upgrading and Housing Reform I All sub-projects to be financed out of the Project s proceeds shall fulfill the following criteria: (a) The sub-project is given high priority in the capital expenditure program of the municipality by major stakeholders in a participatory manner; or is part of an integrated upgrading program for a specific neighborhood. (b) The sub-proj ect supports water supply, power, roads, transport, area development, education, health and other remunerative and non-remunerative urban infrastructure contributing to the improvement of the living standard of the urban populations; (c) The sub-project is cost effective and adopts an appropriate and most cost effective technology in accordance with the applicable technical noms and specifications in Iran; Cost effectiveness will be determined based on the comparison of the specific household s costs relative to its income with a predetermined hurdle ratio. The hurdle ratio will be established based on the average cost per family in each city, but no more than 10% of average household income. (d) The economic rate of retum for project is at least the opportunity cost of capital in Iran, for projects with quantifiable benefits (ERR calculation is not required for the projects less than us$loo,ooo); (e) The sub-project supports or serves key commercial areas to facilitate business linkages; (f) The sub-project is on government-owned land and do not require land acquisition or expropriation; (g) The sub-project will either have no environmental impact or limited impact for which all the necessary preventive measures are envisaged; (h) The sub-project can be completed without resettlement of economic activities or inhabitants residing in the project area; and (i) The sub-project has a clear plan for sustainable management, maintenance, and operation. The rehabilitation or construction of service facilities such as health, cultural, community centers, and schools should ensure adequate provision of these services. In addition, sector-specific eligibility and design criteria (see table below) will have to be complied with during the selection of the investment program. Projects Schools Health Centers General Eligibility & Design Criteria. Evidence confirming ownership of the project site by the Government;. Adequate water supply and sanitation facilities;. Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the Ministry of Education;. Evidence confirming ownership of the project site by the Government;. Adequate water supply and sanitation facilities; Specific Eligibility & Design Criteria. Adequate access roads and street lighting provided to the school;. Off-site solid waste storage/ garbage collection facilities provided;. Evidence confirming that the estimated 0 & M costs will be met by the Ministry of Education;. Satisfactory justification for the location of the proposed school within the neighborhood and ease of access to girls;. Adequate access roads and street lighting to the health center entrances;. On-site medical solid waste storage facilities and

45 Parks & Green Spaces Roads and Streets Public Markets Communi0 Centers. Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the Ministry of Health;. Other authorizations and approvals including the written approval of the Ministry of Health;. Evidence confirming ownership of the project site by the Government or municipality;. Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the municipality;. Other authorizations and approvals including the written approval of the municipality;. Evidence confirming the availability of land for extension of street;. No resettlement of economic activities or inhabitants;. Existing Infrastructure and the municipality and Government plans taken into consideration;. Other authorizations and approvals including the written approval of the municipality and related agencies (Water and Sewage, etc.);. Evidence confirming ownership of the project site by the Government or municipality;, Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the municipality;. Adequate water supply, sanitation facilities, drainage and provisions for public hygiene;. Other authorizations and approvals including the written approval of the municipality and related agencies (Ministq of Health);. Evidence confirming ownership of the project site by the Government or municipality;. Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the municipality. Adequate water supply, sanitation facilities, separate garbage collection ensured;. Evidence confirming that the 0 & M costs will be met by the Ministry of Health;. Satisfactory justification for the location of the proposed school within the neighborhood and ease of access for the community especially the disabled;. Reliable supply of water for Irrigation;. Appropriate choice of vegetation and landscaping;, Easy Access through improved access roads and lighting;. Toilet Facilities to be provided with appropriate design; Water supply, drainage and maintenance;. Neighborhood Associations to be formed to share responsibility for maintenance;. Evidence confirming that the 0 & M costs will be met by the municipality;. Existing unpaved streets with a more significant role in access and trafic are prioritized;. Provide clear economic and traffic justification;. Roads used by the largest number of direct and indirect beneficiaries are prioritized;. Adequate access roads and street lighting provided:. On-site solid waste storage/ garbage collection facilities provided;. Traders Association formed to manage and maintain the market;. Evidence confirming that the estimated 0 & M costs will be met by an municipality andor Traders Association;. Satisfactory justification for the location within the neighborhood and ease of access by community especially the disabled;. Ensuring that no meat is sold in the market as per environmental and health regulations;. Adequate access roads and street lighting provided. Solid waste storage/ garbage collection facilities provided;. Institutional arrangement for management and maintenance should be clarified;. Evidence confirming that the estimated 0 & M costs will be met by an municipality community and/or local council;

46 Water Sports Centers drainage and provisions for public hygiene, Other authorizations and approvals including the written approval of the municipality, Water master plan for the city should be completed and approved;, Existing Infrastructure and the municipality and Government plans should be taken into consideration;, Other authorizations and approvals including the written approval of the municipality and related agencies (Water and Sewage, etc.);. Evidence confirming ownership of the project site by the Government or municipality;. Participatory design with the community taking into account the environmental, public hygiene and public safety issues;. Other authorizations and approvals including the written approval of the municipality;. Other authorizations and approvals including the written approval of the municipality.. Satisfactory justification for the location within the neighborhood and ease of access by community especially the disabled;. Satisfactory justification for the location within the neighborhood and ease of access by the largest number of population especially the disabled;. Use of appropriate technology and adequate specifications for water tanks operation and maintenance;. Prior agreement with the water company on design specifications including water quality and quantity;. Water testing program agreed upon with the water company;. Easy Access through improved access roads and lighting;. Toilet Facilities to be provided with appropriate design water supply, drainage and maintenance;. Neighborhood Associations to be formed to share the responsibility for maintenance;. Evidence confirming that the 0 & M costs will be met by the municipality

47 Annex 3: Estimated Project Costs ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Project Cost By Component ~ Component A- 1 Component A-2 Component A-3 Component A-4 Component B-1 Component B-2 Component B-3 Component B-4 Component C Non-allocated Total Baseline Cost Physical Contingencies Price Contingencies 1 Total Project Costs Front-end fee Local Foreinn US $million Total Financing Required I I Goods Works Services Non-allocated Project Cost By Category 1 Total Project Costs Front-end fee Total Financing Required Local US $million Foreign US $million Total US $million Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 100 (USSm). Therefore, the project cost sharing ratio is 80% of total project cost net of taxes

48 Annex 4: Cost Benefit Analysis Summary ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Summary of Benefits and Costs: Benefits from the urban upgrading component are expected to improve the quality of life to about 3.5 million of the poorest residents of Iran (living in underserved areas of 3-5 cities) in the following ways: (i) improved access to and security in the areas; (ii) improved water and ultimately improved heath conditions and reduction of morbidity rates; (iii) increased access to recreational activities which will bring social benefits; (iv) increases in social capital by involving community groups in the planning and execution of the Project; (v) easier access to public services and other benefits arising from property ownership and registration; (vi) improved institutional capacity to address planning and shelter needs and (vii) short-term employment since labor (mainly unskilled) will account for a significant percentage of total sub-project costs. Economic Benefits from Community Development and Local Government Capacity Building The most important benefits of the upgrading component in terms of community development and local government capacity are: (i) the empowerment of communities and establishment of a partnership between communities and local governments; (ii) more efficient and effective public investments that systematically respond to aggregated community demand; (iii) increased community ownership of services delivery; (iv) improved municipal financial management and capacity to operate and maintain infrastructure investments; and (v) increased municipal revenue base. The empowerment of communities and establishment of a partnership between communities and local governments (LGs) lays the basis for more participatory development planning and more demand responsive local services leading to more effective public investments. Top-down, supply-driven service provision often result in an ineffective use of public resources due to over-supply of services that people do not want and under-supply of services that people really want. In addition, it would contribute to establishing greater accountability of local governments towards local communities (i.e. better governance). The Project will also require initiation of collection of contributions from the communities that would contribute to building resilient community organizations capable to prioritize their needs and demands. Thus, also the local governments would be able to develop more efficient and focused plans to address the specific concerns at a city level. Also, experience has demonstrated that public investment in urban services that have involved communities in design and delivery of services are more efficient. Services delivered in this fashion are not only able to multiply every dollar invested by community contributions, but are also more sustainable. Community participation increases beneficiary ownership and provides incentives for adequate management and maintenance of the infrastructure. In Iran maintenance of even primary infrastructure in underserved communities is minimal at best. As a result premature failure of infrastructure is widespread. As sustainable infrastructure, in relative terms, is highly effective public investments, the economic benefits accrued through community involvement generally have higher economic

49 benefit than services provided in a traditional way. The specific investments and their respective economic benefits are discussed below. Cost and Economic Benefits from Upgrading Informal Settlements In general terms, proven economic viability of each sub-project, in the form of a positive NPV and an ERR equal or above the appropriate opportunity cost of capital, will have to be established prior to committing any funding from the Project. To ensure that the proposed investments do not artificially support one another in terms of the economic retums, and to establish cost-effective investment parameters, the economic analysis will be conducted for each sector investment separately, if feasible. For ease during implementation, a set of criteria have been developed to help during the evaluation of individual investments. Sub-projects will have to satisfy the following criteria: (a) it is given high priority in the municipality's capital expenditure program prepared in a participatory manner; (b) it supports water supply, power, roads, transport, area development, and other remunerative and non-remunerative urban infrastructure contributing to the improvement of the living standard of the urban populations; (c) the Affordability Indicator (AI; the methodology for calculating AI is discussed below) for the sub-project does not exceed the established hurdle rate (also discussed below). (d) sub-projects of US$ 100,000 or more shall have positive Net Benefits Indicator (NBI; the methodology to be used for calculating NBI is discussed below). Should the indicator be negative, additional qualitative analysis will be carried out. The NBI requirement will not be applied to sub-projects with non-quantifiable benefits or those costing less than US$lOO,OOO. In the case of competing investments (i.e. when several schools are being considered in the same city / neighborhood), the investment to be considered for funding first would be that with the highest NBI and the lowest AI. The Project Team will review on a no-objection basis all sub-projects with total costs of US$ 200,000 and above and a sample of sub-projects below this threshold at its discretion. This procedure will be reviewed as needed to ensure adequate quality of the investment analysis. Methodology The net incremental economic costs and benefits of the proposed sub-projects will be assessed by constructing "with" and "without" sub-project scenarios. The cash flows will be discounted using the appropriate opportunity cost of capital in Iran. The analysis will include calculation of the Net Present Value (NPV) and the Economic Rate of Return (ERR) for each area / neighborhood to be upgraded. Finally, sensitivity analyses by testing a number of scenarios will be conducted to assess the impact of changes in critical assumptions on the economic viability of the sub-project. The base year will be 2003 and all amounts used in the models will be in 2003 currency (IRR or USD). The period of analysis will be at least 10 years after each investment becomes operational, preferably 20 years which is assumed to be the usefbl life of the sub-project and does not include re-investments during this period. Data used for sub-project analysis must be actual in the specific city where the proposed -43-

50 investment will be undertaken and should be obtained from socio-economic indicators, surveys, interviews, focus groups, or actual on-site observations. Willingness to pay surveys should be undertaken when necessary. Estimating Economic costs and benefits. For estimating economic costs and benefits economic prices will be used, i.e. financial prices adjusted for the impact of taxes, implicit taxes, subsidies and extemalities, mainly on material and labor costs. Alternatively, economic costs will be estimated by applying the standard conversion factors: for the financial prices, for skilled labor and for unskilled labor. In this case taxes will be eliminated from the financial prices. For the purposes of estimating economic costs all costs associated with the proposed investment shall be considered, including: - capital costs (including designing, planning and engineering costs, construction costs, etc.), - operating and maintenance costs (O&M) - contingencies and complementary actions necessary to achieve the expected benefits - for physical contingencies during the construction stage a ratio of 15% of the estimated construction costs will be used. Specific adjustments will be made to deduct implicit taxes in material and labor costs and from investment and O&M costs. Standard conversion factors for skilled and unskilled labor, and national inputs will be estimated. Once all financial costs are converted into economic costs, incremental costs will be calculated based in the comparison of the "with" and "without" sub-project scenarios. No residual value will be included in the analysis. A factor of 10.5% will be applied to total investment costs to capture the costs of program administration, community outreach and related contingencies. For the purposes of estimating economic benefits calculation of some upgrading benefits may require direct measurement techniques based on potential expenditures saved (e.g. savings relative to replacement costs) or willingness to pay (i.e. contingent valuation methods) by the beneficiaries for the new improved services (more details on assessing the willingness to pay are discussed below). The methodology to be used depends on whether or not the neighborhood currently has or not access to the service. For facilities in neighborhoods with existing services, the benefits from the upgrading initiative will be established based on the direct use benefits (e.g. measured by the tariffs charged to customers) and the opportunity cost of not having access to these services (e.g. time savings, health benefits in the form of increased water consumption, productivity benefits and/or other benefits that apply in the Iranian context). For facilities in neighborhoods with very limited or nonexistent services, direct-use benefits method cannot be applied. Therefore, contingent valuation techniques will be used instead and demand curves and consumer surplus reflecting all benefits arising form the rehabilitation estimated. The table below presents an indicative list of specific types of analyses to be carried out. -44-

51 ~ Upgrading Power networks and street lighting Strengthening o f water supply services by providing stand-alone pipes or cistern tanks with chlorinated water to fill a local reservoir Rehabilitation of access roads, side walks, and drainage Rehabilitation or construction of public and civic buildings (schools, clinics, recreational or cultural community centers) Estimating Economic Benefits of the Upgradin1 Benefits Comments Increased water availability Reduced cost of fetching water Reduced sickness Reduced dry season flow endangers the population s water supply Long distances to taps results in high opportunity costs Poor water quality results in loss of earnings and increased medical costs Travel expenditure to reach a recreational site indicates its value to societv Component Valuation Method Willingness to pay (Contingent valuation) Potential expenditures (Replacement Cost) Surrogate market values (Time-saving analysis) Loss of earnings. Medical costs. Willingness to pay (Contingent valuation) Willingness to pay (Contingent valuation) Surrogate market values (Travel cost) In the case o f investments where it is not possible to make cost-benefit calculations, as is the case with land titling, a set of guidelines will be prepared and used during Project implementation to evaluate the economic feasibility of these investments. In addition, cost-effectiveness factors will be established for each of the components to verify that total investment costs on a per-capita basis is effective. The Affordability Indicator (AI): the cost of investment per beneficiary household as a share of the beneficiary household income. AI will be used to determine a reasonable magnitude of the investment costs. The AI hurdle rate will be set on the basis o f the average expenditures of the low-income households in each city and is expected to be around 10%

52 The Net Benefit Indicator (NBI): NBI is a type of cost benefit ratio and will be calculated on a per capita and per investment type basis. NBI is calculated by dividing the Net Present Value (NPV) of the investment by the number o f beneficiaries and the appropriate investment measure (e.g. km for roads, sq. m. for parks, cu. m. for water, etc.). The Economic Rate of Return (ERR): ERR is an Internal Rate of Return of the sub-project when NPV calculated based on economic prices equals zero. Sub-projects to be funded should yield an ERR equal to at least the appropriate opportunity cost o f capital. Specific Remarks on the Economic Evaluation of Specific Types of Investments The economic benefits for the different investments will be estimated using the following indicative menu of parameters: - community facilities - cost savings due to avoiding building new facilities in the hture; - preschools and primary schools - time savings for mothers; - secondary and high Schools - increase in income earned due to employment opportunity as a result of increased education; - health - income earned due to increased life expectancy; - roads, streets and drainage - savings in travel time and actual level of pedestrian and vehicular traffic; - markets - time saved in travel time; - water - increased and continuous access to water; - sewage - reduction in health costs due to water-borne diseases, contamination, or the like; - parks, sport fields, community centers - willingness to travel to the respective place; and other Road Infrastructure: Under this Project only investments in secondary roads, which include internal neighborhood access roads and pedestrian ways, will be eligible. Most of these roads have poor surface conditions, internal vehicular access is nearly absent and pedestrian access is limited due to density, difficult terrain and the absence of any investment in these areas. While no data are available on traffic patterns on these roads, they are predominantly on-site and local service roads and not major collector or trunk roads. Car ownership is low in these communities and public transportation operates only where roads are passable. The limited road access in the underserved areas impose significant transport costs in both time and money on the local residents. In addition, the restricted access greatly impedes public services in these areas, makes maintenance of infrastructure systems very difficult and severely limits the availability of emergency services such as fire, rescue and police. Indicative estimates elsewhere suggest that the construction of internal access roads and sidewalks result in 20% savings in travel time. The minimum acceptable level of internal access will result in a number of other benefits such as: (a) reduced costs associated with local cargo costs of household goods such as gas canisters and construction materials; (b) increased mobility of households and their connection with other areas of the city; (c) improved accessibility, and operations and maintenance of public services;

53 (d) accessibility of underserved areas by emergency vehicles such as fire, police and rescue; (e) improved productivity of the neighborhood by making commercial activities more attractive and prevalent in the underserved areas. Rehabilitated or New Public Buildings: For public and civic building, ERRS will be calculated by taking into account the incremental higher fees users are willing to pay for improved facilities, or by the costs saved by improving the existing facility rather than building a new one. In the case of recreational facilities, ERRS will measure the additional expenditure on travel the household is willing to incur to reach the facility. Assessment of the Willingness to Pay (AWP) The purpose of the AWP is to collect and analyze sufficient data to estimate what the potential beneficiaries would be willing to pay for the improved or new services. Based on the collected data on the beneficiary willingness to pay a demand curve and the consumer surplus reflecting all benefits arising form the rehabilitation will be estimated. In order to assess the willingness to pay a survey questionnaire shall includes the basic socio-economic characteristics of the target population, characteristics of water supply and/or sanitation or other services as applicable, and the willingness to pay for the new or improved services under different assumptions. The following are the main steps to be taken to carry out an AWP: (a) Designing sampling procedure. The sampling procedure should result in a representative sample comprising enough customers from different income groups, locations within the citylneighborhood, and distinguishing between customers with and without access to the current water network. (b) Pre-testing and, if necessary, adjusting the questionnaire. (c) Analyzing the socio-economic indicators and water and sanitation characteristics of the target population. (d) Analyzing the data from the willingness to pay survey and investigating the significance of various socio-economic and service specific (for example, water and sanitation) characteristics. This may be done in Probit or Logit regression models so as to quantify the willingness to pay for tariffs and the willingness to use standpipes and the like. Main Assumptions: NIA Sensitivity analysis / Switching values of critical items: For the purposes of the sensitivity analysis the variables conveying major risk to the sub-projects will be identified and the impact of these variables analyzed. This analysis will show whether or not the results of the economic analysis are robust for all cases analyzed. The following are some of the potential critical variables to be considered for sensitivity analysis: - two-year delay in sub-project implementation; - 10% increase in costs; - 10% decrease in revenues (for revenue-generating sub-projects only); and other

54 Annex 5: Financial Summary ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project 1. Summary of Financial Benefits Among the main benefits of the Project s upgrading component will be the strengthened financial management capacity of the participating municipalities, particularly, in managing larger investment budgets and financing of operating and maintenance costs of additional infrastructure projects. In addition, the appreciation in property/land values will lead to a significant improvement in own revenue generation, thereby increasing the sustainability of benefits attained under the Project. For example, the increased revenue base due to land titling and regularizing the currently informal settlements. The Project will test whether the community-based decision-making framework for the provision and delivery of services is an economically, financially and socially viable approach, provided that the infrastructure standards are appropriate and respond to budget constraints. From this derives another major financial benefit of the Project - replicability of such framework ultimately leading to improved quality of public expenditures for the provision of urban infrastructure services more broadly and beyond the Project. 2. Methodology for Financial Evaluation Proven financial viability of each sub-project will have to be provided prior to committing any funding under the Project. The financial evaluation will include the analysis of the available investment funding and ability of the municipality or the responsible agency to cover operating and maintenance expenses of the additional infrastructure sub-projects. Financial analysis will be required for investments in health, education and water & sewage and those that are under direct responsibility of the municipality such as roads, surface drainage, parks, community centers and markets. These investments would constitute by far the majority of works financed by the World Bank loan. The sub-projects will have to satisfy the following two requirements: (i) the municipality maintains a ratio of total expenditurehotal revenues (tax and regular non-tax revenue) below 1. As the municipalities fimd their O&M costs from the own revenues and no transfers are received form the central or provincial budgets for these costs, the ratio of total O&M costs (including the additional O&M costs originating from the new investments) to total own revenues will be calculated (excluding development fimding from central and provincial governments). For the investments to be considered for hnding, this ratio should be less than 1. Should the ratio be greater than 1, the municipality will provide evidence that either it has a feasible plan for increasing its revenues in the following year to bring this ratio below 1, or it will receive additional budget from the central or local government. When detailed O&M estimates are not possible to make, these costs for the proposed investments could be assessed using the following guidelines: e Roads - 3% of the accumulated investment costs; e Water supply and electricity - 4% of the investment costs; and e Schools, health centers and community centers - 2% of the investment costs

55 (ii) Fiscal impact of the proposed sub-project on the municipality's budget is negligible. Evidence must be provided that the share of capital expenditure of the sub-project'would be a small percentage (e.g. 455%) of the annual capital expenditure of the municipality or the responsible agency. This would ensure that the sub-project does not create excessive demands on reallocation of budgets. Cost recovery Revenue-Generating Sub-projects. For revenue-generating sub-projects, such as recreational or cultural public and civic buildings, user fees could be charged. For sub-projects in water supply, the present government policies regarding user fees and subsidy ceilings will be applied. The tariff for water will be calculated using the social tariff that is significantly lower than the long-run marginal cost of the system expansion prevalent in the area. The results of a qualitative survey in Zahedan suggest that there is willingness to pay for this service. Nevertheless, care must be exercised to ensure that household expenditures on the new or improved services are not excessive and should not exceed 5% of their monthly income with an absolute maximum of 10%. Non-revenue Earning Sub-Projects. Some sub-projects such as schools, health centers, street drainage and lighting, and rehabilitation of access roads have characteristics of public goods for which cost-recovery of O&M will not be possible through direct user charges. These will be recovered indirectly through taxes such as property tax. Should there be any resettlement involved in APL2, the associated costs will be assumed as social costs to be imputed to the state and indirectly to the general taxpayer. Operations and Maintenance (O&M) Assuming that the average participating municipality will receive a US$ 15 million grant and that the infrastructure under the mandated responsibility o f the municipality will be around 33% of the total investment, then the total O&M cost resulting from the investment will be US$ 150,000 per year based on an average annual O&M cost of 3%. This amount is very small relative to the annual budget of the participating municipalities and will be offset by the increase in municipal revenues resulting from the incorporation of the upgraded neighborhoods into the revenue base of the participating municipalities

56 Annex 6(A): Procurement Arrangements ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Procurement Procurement methods (Table A) Procurement for the proposed Project would be carried out in accordance with World Bank Guidelines: Procurement under IBRD Loans and IDA Credits, published in January 1995 (revised January/ August 1996, September 1997 and January 1999); and Guidelines: Selection and Employment of Consultants by World Bank Borrowers published in January 1997 (revised in September 1997, January 1999 and May 2002), and the provisions stipulated in the APL agreement. A General Procurement Notice of bidding opportunities and consultants contracts will be advertised in the UN Development Business before Project launching and updated annually for all outstanding procurement. Where National Competitive Bidding (NCB) will be carried out, the procedure must be acceptable to IBRD which would require: (i) explicit evaluation and award criteria in bid documents; (ii) national advertising with public bid opening; (iii) sufficient time for bidders to submit bids (four weeks usually); (iv) no preference margin to domestic contractors; (v) foreign bidders to participate in NCB if they so wish; and (vi) contract award to be made to the bidder whose offer is substantially responsive and lowest evaluated. In this context, agreement should be reached on a standard bidding document, in Farsi, that will be acceptable to the Bank to be used for the local procurement of works and goods. The draft of this document will be prepared by the MHUD and submitted to the Bank for review by end of May 2004, with a final draft to be ready by end of July Iranian procurement legislation needs to be adapted to Bank requirements under the procurement guidelines, irrespective of adequate capacity of implementing agencies to handle procurement and adequate control organizations in the country. The Bank s procedures need to be applied in particular concerning the following issues: (a) Bank Guidelines stipulate that open competitive bidding must be used for hiring of contractors through. Concerning the use of two envelopes, the envelope containing the administrative and technical documents, and the envelope containing the financial offer, will be opened simultaneously in public and in one single stage, and prices announced in the same session; (b) For works and goods, explicit bid evaluation criteria must be specified in the bid documents. Elements other than price, which may be specified in bid documents, must be expressed in monetary terms. The lowest evaluated responsive bid will be selected; (c) services for consultants: In accordance with the Bank s procedures, the Borrower addresses a request for proposals to a predetermined short list. The envelopes containing the financial proposals will be opened in public in a second stage, only after the technical evaluation is completed; and (d) For consultants, unlike contracts for works and goods, the selection criteria must be based on a combined score of the technical proposal and the price. The weighting for price should

57 be between 10 and 20 points, or a maximum of 30 points out of a total combined score of 100. For small assignments of less than US$ 100,000, the shortlist may be limited to local consultants (paragraph 2.7 of Consultants Guidelines) provided local expertise is available at a comparative level. However, if foreign firms have expressed interest, they shall not be excluded from consideration. Procurement of Works. Works to be procured under the Project include infrastructure networks, social and trunk infrastructure in poor urban settlements and in selected cities. Because of the scattered nature of the Project, it is however anticipated that no individual contract would exceed US$2 million. All contracts may be procured following NCB procedures, using a standard bid document (SBD) agreed in advance with the Bank. The Instructions to Bidders, Bid data sheet, Bill of quantities and other standard forms will be taken from the Bank s SBD for Works, with minor modifications to suit local requirements. The General Conditions of Contract issued by MPO may be used, subject to the Bank s prior review. The aggregate value of contracts that will be awarded under this procedure shall not exceed US$ 70,000,000 equivalent. Contracts estimated to cost more than US$ 10,000 and less than US$ 100,000 equivalent may follow procedures applicable for the procurement of minor works and based on three quotations obtained from local contractors. The aggregate amounts of contracts to be procured by this procedure shall not exceed US$ 1,000,000. Refer to the Operations Manuel for detailed procedure. Direct Contracting may be used for works of an emergency nature and following the requirements in paragraph 3.7 of the Guidelines for Procurement under IBRD Loans and IDA Credits. Direct contracting may only be used for contracts estimated to be less than US$lO,OOO up to an aggregate amount of US$200,000. Procurement of Goods. Goods to be procured under the Project would consist primarily of solid waste trucks, equipment for wastewater plants, health equipment, educational systems, computers, etc.. To the extent possible, contracts for these goods will be grouped into packages of more than US$ 250,000 and procured following ICB procedures, using the Bank SBD for Goods. Contracts with estimated value below this threshold may be procured using NCB procedures on the basis of the Bank s SBD for Goods with needed modifications to reflect local requirements. The aggregate amounts of contracts to be procured by this procedure shall not exceed US$ 2,500,000. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$50,000 per contract up to an aggregate amount of US$ 200,000 may be awarded on the basis of International Shopping (IS) or National Shopping (NS) in accordance to procedures acceptable to the Bank. Selection of Consultants. Consultant services will be contracted to carry out studies, design and supervision of community development and institutional upgrading programs, technical assistance for capacity building, urban upgrading and housing sector reform, feasibility studies and institutional strengthening. These services would be procured using a standard request for proposals document. Firms: All contracts for firms would be procured using Quality and cost based selection (QCBS) except for contracts estimated to cost US$lOO,OOO equivalent or less, which may be procured on

58 the basis of selection based on Consultants Qualifications (CQ). Short lists may be comprised entirely of national consultants (firms registered or incorporated in Iran), if the assignment does not exceed US$200,000 equivalent, and a sufficient number of qualified firms (at least three) is available at competitive costs and competition including foreign fms is not justified. However, if foreign firms have expressed interest, they shall not be excluded from consideration. For contracts exceeding US$200,000 the Bank s standard RFP will be used. For contracts below US$200,000 the Bank s RFP will also be used, with minor modifications to address country and Project specific issues. In the latter case, the document may be in English. Evaluation of the quality of the proposals shall be carried out in accordance to Paragraphs 2.14 through 2.18 of the Guidelines of the Selection and Employment of Consultants by World Bank Borrowers and the Operations Manual. For Component 2 (b) with assignments that emphasize participation and considerable local knowledge, the shortlist may consist entirely of NGOs. If so, the QCBS procedures shall be followed. Evaluation criteria shall reflect the unique qualifications of NGOs, such as voluntarism, nonprofit status, local knowledge, scale of operation, and reputation. An NGO may be selected on a single source basis, provided the criteria outlined in Section 3.9 of the Consultants Guidelines are followed. Individuals: Specialized advisory services may be provided by independent consultants selected by comparison of qualifications of three candidates and hired in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant guidelines. In exceptional cases, single-source selection of consultants for services estimated to cost less than $50,000 equivalent per contract may, with the Bank s prior agreement, be procured in accordance with the provisions of paragraph 5.4 of the Consultant Guidelines. Prior review thresholds. Works contracts of US$500,000 equivalent or more and Goods contracts of US$250,000 or more are subject to prior review by the Bank. In addition, the first two contracts for works and goods, which are below these thresholds, are subject to prior review by the Bank. For consultant assignments, firms contracts of US$lOO,OOO or more, and individuals contracts of US$40,000 or more are subject to prior review by the Bank. All single-sourced selection of consultants and direct contracting of suppliers/contractors will require prior review by the Bank. Procurement plan. At appraisal, MHUD developed a procurement plan for the first year of implementation of the Project, which provided the basis for the procurement methods. The Bank discussed the plan with MHUD and found it acceptable (Tables attached). For the first year, the total amount of contracts to be committed is in the order of US$10.4 million. At the beginning of each calendar year, the procurement plan will be updated with a procurement schedule for the coming year. Implementation Arrangements. Procurement under the Project will be implemented by the Ministry of Housing and Urban Development (MHUD) through the Project Management Unit (PMU) to be located in the same ministry. For procurement related activities, the PMU will play a central role in coordinating the procurement process and in keeping consistency with

59 ~ ~ procurement procedures at the central and local levels (see chart below). It will have on its team a procurement officer to be hired competitively in accordance with Bank procedures, and to report to the PMU director. The PMU will prepare the standard bid documents (SBDs) for procurement of works and goods, and the standard request for proposals for larger and smaller consultant assignments. These documents must be prepared in accordance to the Bank s recommended procedures. The standard documents will be used for all contracts at the central level, and will also be disseminated to MHUD s representative in each city, the Housing and Urban Development Organization (HUDO). The beneficiary entities at the central and local levels, including the municipalities, will prepare their own technical specifications and/or terms of reference as well as the bill of quantities to be included in the bid documents. At the central level, the technical studies and procurement of goods will be launched by the PMU. Consultants and/or suppliers will submit their offer to the PMU, which will participate in the bid opening, the preparation of the bid evaluation reports and selection of consultants or suppliers. At the local level, HUDO in each city will receive the SBD-Works through the PMU, will launch the bids and participate in the bid opening, the preparation of the bid evaluation reports and selection of contractors. Procurement Flow-chart TUA at UDRO TORS for studies by TUA PMU - Preparation of SBDs and RRPs Launching and receipt of bids or RFPs - TUB at NHLO TORS by bencficiary agencies Bid Opening and Bid EVALUATION COMMITTEE PMU Project Director TUA or TUB Project Managers Financial Controller Contracts Department Representativc Beneficiary agency representative (Technical person) I Contract awards to Consultants, goods and services signed by PMU Director I Receipt of SBDs from PMU Launching and receipt of bids Bid Opening and Bid EVALUATION COMMITTEE Manager of HGDO Financial Controller Contracts Department Representative Beneficiary agency reprcscntativc (Technical person) Prcparation of technical specifications and bill Contract awards to contractors signed by Head of Contracts Department NOTE: Component A Beneficiaries at the center: UDRO Component B Beneficiaries at the center: MHUD, CBI, MPO, MEAF, Bank Maskan. Component A Local Beneficiaries: Municipality, Water and Sewerage Co, Bureau for electricity, Organization for rehabilitation of schools. Director General for Health. The PMU staff, including the procurement officer, have not been appointed yet. Also HUDO, in each of the cities, has so far not yet appointed a procurement officer. Agreement has been reached between the Bank and MHUD that procurement officers will be recruited by end of June Also, the procurement section in the Operations Manual will be discussed once all PMU

60 staff are in place. MHUD s procurement capacity. Contracts being presently implemented by MHUD s executing arms UDRO and NLHO, as well as contracts presently implemented by HUDOs, MHUD s representatives in the cities, are generally in line with the size and type of work required under the Project. It is therefore expected that these agencies would not experience significant difficulties in undertaking their task under the Project. Nevertheless, because of several issues in local procurement procedures not in line with the World Bank s procurement guidelines, and lack of experience in international contracts, it can be safely assumed that the agencies under MHUD have no adequate procurement capacity to handle Bank financed projects. The PMU and HUDO in the selected cities, which are responsible for preparing bid and consultant documents and launching of bids, would have to be satisfactorily staffed, and the final selection of the managers and procurement officers would have to be cleared by the Bank. The assessment of MHUD s capacity would also specifically depend on the choice of procurement officers to be appointed. Procurement training cannot be started unless the core staff is appointed. Short term consultants would also be hired to meet requirement of peak workloads andor to carry out assignments requiring specialized skills. A budget is set aside for training across the board of all core staff under the Project. To minimize the risk, the Bank will organize a procurement seminar during the Project launch, paying particular attention to the training needs of the PMU and HUDOs. Total (0.72) (51.71) (27.57) (0.00) (80.00)

61 Table AI : Consultant Selection Arrangements (optional) (US$ million equivalent) Consultant Services Expenditure Category A. Firms 8. Individuals Total Selection QCBS QBS SFB LCS (17.87) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (17.87) (0.00) (0.00) (0.00) 5.60 (5.00) 0.00 (0.00) 5.60 (5.00) (0.00) (0.00) (22.87) (2.90) (0.00) (2.90) (2.90) (0.00) (25.77) CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan

62 Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review Contract Value Threshold Procurement Expenditure Category (US$ thousands) Method I. Works <2,000 NCB; 2. Goods 3. Services(Consu1tant >10<100 >50<250 I Minors works procedures Direct Contracting ICB NCB shopping Direct Contracting I Contracts Subject to Prior Review (US$ millions) All contracts above 500,000 and first 2 contracts below 500,000. First contract. All contracts All contracts. First 2 contracts. First contract. First contract. b) Individuals >40 c) Miscellaneous QCBS co See Section V of Guidelines <40 I I I All (TOR, shortlists, RFPs and contracts). All TOR. first Contract Shortlists, selection report and contracts. TORS. first Contract. Total value of contracts subject to prior review: Overall Procurement Risk Assessment: High Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-reviewlaudits) Due to lack of familiarity of MHUD with World Bank procedures, the overall risk for procurement is considered high. Also, a CPAR on procurement in Iran has not been carried out yet. In the Project preparation, through the implementation of a PHRD grant, intensive advisory support on the Bank s procedures has been provided. For this reason, the Project design components are kept as simple as possible. The Bank will organize a seminar on procurement, disbursement and financial management during the Project launch, paying particular attention to the training needs of Project implementation teams. Particular attention would also be given to the needs of the PMU and HUDO in each city, which will have the responsibility to prepare and launch all bids and requests for proposals at the central and local levels respectively. Project implementation will be monitored closely through intensive Bank supervision missions. Frequency of procurement supervision missions proposed: It is recommended to have three full supervision missions during the first year of implementation and to have two full supervision missions each year thereafter. These missions should also include special procurement supervision for post-review of contracts awarded

63 First Year Procurement Plan: The following is a summary of the first year's procurement plan (for more details, see project files): Procurement Planned Estimated Procurement category number of amount method contracts (first Year) ComDonent A - Urban Upgrading A- 1. Design & supervision of Services QCBS I CQ upgrading programs in APL 1 cities A-2. Implementation of upgrading Works NCB programs in APL 1 cities Goods A-3. Design of upgrading programs in APL2 cities A-4. Design of upgrading financing Services Services arrangements for APL2 & APL3 TOTAL for Component A I ComDonent B - Housing Reform B-1. Housing and Land Services QCBS Management B-2. Housing; Finance 1 Services OCBS. B-3. Housing Subsidies Services QCBS B-4. Housing Information Services QCBS TOTAL for ComDonent B omponent C - Project Management TOTAL (excluding Unallocated & Front-End-Fee) Goods Services NCB QCBS I CQ / Individual ~._ "Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance

64 Annex 6(B): Financial Management and Disbursement Arrangements ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Financial Management 1. Summary of the Financial Management Assessment The Project is introducing an integrated approach to urban upgrading in the Islamic Republic of Iran (IN) focusing on close coordination between various service providers at the local level. The Ministry of Housing and Urban Development (MHUD) will be the implementing agency of the Project. Component-A will be implemented by the central and provincial offices of the ministry operated in the provinces under the name of the Housing Upgrade Development Organization (HUDO). Component-B of the Project will be implemented by The National Land and Housing Organization (NLHO). All payments, under the Project will be subject to the government laws, regulations and controls. In the absence of a Country Financial Accountability Assessment and being the first Project to be implemented by the MHUD, the financial risk is rated as medium to high. To reduce this risk and ensure reliable and timely Project reporting, the engagement of a qualified Financial Officer is condition for Board. The PMU, assisted by its provincial offices at the participating cities, will be responsible for the financial management of the Project on behalf of the MHUD. The PMU will maintain accounting records, prepare financial monitoring reports (FMRs) and transmit these to the Bank on quarterly basis. The PMU will also be responsible for the preparation of annual Project Financial Statements to be audited by an external independent auditor. To ensure that fhds are readily available for Project implementation, a Special Account (SA) in US Dollars will be opened at a commercial bank and will be operated by MHUD. The below chart provides a summary of financial management responsibilities among different institutions

65 Central Level (a) To open budget lines in local and foreign currencies account (SA) prior to March 2 1,2004 (b) To sign agreement with the MHUD defining the scope and Project implementation procedures I issue request for Bank Account opening (b) Authorize PMU Project Director and Provincial Executive Office to sign contracts (c) Financial Controller to request opening of Bank accounts at provincial level (a) Open Bank Account (b) Request advance of (c) Transfer of loan proceeds from Special Account in the form of advances and replenishments to the Provinces (d) Pay contractors (e) Remit documents to MHUD (0 Replenish accounts from loan proceeds The financial systems at the MHUD offices in Tehran and two provincial cities were assessed through a series of meetings with the Financial Controllers (FC) and also reviewing the existing accounting systems, policies and procedures, budgeting systems, reporting, staffing, internal controls policies and procedures, internal auditing and external auditing arrangements

66 The findings of the above assessment are summarized as follows: 1. Implementing Entity 2. FundsFlow 3. Staffing 4. Accounting Policies and Procedures 5. Project Controls 6. Flow of information between the MHUD and the provinces 7. Intemal Audit Rating Satisfactow with limitations Satisfactory Satisfactory with limitations Satisfactory with limitations Satisfactory Unsatisfactory NIA Comments The MHUD and the provincial offices have never implemented Bank-financed projects and are not familiar with Bank requirements, procedures and guidelines. However, the Ministry has in place a financial system designed to follow-up on its budget and expenditures as defined in the legal framework applicable to Ministries in the Islamic Republic of Iran. The Project will be funded through two sources, the IBRD loan and the govemment budget. In order for the Project funds to be disbursed, two budget accounts must be opened by the MPO and a framework agreement should be signed to allocate the Project funds. MPO have committed to the to opening the accounts and signing the agreement. Disbursement arrangements will be handled by the MEAF controller who is already following on the MHUD hnds and activities. The Project funds will be disbursed in accordance with the applicable laws requiring the approval of the controller in Tehran and at the provinces. However the risk of not generating timely Project reports would be contained by ring fencing a parallel accounting system, which will be operated by a new financial officer and who should be recruited prior to board presentation. The Procedures in place are based on the laws applicable to the IRI public sector. However a Financial Operations Manual is being prepared and will define the Project financial activities detailing the information and flow of documents related to the Project. It will identify the monthly reports required from the HUDOs and NLHO to feed into the parallel accounting system. The budget is prepared by the MPO, the expenditures are authorized by MHUD, payments are signed by the MEAF Conttoller and the Project Director. Five provincial offices and the Tehran office of the MHUD will be implementing the Project. The flow of information between the Provinces and the Ministry is limited to monthly expenditure summaries remitted to the FC. 8. Extemal Audit 9. Reporting and Monitoring 10. Information Systems I I, Risk Management Overall Current Financial Management rating NIA Unsatisfactory Unsatisfactory Unsatisfactory Unsatisfactory The Diwan Mohassabah, as per applicable laws, perform annual audits on ministries and public agencies that receive public funds. A review to determine the scope of this audit has not been performed. However, the Project will be audited by extemal auditors to be engaged under TORS acceptable to the Bank. The MHUD accounting system is not capable of generating quarterly Project reports. This risk will be contained through ring fencing a parallel accounting system that will follow on the Project accounts in addition to the MHUD main accounting system. Financial Monitoring Reports (FMR) will be generated quarterly through the parallel system. The systems in place are manual. The present FM system in place reply _._ partially to the Proiect needs. The controls are adequate howiver a financial officer has tb be engaged and an accounting software will be installed. Applying these activities would reduce the risk of not generating Project reports will be contained by ring fencing the accounting activity. Systems in place at the MHUD and the provincial offices are based on principles and procedures defined by the legal framework and operational decrees applicable to the public sector including ministries. The control environment is adequate, however, the accounting system requires enhancement to become capable of generating timely Project reports. Also, the Project is introducing a new concept of implementation that requires new definition for the exchange of information between the different provincial offices and the center. To avoid the risk of MHUD not being able to generate timely reports for Project management and monitoring purposes, ring fencing accounting arrangements will be implemented

67 MHUD Control environment and IT systems. All payments, under the Project, will be subject to the government controls. These are applied by the Management and Planning Organization (MPO); the Minishry of Economic Affairs and Finance (MEAF); and the Supreme Audit (Diwan Mouhassaba) (DM). The budget is agreed upon with the MPO while the budget expenditure controls are implemented by the MEAF through providing the funds and approving payments. The DM, being the Supreme Audit Institute will verify all transactions to insure compliance with the budget and other applicable laws. These controls, plus the engagement of an external independent auditor, will be used to follow on the Project hnds that consist of the loan proceeds and the counter part financing provided by the govemment. Presently, except for the budget system that follows on expenditures by budget line, all activities and financial information are prepared manually. Accordingly, the systems in place are not capable to generate periodical Project reporting such as the Financial Monitoring Reports (FMRs) and other similar reports that will be used for monitoring and decision making MHUD Project Arrangements Budget Accounts: Two Project accounts will be established by the MPO. Also, a framework agreement, detailing the flow of funds and Project implementation arrangements will be signed between the MPO and the Ministry. The two accounts will be used to allocate the loan proceeds and the counterpart funds over the life of the Project. All Project payments will be charged to these accounts. These accounts will be reconciled on monthly basis with the parallel accounting system that will record in details the Project financial transactions and provide the detailed reports. Accounting System: The MHUD system is characterized with acceptable controls, however, to avoid the risk of MHUD not being able to generate timely reports for Project management and monitoring purposes, parallel arrangements are being implemented to overcome this shortcoming in the system. The Project accounting and reporting activities will be undertaken separately but in conjunction with MHUD control procedures and applicable laws. To that end, MHUD will seek the services of a full time Financial Officer. This new recruit will report directly to the MEAF financial controller at the MHUD and will coordinate closely with the provincial FC and the PMU. The accounting system should be able to account separately for each of the Project activities, by city and categories indicating the source of financing. It is expected that the development contract of the system will be awarded soon and will be ready by May Flow of Information: The Project will be implemented by different offices of the MHUD located in five cities while the accounting system is managed at the ministry in Tehran. The flow of information will be defined, agreed upon and documented in the Project s Financial Operations Manual. To facilitate the compilation of the Project financial information and progress, the provinces will remit to the ministry in Tehran, on monthly basis, the provincial data in order to compile the information into the consolidated quarterly FMRs detailing the implementation progress of the overall Project. The data should include: - Listing of all signed contracts, detailing amounts paid during the month, year to date and cumulatively including the disbursement forecast, under each, for the coming six months; - The activities that will be committed during the next six months and the disbursement forecast under each; -61 -

68 - Physical progress report detailing the progress of the activities being implemented. If any department faces difficulties in preparing these reports, the PMU would provide the required assistance and training to the financial staff of the various provincial offices that are part of the Project. The format of the Financial Monitoring Reports (FMRs) has been agreed upon with the MHUD. Manual of Financial Procedures: In order to define the relation between all departments involved with the Project implementation thus facilitate the flow of information related to the Project, the financial officer, assisted by an external financial consultant, will prepare by June 2004 the Project Financial Operations Manual, integrating the applicable laws and outlining the parallel system by detailing: - The Financial Officer s responsibilities within the MHUD financial department and his relationship with the MEAF financial controller; - The insertion of the Project in the Development Budget. - The Project accounting system - The Project chart of accounts and accounting principles, practices and methods the Project will follow. This chart of account should reflect the classification of MHUD budget classification, if applicable, for easy reconciliation; - The budgeting process; - The reconciliation procedures, timing and output between the two systems; - The document flow; - The frequency and forms of the financial reports; - Banking arrangements, transfer of fund to the provinces and the process for replenishment of the Project funds including the SA and counterpart fund accounts and other. Flow of Funds and Controls. All invoices, either for advance payments or for incurred expenses will be subject to applicable govemment controls and procedures. These invoices will be approved by the appropriate implementing department and will be honored through payments signed by the MEAF controller or his provincial representative. The FC of the MHUD will be responsible for the Project funds and for the management of the SA. The MHUD will transfer funds from the loan account to the Project s SA, opened at a commercial bank as per the Central bank instructions. In turn, the provincial offices will be provided with advances from the SA based on their monthly forecasts and replenishments will be transferred upon presentation of supporting documentation for incurred expenditures. While the MEAF will transfer the counterpart funds to MHUD who in turn will transfer funds on as need basis to the provincial accounts after the MPO opens the required budget lines. Deposits into and payments out of the SA, to pay contractors/suppliers/consultants, will be made in accordance with the provision of the Loan Agreement Project reports Quarter&: The MHUD will generate Financial Monitoring Reports and submit them to the Bank as part of the Project progress report, or separately. These reports are made up of: Financial Reports: to include a cash flow statement, beginning and ending Project cash balances and an expenditure report by city and activity comparing actual and planned expenditures in addition to the SA reconciliation statement. Also, a narrative report

69 explaining all variances that exceed 15% when compared to plan and the proposed corrective actions should be included as an annex to the financial reports. Physical Progress Reports: to include narrative information and output indicators linking financial information with physical progress, if applicable. Contracts Reports: providing information on the contracts, by city, of goods, works, services, training and selection of consultants showing contract financial status against plan, including information on all authorized contract variations. These reports should be remitted to the Bank within 45 days from the end of the period. Annual: Audited Project Financial Statements (PFS) will be submitted to the Bank. PFS, will include: (i) Statement of sources and utilization of funds, indicating funds received from various sources. (ii) Appropriate schedules classifying Project expenditures by activity and by city, showing yearly and cumulative balances. (iii) Special Account Reconciliation Statement reconciling opening and year-end balances; (iv) Statement of payments made using SOEs procedures as defined in the legal agreement. The chart below illustrates the flow of funds and documentation

70 CASH & DOCUMENTS FLOW CHART! Loan Account ----_--- Ministry of HUD Financial Controller Accounting Entry Project System 3P I Accounta:bank Project Special Replenishment Ministry of Economic 4 times /year Project Counterpart Affairs and Finance Funds Account at bank Counterpart Funds 1 Financial Monitoring Reports (FMRs) I t Project Account Provincial level I 1 Contractors I t Suppliers Counterpart Funds Consultants Provincial level I c I Provincial Project Account level Coumrpart Funds Provincial level DP: Direct Payment SAR Special Account Replenishment : Document Flow Contractors, Suppliers & Consultants -. Cmh Flnw I I t Project Account l- Provincial level I t Counterpart Funds Provincial level I t Other Cities

71 Project reports Quarterlv: The MHUD will generate Financial Monitoring Reports and submit them to the Bank as part of the Project progress report, or separately. These reports are made up of: Financial Reports: to include a cash flow statement, beginning and ending Project cash balances and an expenditure report by city and activity comparing actual and planned expenditures in addition to the SA reconciliation statement. Also, a narrative report explaining all variances that exceed 15% when compared to plan and the proposed corrective actions should be included as an annex to the financial reports. Physical Progress Reports: to include narrative information and output indicators linking financial information with physical progress, if applicable. Contracts Reports: providing information on the contracts, by city, of goods, works, services, training and selection of consultants showing contract financial status against plan, including information on all authorized contract variations. These reports should be remitted to the Bank within 45 days from the end of the period. The proposed format of reports is in the Project files and will be agreed upon with the Borrower during negotiations. Annual: Audited Project Financial Statements (PFS) will be submitted to the Bank. PFS, will include: (i) Statement of sources and utilization of funds, indicating finds received from various sources. (ii) Appropriate schedules classifying Project expenditures by activity and by city, showing yearly and cumulative balances. (iii) Special Account Reconciliation Statement reconciling opening and year-end balances. (iv) Statement of payments made using SOEs procedures as defined in the legal agreement

72 1.4. Risk Analysis The following summarizes the risk assessment findings for the Project: Inherent Risk 1.Country Financial Management Risk 2.Proiect Financial Management Issues 3,Counterpart Funds Overall Inherent Risk - H M to H L M The CFAA report for The Islamic Republic of Iran has not been prepared. The MHUD has not imlemented Bank financed Proiects in the past and the systems in place are not capable to follow on the Project activities and funds. MPO committed to opening two accounts for the Project within MHUD budget to facilitate flow of funds and to sign the framework agreement detailing the Project implementation. 6.Extemal audit 1.4. Bank Supervision The requirements for Bank supervision will intensify initially in order to ensure that the parallel accounting system is implemented. The first supervision mission after effectiveness will take the form of a launch workshop where a seminar on Bank rules, regulations and guidelines will be presented. The Project will be supervised every four months for the first eighteen months, then every six months thereafter. Bank supervision missions will consist of visits to MHUD, NLHO, the HUDO offices in the provinces and the MPO to review financial management practices, budget accounts balances, procurement methods, payment procedures and documentation, in addition to field visits to the Project sites and other agencies concerned. 2. Audit Arrangements The MHUD will remit to the Bank not later than six months after the end of each year, the audit report of the Project. The extemal audit report shall encompass all Project related activities and shall be in accordance with internationally accepted auditing standards e.g., International Standards on Auditing (ISA). The annual audit report of the Project accounts shall include an opinion on the PFS Also, the audit report shall include a separate opinion on the SA and payments made using SOEs procedures. In addition to the audit reports, the auditor will prepare a "management letter" identifying any observations, comments and deficiencies, in the system and controls, that the auditor considers pertinent, and shall provide recommendations for their improvements. The external independent auditor should be acceptable to the Bank and his TOR

73 will be prepared and submitted for the Bank's no objection, at least nine months prior to the end of the Project fiscal year. 3. Disbursement Arrangements The Loan will be disbursed during Project implementation over a period of five years. Managing the Project h d s and all related financial transactions, including preparation and submission of disbursement applications throughout the Project will be the responsibility of MHUD. Payments made for expenditures incurred prior to the Loan signature date but after March 31, 2004 in an aggregate amount not to exceed the equivalent of US$2 million will be reimbursed to the government upon presentation of a withdrawal applications with summary sheets and/or statements of expenditure and supporting documentation. The allocation of Loan proceeds by expenditure category are summarized in the table below: Allocation of loan proceeds (Table C) ~~~ Works Goods, Equipment and Vehicles Table C: Allocation of Loan Proceeds Expenditure Category I Amount in US$million I Financing Percentage % % of foreign expenditures, 100% of Consultant Services and Training Non-allocated Total Project Costs with Bank Financing Front-end fee % of local expenditures for services of consulting firms and individuals domiciled within the temtory of the borrower and 95% for foreign expenditures Total

74 Use of statements of expenditures (SOEs): The transaction-based disbursement will be used under this Project. Accordingly requests for payments from the loan account will be initiated through the use of withdrawal applications (WA) for direct payments, the replenishment of Special Account, reimbursement, or issuance of special commitments. All WA will include appropriate supportive documentation including detailed Statements of Expenditures (SOEs). During implementation SOEs will be used for all expenditures for: (i) works under contracts costing less than US$ 500,000 equivalent each, except the first two contracts; (ii) goods under contracts costing less than US$ 250,000, except the first two contracts; (iii) services under consultant firms contracts costing less than US$lOO,OOO equivalent each and under individual consultant contracts costing less than US$40,000 equivalent each; (iv) training; and (iv) the incremental operating costs, under such terms and conditions as the Bank shall specify by notice to the Borrower. The supporting documentation would be maintained by MHUD and made available for review by Bank supervision missions upon request, documentation relating to SOEs would be retained for up to one year from the date the Bank receives the audit report for the fiscal year in which the last withdrawal from the loan account was made. Special account: To facilitate Project implementation and make timely payments of the Bank's share of eligible expenditures to contractors, suppliers, consultants and others, MHUD will open a US Dollars Special Account, after receiving the Central Bank approval. This SA will have an authorized allocation of US$ 5 million and an initial deposit of US$ 2 million, while the full allocation may be claimed when disbursements and special commitments reach US$ 15 million. Replenishment of the SA would follow Bank's procedures, and a Bank's statement of SA transactions would support all replenishment applications. The minimum amount for applications regarding direct payments and special commitments would be 20% of the respective authorized allocations to the SA. Requests for replenishment o f the SA will be submitted on a monthly basis. The MHUD will advance to the provincial offices, from the Project SA, funds into the Project account (PA-Sub Account) to be opened at a local bank as per applicable laws. MHUD will advance funds upon receiving a request from the Provincial Financial Controller (PFC) specifying the amount of funds needed for the first quarter, accompanied by a cash-flow forecast based on the budgeted activities. Accordingly the PA account will be replenished from the SA upon remitting the supportive documentation relative to the incurred expenditure. Also local accounts will be opened for the Project counterpart funds at the MHUD and at the provincial offices. These accounts will be replenished as per applicable laws and procedures. The SA and the PA-Sub Accounts statements will be audited annually by independent auditor acceptable to the Bank and a separate opinion will be issued accordingly. The audit report should be submitted to the Bank for review no later than six months after the end of each Project fiscal year. The Project transactions are expected to increase the work load at the provincial offices of the MHUD, thus there, will be a need to engage Project accountants to assist the PFC

75 ~ Housing Annex 7: Project Processing Schedule ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Time taken to prepare the project (months) First Bank mission (identification) Appraisal mission departure Negotiations Planned Date of Effectiveness 10/01/ /10/ /09/ /14/2004 Prepared by: Sateh El-Arnaout Preparation assistance: Elena Gagieva Bank staff who worked on the project included:.,,......,. Name....,,,,.... Speciality,, I. Sateh El-Amaout Task Team Leader and Sr. Municipal Development Specialist OmarRazzaz Co-Task Team Leader Maurice Gress Procurement Specialist (Consultant) Helen Shahriari Sr. Social Scientist Rancia Nemer Environmental Specialist (Consultant) samir Kanoun Institutional Specialist (Consultant) Robert Bou Jaoude Sr. Financial Management Specialist Isabel Chatterton Economist Bertrand Renaud Finance Specialist (Consultant) Mayumi Kato Urban Management Specialist Loic Chiquier Lead Financial Officer Barjor E. Mehta Senior Urban Specialist Rosanna Nitti Urban Specialist Laura Vecvagare Young Professional Hiba Tahboub Sr. Procurement Specialist Tuyet Chuppe Program Assistant Josephine Ngou Program Assistant,,

76 Annex 8: Documents in the Project File* ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project 0 A. Project Implementation Plan Project Implementation Plan B. Bank Staff Assessments Assessment of the MHUD executing arm for UDRO and the Ministry s local representatives in two provinces to implement Project procurement; Economic and Financial Assessment of investment programs for the first year of the Project. C. Other Environmental Management Plan Environment Guidelines Manual Resettlement Policy Framework Operations Manual Procurement Plan for Year 1 National Strategy for Enabling Regularizing Informal Settlements National Housing Strategy Feasibility studies for Bandar-Abbas, Kermanshah and Zahedan, including environmental and rapid social assessments Interim report on Housing Finance Technical Assistance - Evaluation of Contractual Savings System for Housing and Liberalizing Housing Finance Lending.. February 25,2004 TOR for Technical Assistance Activities under Component B TOR for Needs Assessment *Including electronic files

77 Annex 9: Statement of Loans and Credits ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project 29-Am-2004 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd PO IR-Environmental Management Supp. Prog PO IR-EARTHQUAKE EMERGENCY RESPONSE PO IR-2nd Primary Health Care 8 Nutrition PO IR-Tehran Sewerage Total: ISLAMIC REPUBLIC OF IRAN STATEMENT OF IFC's Held and Disbursed Portfolio Mar In Millions US Dollars Committed IFC IFC Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Total Portfolio: Aoorovals Pendine Commitment FY Approval Company Loan Equity Quasi Partic 2003 KLC Total Pending Commitment:

78 ~ Iran, Annex IO: Country at a Glance ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project POVERTY and SOCIAL 2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions) Average annual growth, Population (%) Labor force (%) Most recent estimate (latest year available, ) Poverty (% of population below national povertv line) Urban population (% of totalpopulation) Life expectancy at birth (years) Infant mortality (per 1,WO live births) Child malnutrition (% of children under 5) Access to an improved water source (% of population) Illiteracy (% of population aue 15+1 Gross primary enrollment (% of school-aqe population) Male Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 GDP (US$ billions) Gross domestic investmenffgdp 22.8 Exports of goods and serviceslgdp 11.8 Gross domestic savingslgdp 18.8 Gross national savingslgdp 17.8 Current account balance/gdp Interest paymentslgdp Total debffgdp Total debt service/exports Present value of debtlgdp Present value of debffexports Iran , IS M. East B North Africa 301 2, Lowermiddleincome 2,164 1,240 2, (average annual growth) GDP GDP per capita _- Exports of goods and services STRUCTURE of the ECONOMY (% of GDP) Agriculture Industry Manufacturing Services Private consumption General government consumption Imports of goods and services O I GNI per capita Life expectancy T i Access to improved water source Economlc ratios- Domestic savings - lslamic Rep. Lower-middle-income amup Trade Indebtedness Gross primary enrollment Investment Iran, lslamic Rep. Lower-middle-income amud Growth of Investment and GDP (%) (average annual growth) Agriculture Industry Manufacturing Services Growth of exports and imports (%) 40 Private consumption General government consumption Gross domestic investment Imports of goods and services Note: 2001 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with Its income-group average. If data are missing, the diamond will be incomplete

79 Other Private Iran, Islamic Rep. PRICES and GOVERNMENT FINANCE Domestic prices (% change) Consumer prices Implicit GDP deflator lnflatlon (%) I Government finance (% of GDP, includes cufrent grants) Current revenue Current budget balance Overall surplusldeficit o -GDP deflator *CPI I TRADE (US$ millions) Total exports (fob) Fuel Textiles Manufactures Total imports (cif) Food Fuel and energy Capital goods Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100) ,831 11,491 13,138 1, ,661 16,012 25, ,900 24,280 17, ,000 19,339 21, Export and Import levels (US$ mill.) 40,000 T / i I 20,ow s O1 I I BALANCE of PAYMENTS (US$ millions) Exports of goods and services Imports of goods and services Resource balance ,387 16,453-4, ,329 30, , ,461 15,086 13, ,716 18,138 5,578 IO account balance to GDP (%) Net income Net current transfers , , Current account balance Financing items (net) Changes in net reserves -3, ,770-10,248 8,149 2,099 13,524-20, ,754-9,695 4,941 0 Memo: Reserves including gold (US$ millions) Conversion rate (DEC, loca//us$j , ,527 5, ,468 5,819.0 EXTERNAL DEBT and RESOURCE FLOWS (US$ millions) Total debt outstanding and disbursed IERD IDA , , , Composition of 2001 debt (US$ mill.) I A: 380 Total debt service IBRD IDA , , Composition of net resource flows Ofticial grants Official creditors Private creditors Foreign direct investment Portfolio equity World Bank program Commitments Disbursements Principal repaymenis Net flows Interest payments Net transfers A IBRD E - Bilateral B IDA D ~ multilateral F I ~ C - IMF G - Short-term Development tconomics w1 J/UZ

80 Additional Annex 11 : Institutional Arrangements ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project I. Institutional setup Project implementation is aligned with current institutional responsibilities in Iran: each Project component will be implemented in close cooperation with the relevant agency. The Urban Development and Rehabilitation Organization (UDRO), the main agency responsible for urban upgrading projects in Iran, will implement component-a. The National Land and Housing Organization (NLHO), the organization responsible for land and housing policies, will coordinate the implementation of Component-B. An Inter-ministerial Steering Committee (ISC) with representatives of the MOI, MEAF, Central Bank (CBI), MPO, the High Commission for Architecture and Urban Development, and UDRO has been established during Project preparation. Its main role was to provide guidance to the reform strategy and to the design of the Program. During the implementation, the ISC will be in charge of Program oversight. It will meet at least quarterly to review progress, coordinate decisions and remove impediments to the timely implementation of the Program. At the central level: the Ministry of Housing and Urban Development (MHUD) will be responsible for the overall execution, procurement, financial management and coordination of the program. Reporting to MHUD will be the Project Management Unit (PMU), which will be located separately at the Ministry and will solely serve the proposed Project. The PMU will rely on two Technical Units TUA and TUB to work closely with UDRO and NLHO, respectively. Both units will have a core staff complemented as necessary by specialized short-term consultants to meet peak workloads and/or to provide specialized expertise. Training of the core staff in the various program specialties and in Bank procedures will be provided for under the Project. At the local level: the HUDO and the local Executive Upgrading Committee will nominate An Executive Officer. Together with the PMU, he will responsible for Project implementation and will be located at the MHUD provincial office (HUDO). He will act as contract manager for the specialized regional organizations and will operate under the umbrella of the local executive upgrading committee. Upgrading Committees chaired by the Provincial Governor will oversee the preparation and implementation of the enabling and upgrading component in their respective cities. Members of these committees are the heads of all specialized organizations operating at the local level, as well as the mayor and representatives of the city council. 2. Project Management Unit (PMU) The PMU will be headed by a Program Director appointed by the MHUD. It would be set out as a stand-alone unit with its own procurement procedures and will be organized in two separate divisions: (i) An accounting, procurement and disbursement division and; (ii) a planning and programming division. The accounting, procurement and disbursement division will have the responsibility to prepare all standard procurement documents under the Project, launch and evaluate bids at the central level, and sign the contract with the selected consultanthupplier. It will also disseminate

81 the standard procurement documents to HUDO in each of the selected cities and provide any assistance on procurement when needed. The division would be also responsible for maintaining accounting records and processing all matters related to disbursements and will process all administrative and financial work related to the PMU. The unit will maintain a parallel accounting system consistent with acceptable international standards. It will also comply with the requirements of Iran public finance accounting and financial control requirements. Suitable candidates for heading the division would be persons holding graduate degrees and having at least five years experience in accounting and/or financial management and familiar with both Iranian and international accounting standards. A staff unit responsible for legal matters would be attached to the office of the Project Director to provide services as required to all the divisions of TUA and TUB. The planning and programming division would be responsible for following up on matters related to the selection of participating cities and approval of their investment programs. It would also be responsible for programming implementation activities in coordination with the technical units and following-upheporting on program implementation and housing policy reform progress. It would handle the operation of the Management Information System (MIS) development, website and public relation needs of the whole project. Suitable candidates for heading the division would be persons holding graduate degrees and having at least ten years experience, including at least two years at a managerial position preferably, in the fields of housing and/or urban development. The PMU would have a core staff as summarized in the table below. It would also have access to short-term consultants as warranted (auditors, legal advisors, accounting assistance, training, etc.). Responsibilities of the PMU will include: 0 Assuming the role of Secretariat of the ISC 0 Maintaining overall program accounts and records, 0 Preparing the Financial Management Reports, 0 Coordinating and ensuring audits of all program accounts, 0 Centralizing all disbursements under the program, 0 Selecting eligible cities, approving the investment programs of these cities, and preparing six months activity programs, 0 Coordinating the activities of the program implementation units and insuring adherence with program procedures, 0 Preparing quarterly progress reports, 0 Liasing with World Bank, and the ISC, 0 Coordinating the preparation of subsequent APLs, 0 Preparing the standard bid documents for works and goods, as well as the request for proposals for both larger and smaller assignments, 0 Launching, receiving and evaluating bids and proposals at the central level, 0 Participating with a bid opening and evaluation committee and in the decision on contract award. 0 Signing, through PMU s director, all contracts with consultants/ suppliers at the central level 0 Disseminating the standard bid and request for proposals documents to HUDO in the field

82 e and provide any assistance on procurement when needed, Documenting and administering all procurement contracts awarded at the central level. PMU Core permanent staff: A total of 14 personnel are required for PMU as shown in the table below. For detailed job descriptions see Annex 1. Table. C-1. PMU Core Dermanent staff Procurement Unit Planning and Sub-Total - 1 Program Director - 1 Legal Advisor -1 Head of Unit -1 Senior Accountant - 1 Procurement Officer -1 Head of Unit -1 MIS/ IT suecialist Executive secretary. - A pool O f 4 secretaries for both project components A & B + 6 As required 3. Technical Unit A (TUA) The TUA and in close coordination with UDRO will be responsible for the management and supervision of the day-to-day activities of this component and for submitting quarterly Project progress reports to the PMU. At the local level, Executive Upgrading Committees (EUC) chaired by the Provincial Governors will oversee the preparation and implementation of the enabling and upgrading component in their respective cities. Members of these committees include the mayor and representatives of the city council and the heads of all specialized organizations operating at the local city level (regional offices of ministries and public utilities). Participating municipalities will be responsible for implementing their respective pilot urban upgrading and community enabling programs. They will receive technical assistance for environmental impact mitigation from TUA. They will also receive assistance from the specialized local organizations for design specifications and the formal reception of works. Each municipality will designate a Project manager assisted by support staff and technical assistance hded under the Project. Community involvement in monitoring and supervision will be through their representatives at the EUC. The supervision of works will be the responsibility of the MHUD and the specialized local organizations. The day to day supervision will be entrusted to professional supervisory engineering firms or individuals recruited through competitive bidding. Technical audits will be conducted at the end of each year by Senior engineers. The audits will serve to verify the quality of procurement, the timeliness of execution and the quality of constructions. The lessons learned from the audits will facilitate future improvement in both the processes and construction quality. Up-grading investments will also be supervised and monitored by the local communities that will be the beneficiaries of such investments

83 The TUA would be housed at UDRO and headed by a Project Manager chosen in consultation with UDRO. It would be part of the PMU and work closely with UDRO in implementation of component A. The TUA would include: (i) Project Preparation Unit, (ii) Project Implementation Unit, and (iii) Community Enabling and Capacity Building Unit. The Project Preparation Unit would be responsible for: 0 Initiating and monitoring the preparation of feasibility studies for program cities, and, 0 Monitoring the preparation of city performance contracts. 0 Initiating and monitoring the TA and capacity building activities part of the component. 0 Ensuring compliance with environmental safeguards during Project design. The Project Implementation Unit would be responsible for: 0 Initiating and monitoring the preparation of the detailed engineering designs of the infrastructure sub-components, 0 Monitoring works supervision and verifying works progress vouchers. 0 Providing technical assistance to relevant organization for the formal reception of completed infrastructure. 0 Ensuring compliance with environmental safeguards. 0 Reporting on the progress of the upgrading sub-component. 0 Maintaining records for the Enabling and Upgrading component. 0 Managing the general services of TUA not provided by UDRO. 0 Ensuring adherence to record keeping, and other operational procedures under the Project. 0 Providing assistance to PMU in preparing terms of reference for hiring consultants, and 0 Preparing the terms of reference directly under TUA s responsibility. The Community Enabling and Capacity Building Unit would be responsible for: Initiating and monitoring the implementation action research activities and studies in participating cities with a view of developing and testing community enabling activities for subsequent replication to other neighborhoods and/or cities. Evaluating the impact of community enabling programs, Reporting on the progress of the community enabling sub-component; Ensure compliance with applicable safeguards Educating participating cities on the content and procedures of the program, Initiating and monitoring the implementation of all technical assistance, capacity building and training under Component-A of the program, Disseminating manuals and best practices developed as a result of the program as well as relevant international best practices among professionals, practitioners, and participating communities. TUA specific responsibilities will include: 0 The preparation of feasibility studies for Project cities selected by the ISC; 0 Monitoring the implementation of the infrastructure, urban environmental services, enabling, and capacity building sub-components;

84 Insuring adherence to/and or enforcement of Program safeguards, procedures, and providing related technical assistance to participating municipalities; Insuring adequate supervision of works and timely formal transfer of completed infrastructure to responsible organizations; Insuring compliance with the city performance contracts including the mobilization of the financial contributions of local governments, communities and other stakeholders; Handling all preparations for disbursements under component-a in coordination with the PMU; and Promoting action research for the design of new community enabling activities and evaluating the impacts of such activities. Reporting on progress of the implementation of Component-A to the PMU. TUA Core permanent staff: The Unit would have a core permanent staff as summarized in the table below. It would also have access to PMU and core staff (MIS, legal advisers, etc.), support staff (secretarial services) and short-term consultants as warranted (auditors, MIS, accounting assistance, training, supervising engineers). For detailed job descriptions see Annex 1. Project Preparation Unit Project Implementation unit Community Enabling & Capacity Building Unit Total - 1 Head of Unit - 1 Urbanplanner - 1 CivilKontract Engineer - 1 Head of Unit - 1 Environmental/ Safeguards specialist - 1 CivilKontract Engineer - 1 Head of Unit - 1 Social scientist - 1 communication specialist 12 Uses the PMU pool of secretaries 4. Technical Unit B (TUB) The TUB and in close coordination with the NLHO will be responsible for the implementation of Component-B of the Project. It will coordinate and work closely with the relevant counterparts for specific reforms, i.e. MHUD, CBI, Bank Maskan, MEAF, local governments and the High Commission for Architecture and Urban Development. These beneficiary institutions will be responsible for the implementation of their respective TA sub-components. The TUB will be housed at PMU and would work closely with NLHO and other beneficiary organizations. It would be headed by a Project Manager. The Project Manager for the TUB would be assisted by an administrative assistant responsible for following-up on procurement and record keeping matters. The unit would recruit short-term consultants to provide assistance with accounting and other tasks as required; such as organizing training, or information dissemination events, or drafting terms of reference

85 ~ TUB specific responsibilities would include: 0 The initiation preparation and follow up of all activities included in the components in close coordination with the beneficiary institutions, which are responsible for the execution of their respective sub-components; 0 Maintenance of accounts and records for the components; 0 Reporting on progress and evaluation of results in coordination with the PMU; and Provide assistance to the beneficiaries in preparing the terms of reference for the studies needed. 5. Overall Organization Structure The overall organization structure for program implementation is illustrated on the chart below. TECHNICAL 3WYAGEMENT (urban "ppdne) MONITORING, FlNAYClAL AND PROCUREMENT MANAGEMENT TECHNICAL MANAGEMENT (Haurbg wtor refom) FNAVCIAL CONTROL URBANDEVELOPMENT STEERING URBAN DEVELOPMENT & REVITALIZATION ORGANI7ATION -I NATIONAL LAND AND HOUSING ORGANIWTION I &CITY ORGANIZATION UPGRADING LOCAL ORGANIZATIONS -/ ~ COMMUNITIES CONTRACTORS

86 Additional Annex 12: Job description of Key Project Management Staff ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project PMU Project Director (job number - 1; full-time) Reporting to: Minister of Housing and Urban Development Main Function: The PMU Project Director will be responsible for the management an( imdementation of the UUHRF'. Duties and Responsibilities: (a)- Overall management of and coordination of the unit and Secretariat of the ISC. (b)- Monitoring of TUA and TUB. (c)- Preparation and execution of the Unit's Budget. (d)- Management of WHRP special account. (e)- Co signatory of all checks emitted by the unit. (0- Liasing with World Bank (g)- programming and project management including the review of the yearly upgradii programs. (h)- timely implementation and early identification of potential execution delays and changes program costs. (i)- project administration including the authorization of disbursements 0)- participating in all project reviews, particularly the mid-term review (k)- consolidation and preparation of the quarterly, annual and Implementation Completii Report (ICR). (1)- coordination with government institutions for the smooth execution of project activities described in the OM. This includes the streamlining of local consultation with the Governors municipalities and other key stakeholders. (m)- carrying-out strategic planning and upgrading policy formulation (n)- supervising the sound and timely development and implementation of the Financia Management Information System (FMIS). Minimum Qualifications: (a)- post-graduate University Degree in Economic Development and/or Social Development and or Civil Engineering and/or Urban Planning with at least fifteen (1 5) years of relevant experience in participatory systems of local and community development including 5 in an executive position.. (b)-proven ability to lead, manage and motivate multi-disciplinary groups of professionals and senior public servants. (c)-proven ability to establish and maintain contacts at very high level both in the government and with international organizations. (d)- ability to deal with international lending and donor institutions as well as substantial work experience on projects in developing countries (e)- experience in managing contracts and developing, monitoring and managing projects funded by the government and international agencies. (0- fluent in spoken and written English and Farsi. (8)- familiar with project management computer programs and applications

87 PMU Procurement Officer ( job number ; full-time) Reporting to: PMU Project Director Main Function: The function of the PMUPO is to supervise the procurement activities under the project, to prepare tender documents, to participate in the evaluation of tenders and contract awards, and signing of contracts. Depending on the workload and need for specialized services, the PO may be assisted by outside consultants. Duties and Responsibilities: (a)- prepares standard bid documents for the procurement of works, goods and consultant services in accordance to the World Bank s recommended procedures. The PO shall obtain the World Bank s non-objection to the standard documents before bids or requests for proposals are launched at the central and local levels. (b)- ensures adherence to procurement procedures and other operational procedures under the project and is responsible for the PMU compliance with the provisions of the Loan Agreement and the Operations Manual, paying particular attention to the procurement and disbursement conditions. (c)- develops and maintains an updated procurement plan to be submitted to the PMU Project Director. (d)- maintains accurate procurement records, including all actions and documents related to the project, This includes advertisement, preparation of bids, invitation to bid, record of bid submissions, bid opening, evaluation of bids, contract award and performance of the contracts. The procurement files should be maintained for review by World Bank supervision missions. (e)- facilitates post-review and procurement audits on a random basis by the Bank; (Q- provision of procurement technical assistance to the Provincial Executive Officer s unit. (g)- forward copies of the standard documents to the procurement unit created at Housing and Urban Development Organization (HUDO) and, if requested, will provide workshops to HUDOs procurement staff. (h)- participate in reviewing bids or consultant proposals and bid evaluation reports regarding contracts at the central level. (i)- participates in the preparation of the quarterly progress reports submitted by PMU to the Bank. 0)- maintains accurate procurement records including advertisement, invitation to bid, record of bid submission, minutes of bid opening, bid evaluation report, contract award and performance record of the contract. The procurement files should be maintained for review by World Bank sudervision missions. Minimum Qualifications: (a)- university graduate degree in Engineering, Management or Business Administration (b)- at least eight (8) years experience in the procurement of a large number of civil works contracts and in the procurement of goods and consultant services. Knowledge or previous experience with World Bank procurement procedures would be useful. (c)- experience in contract management (d)- fluent in spoken and written English and Farsi. (e)- must be familiar with Computer Programs and Applications. (Q- Training in Bank procurement procedures will be provided

88 PMU Financial Officer oob number - 1.2; hll-time) Reporting to: PMU Project Director Main Function: Financial management, disbursement and reporting including maintaining accounting records in line with international standards and in compliance with the requirements of Iran public finance accounting and financial control requirements. To follow on the project accounts, generate the project financial reports and provide guidance on Financial Management and disbursements to the Provincial Accountants Duties and Responsibilities: (a)- prepares disbursement schedules for the Project Director review and follow-up. (b)-develops and implements accounting control procedures for the dsbursement of the proceed of the project; (c)- maintains proper accounting and administrative records for all project activities; (d)-prepares the project financial manual of policies and procedures (e)- set up the yearly budget reflecting the operations of the project implemented by the MHUD through its provincial offices and the NLHO. (f)- coordinates with the FC to pledge counter-fund. allocation for project implementation. (g)- manages the accounting for the project Special Account (reconcile and replenish). (h)- follow-up on contracts signed with suppliers and consultants regarding, bid & performance securities, validity, implementation and payments. (i)- receives the monthly reports from the provincial offices and post the transactions and contracts into the accounting system. 0)- prepares disbursement schedules and financial forecasts for the project. (k)- processes invoices and post all financial transactions to the accounting system. (1)- records and manages all committed funds. (m)- safeguards the project supporting documentation for auditing purposes (n)- coordinates with the FC all matters related to the project disbursements, audits and accounts. (0)- communicates with the project external auditor. Minimum Qualifications: (a)- Business Administration or Accounting Degree with a minimum of 5 years of experience (b)- proficiency in written and spoken English and Farsi. (c)- must be familiar with Computer Programs and Applications including working with Excel spreadsheets, word processing and accounting software. (d)- familiar with both Iranian and international accounting standards

89 WDO Procurement Officer oob number ; full-time) Reporting to: HUDO Director of Contracts Main Function: The Procurement Officer will be situated in the HUDO and will report to the Director for Contracts. Depending on the workload and need for specialized services, the procurement officer may be assisted by outside consultants. Duties and Responsibilities: (a)- responsible for verifying and completing the date for each specific request for proposals from consultants or bid document for works or goods to be launched. (b)- ensures that no significant changes are introduced to the original basic standard documents received from the PMU, which are prepared in accordance with World Bank's recommended procedures. (c)- participates in reviewing bids or consultant proposals and in the preparation of bid evaluation reports. (d)- ensures adherence to Bank procurement procedures and other operational procedures under the project and will (e)- participates in the quarterly progress reports submitted by HUDO to the PMU. (f)- maintains accurate procurement records. This includes advertisement, invitation to bid record of bid submission, minutes of bid opening, bid evaluation report, contract award anc performance record of the contract. The procurement files should be maintained for review bj World Bank sudervision missions. Minimum Qualifications: (a)- university graduate degree in Engineering, Management or Business Administration (b)- at least eight (8) years experience in the procurement of a large number of civil works contracts and in the procurement of goods and consultant services. Knowledge or previous experience with World Bank procurement procedures would be useful. (c)- experience in contract management (d)- fluent in spoken and written English andfarsi. (e)- must be familiar with Computer Programs and Applications. (f)- Training in Bank procurement procedures will be provided

90 TUA Project Manager ('job number - 2.1; full-time) Reporting to: PMU Project Director Main Function: The TUA Project Manager will be responsible for the implementation of Component-A of the project. Duties and Responsibilities: (a)- timely implementation of Component-A of the project while maintaining the Projec Director informed of potential execution delays and changes in costs. (b)- ensuring that sub-projects are screened in order to identify those classified EA Category B for further review and monitoring the implementation of the appropriate mitigative measures. (c)- supervising all project activities under Component-A, including its field activities and ensuring that monitoring is camed out efficiently, rapidly, and in a transparent manner (d)- providing the TUA non-objection for all disbursements to be made under Component-A of the project (e)- preparing the technical quarterly and annual progress reports as well as the implementatior campletion reports; (f)- coordinating with government institutions the smooth execution of project activities a! described in the OM. This includes the streamlining of local consultation with the Governor municipalities and other key stakeholders. (g)- undertaking regular field visits to control and monitor the implementation of the ciq upgrading programs. (h)-documents and validates the learning experience from the project. (i)- monitors progress towards meeting the project's general and specific objectives includinl progress with key policy reforms under Component-A of the project. Q)- develops monitoring and evaluation procedures and establishes a monitoring and reportin1 system that would facilitate the compilation of quarterly and yearly progress reports; (k)- approving the city upgrading programs (1)- responsible for the preparation of upgrading programs in participating cities under APL and APL2. (m)- responsible for the adherence toland or enforcement of Program safeguards and procedures (n)- responsible for ensuring adequate supervision of works and timely formal transfer o completed infrastructure to responsible organizations. (0)- reports on implementation progress of Component-A to the PMU Project Director. (p)- responsible for the preparation of the technical part of the bidding documents for thc procurement of services, works and goods. Minimum Qualifications: (a)- post-graduate University Degree in Economic Development and/or Social Development and/or Civil Engineering and/or Urban Planning with at least fifteen (10) years of relevant experience in participatory systems of local and community development (b)- ability to deal with international lending and donor institutions as well as substantial work experience on projects in developing countries (c)- experience in managing contracts and developing, monitoring and managing projects funded by the international agencies. (d)-experience in social development and local capacity building and in working with NGOs. (e)- fluent in spoken and written English and Farsi. (0-strong familiarity in working with Computer Programs and Applications. (g)-experience in or familiarity with Urban Upgrading and community enabling as well as international best practices (h)-ability to lead, manage and motivate multi-disciplinary staff

91 TUB Project Manager (job number - 2.2; full-time) Reporting to: PMU Project Director Main Function: The TUB Project Manager will be responsible for the implementation of Component-B of the project. Duties and Responsibilities: (a)- timely implementation of Component-B of the project while maintaining the Projec Director informed of potential execution delays and changes in costs. (b)- supervising all project activities under Component-B and ensuring that monitoring i carried out efficiently, rapidly, and in a transparent manner (d)- providing the TUB non-objection for all disbursements to be made under Component-A of the project (e)- preparing the technical quarterly and annual progress reports as well as the implementatior completion reports; (f)- coordinating with government institutions the smooth execution of project activities a described in the OM. This includes the streamlining of consultation with partner agencie involved in the implementation of Component-B activities. (g)- monitors progress towards meeting the project s general and specific objectives includinl progress with key policy reforms under Component-B of the project. (h)- responsible for the preparation of the technical part of the bidding documents for thl procurement of services and goods. Minimum Qualifications: (a)- post-graduate University Degree in Financial Analysis andor Economic Analysis andor Housing and Urban Planning with at least fifteen (15) years of relevant experience in participatory systems of local and community development (b)- ability to deal with international lending and donor institutions as well as substantial work experience on projects in developing countries (c)- experience in managing contracts and developing, monitoring and managing projects funded by the international agencies. (d)- experience in the preparation of a long-term development strategy and project identification and appraisal (e)- experience in social development and local capacity building and in working with NGOs. (0- fluent in spoken and written English and Farsi. (g)-strong familiarity in working with Computer Programs and Applications

92 Additional Annex 13: Project Cycle for Urban Upgrading (Component A) ISLAMIC REPUBLIC OF IRAN: Iran Urban Upgrading and Housing Reform Project Activity sequence Responsible Institution 1- City selection 1 PMU 2- Feasibility study I UDRO:, selected city of Investment Program RAP if warranted Detailed design and Bidding Documents 0 Procurement I Same as above 0 Evaluation of Consultant 5- Submittal of Investment Program for Financing If approved 6- Implementation: 0 Supervision of works 0 Formal reception 7- Operation and maintenance Consultant Selected city. HUDO Selected city, local organizations, participating communities. Consultants HUDO Supervisory engineers HUDO Municipality Responsible local organization Supervisory engineers HUDO Municipality Responsible local organization Responsible local organization. Approval/validation ISC Executive Upgrading Committee Same as above Same as above Same as above + formal approval by selected city Selected city, UDRO Selected city + local organizations + representative from participating communities. UDRO UDRO, Selected city PMU Supervisory engineers HUDO Selected city, local organizations, participating communities. HUDO, Municipality and responsible local organization. Municipality and responsible local organization. Municipality and responsible local organization. Municipality and responsible local organization. World Bank No-objection TORS + Proc. Bank review Bank review Bank review World Bank No-objection World Bank No-objection