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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 CREDIT IN THE AMOUNT OF SDR 7.5 MILLION (US$11.5 MILLION EQUIVALENT) TO THE AZERBAIJAN REPUBLIC FOR AN Report No: 3874-AZ INTERNALLY DISPLACED PERSONS ECONOMIC DEVELOPMENT SUPPORT PROJECT Infrastructure and Energy Sector Unit South Caucasus Country Unit Europe and Central Asia Region JANUARY 19,25 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 January 19,25) Currency Unit = AZM 4,93.AZM = US$1 US$1.52 = SDR 1 FISCAL YEAR January 1 - December 31 ADB CFAA CQS cu EMP EU FBS FM FMR GDP ICB IDP IDPiEDS IFRS LCS M&E MFI MTR NCB OM PLI PPL PRSC S SFDI SOE SPA SPPRED UNDP UNCHR USAID ABBREVIATIONS AND ACRONYMS Asian Development Bank Country Financial Accountability Assessment Consultant Qualification Selection Credit Union Environmental Management Plan European Community Fixed Budget Selection Financial Management Financial Management Reports Gross Domestic Product International Competitive Bidding Internally Displaced Person IDP Economic Development Support Project International Financial Reporting Standards Least-Cost Selection Monitoring and Evaluation Micro-Finance Institutions Mid-Term Review National Competitive Bidding Operations Manual Partner Lending Institution Public Procurement Law Poverty Reduction Support Credit Shopping Social Fund for the Development of IDPs Statement of Expenses State Procurement Agency State Program for Poverty Reduction and Economic Development United Nations Development Program United Nations High Commission for Refugees United States Agency for International Development Vice President: Country ManagedDirector: Sector Director: Sector Manager: Task Team Leader: Shigeo Katsu D-M Dowsett-Coirolo Hossein Razavi Sumter Lee Travers Ellen Hamilton

3 AZERBAIJAN IDP ECONOMIC DEVELOPMENT SUPPORT CONTENTS FOR OFFICIAL USE ONLY A B C D STRATEGIC CONTEXT AND RATIONALE Page 1 Country and sector issues... 1 Rationale for Bank involvement... 1 Higher level objectives to which the project contributes... 2 PROJECT DESCRIPTION 2 Lending instrument... 2 Program objective and Phases... 2 Project development objective and key indicators.,... 3 Project components... 3 Lessons leamed and reflected in the project design... 4 Altematives considered and reasons for rejection... 5 IMPLEMENTATION 5 Partnership arrangements (if applicable)... 5 Institutional and implementation arrangements... 5 Monitoring and evaluation o f outcomes/results Sustainability... 7 Critical risks and possible controversial aspects... 8 Loadcredit conditions and covenants... 8 APPRAISAL SUMMARY 8 Economic and financial analyses... 8 Technical... 9 Fiduciary... 9 Social... 9 Environment... 1 Safeguard policies... 1 Policy Exceptions and Readiness 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.

4 Annex 1: Country and Sector or Program Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3 : Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs... 2 Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements... 3 Annex 9: Economic and Financial Analysis Annex 1: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File... 4 Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance MAP IBRD 33365

5 AZERBAIJAN IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA Date: January 19,25 Country Director: D-M Dowsett-Coirolo Sector ManagedDirector: Sumter Lee Travers Project ID: PO Lending Instrument: Specific Investment Loan ECSIE Project Financing Data [ ]Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 11.5 Proposed terms: Standard IDA with 35 years maturity Team Leader: Ellen Hamilton Sectors: Other social services (7%); Microand SME finance (3%) Themes: Conflict prevention and post-conflict reconstruction (P);Other social development (P) Environmental screening category: Financial Intermediary Assessment Safeguard screening category: No impact ASSOCIATION Total: Borrower: Government of AzerbaijadMinistry of Finance Baku, Azerbaijan Tel: (994-12) Responsible Agency: Azerbaijan Republic Social Fund for Development of IDPs (SFDI) 65 Fizuli Street, 5th Floor Baku, Azerbaijan 371 Tel: (994-12) / Fax: (994-12) offce@sfdi.net i

6 ?Y hual hmulative Expectedclosing date: December 3 1,28 Does the project depart from the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 [ ]Yes [XINO [ ]Yes [XINO [ ]Yes [ IN [ ]Yes [XINO [ ]Yes [XINO [XIYes [ ]No Project development objective Re$ PAD B.2, Technical Annex 3 The proposed IDP Economic Development Support Project (IDP-EDS) is a repeater project that replicates part of the Pilot Reconstruction Project (Cr. 3 19/3 191-AZ), and its objective, like that of its predecessor, is to help improve the living conditions of IDPs and enhance their economic opportunities and prospects for social integration. Project description Re$ PAD B.3.a, Technical Annex 4 IDP-EDS will consist of three components: (1) micro-projects: financing the preparation and implementation of up to about 2 small-scale projects of rehabilitation, repair or reconstruction of, as well as the acquisition of related equipment for: (a) basic small infrastructure, such as water supply and sewage networks, electricity networks, access roads, and drainage systems; (b) social infrastructure such as schools, community centers; and (c) temporary shelter facilities. (2) micro-finance resources: providing financing to Partner Lending Institutions (PLIs) for the extension of micro-finance to IDPs; and (3) IDP/EDS Implementation Support: financing (a) the operating costs of SFDI (including staff salaries, office consumables, utilities, in-country travel, office and vehicle maintenance, insurances, etc., as well as renewal of office equipment and vehicles), (b) SFDI staff training, (c) portfolio development activities, (d) annual audits, and (e) monitoring and evaluation surveys and studies. Which safeguard policies are triggered, if any? Re$ PAD.6, Technical Annex 1 Environmental Assessment (OP/BP/GP 4.1); Projects on International Waterways (OP/BP/GP 7.5)... 11

7 Significant, non-standard conditions, if any, for: Re$ PAD C.7 None. Board presentation: Not applicable. Loadcredit effectiveness: (1) Standard Conditions and the Subsidiary Grant Agreement has been executed on behalf of the BorrowedRecipient and SFDI; (2) Adoption of a revised Operational Manual, satisfactory to the Association, by SFDI. Covenants applicable to project implementation: Not applicable

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9 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Azerbaijan s armed conflict with Armenia over the Upper Garabagh region, which lasted from 1992 to 1994, left over 3, dead and over 1 million people displaced. About 575, or 15% of Azerbaijan s population became internally displaced persons (IDPs), (in addition to the about 2, Azerbaijanis who returned from Armenia). During the first years of the post-conflict period the Government gave the highest priority to resettling the refugees from Armenia, since it was unlikely they would ever be able to retum to their original places of residence. IDPs were expected, at least in principle, to retum to the areas from where they had been displaced as soon as a political settlement of the conflict could be reached. Efforts to resettle them or promote their social and economic integration were therefore viewed as a lower priority and considered a purely temporary necessity. About 36, IDPs from the areas that were only temporarily occupied by Armenian forces at the time of their farthest advance into Azerbaijan could indeed return to their locations in connection with the reconstruction efforts undertaken jointly by the Government and the International Donor Community. The strain on the Azerbaijan economy that results from caring for these IDPs is substantial. The Government supports all IDPs with provision of a monthly cash grant (about USD 5 per person per month), food subsidies (about USD 3 per person per month) and free utilities (electricity, water, etc.). These measures alone cost the Government about USD 1 million every year (about 2 % of GDP) and are supposed to last until the people have either returned to their places of origin (which would presuppose a workable peace agreement with Armenia) or have been permanently resettled and provided with productive agricultural land or another basis for livelihood at their current places of living. Chances for a rapid settlement of the conflict remain uncertain and the Government has begun to revise its strategies and approaches to the IDP problem. The Government s first priority has now become to resettle the IDPs still living in tent camps and other temporary shelters outside Baku. To this end, a series of new settlements have been built in previously unoccupied areas of the country with Government resources. To date, about 25, of these IDPs have already been resettled and another 16, are expected to have moved by the end of 25. However, even among those IDPs that do not have to be relocated immediately, many live in conditions where infrastructure, housing and service needs are substantial. Large numbers dwell in excessively poor housing conditions in school dormitories, former hotels and/or occupy public buildings. Others live in informal settlements that often lack most elementary services, such as water supply and electricity, schools or health facilities. Economic opportunities are limited and unemployment is high, especially in places outside the Greater Baku area. 2. Rationale for Bank involvement Together with UNDP, UNCHR and the EU, the World Bank developed in a USD 12. million priority program for the Resettlement and Reconstruction of Liberated Territories. To finance the first phase of that program, the Bank approved in August 1998 a USD 2. million 1

10 IDA credit (Cr. 319-AZ) for a Pilot Reconstruction Project. The credit was complemented by parallel financing from UNDP (USD 3.2 million), UNCHR (USD 12.1 million) and EU (USD 9.5 million), and supported by a Government contribution of USD 9.5 million. The purpose of the project was to help Azerbaijan rebuild economic and social infkastructure in the war ravaged regions and allow as many IDPs as possible to retum to their places of origin. The efforts were relatively successful. A sizeable portion of transport, energy transmission and other infrastructure in these territories was rebuilt. As mentioned above, about 36, IDPs were able to retum to the areas where they came from, and economic activities there have resumed. To address the needs and help improve the living conditions of IDPs from other regions, the Bank agreed in June 1999 to provide a USD 1. million Supplemental Credit to the Pilot Reconstruction Project (Cr AZ). Specifically, the Supplemental Credit was to finance (through the Social Fund for IDP Development-SFDI ) micro-projects with social and economic objectives, and to provide micro-credits to enhance the economic opportunities of IDPs. This second component of the project has financed about 19 micro-projects of an average cost of about USD 35, for a reported total of about 16, beneficiaries. About USD 1.8 million in funds have been used to provide funding to partner lending institutions, which, in tum, are using the funds for about 2,5 active clients. The Pilot Reconstruction Project will close on June 3, 25. The project has not encountered any fiduciary problems. All audits have been consistently unqualified. At this point, virtually all project resources have been committed and all activities are expected to be fully completed by the time of closing. Importantly, a large number of applications for micro-projects that were submitted to SFDI by the IDP communities could not be funded for lack of resources, but are ready for implementation. 3. Higher level objectives to which the project contributes Improving the living conditions and economic opportunities of IDPs is an explicit objective of the Government s poverty reduction strategy formulated in the State Program on Poverty Reduction and Economic Development (SPPRED). The Government objective is fully consistent with the Third Strategic Goal of the 23 CAS which focuses on improving social services and infrastructure. B. PROJECT DESCRIPTION 1. Lending instrument Specific Investment Loan (SIL) 2. Program objective and Phases Not applicable. 2

11 3. Project development objective and key indicators The proposed IDP Economic Development Support Project (IDP-EDS) is a repeater project that replicates part of the Pilot Reconstruction Project (Cr. 3 19/3 191-AZ), and its objective, like that of its predecessor, is to help improve the living conditions of IDPs and enhance their economic opportunities and prospects for social integration. Key indicators: Progress in achieving development objectives will be assessed periodically by key performance indicators measuring project outputs and outcomes. The results framework is detailed in Annex 3. Indicators will include the following: Overall satisfaction of the IDP community with project-supported improvements Number of micro-projects completed Number of micro-project beneficiaries Number of micro-credit loans extended by Partner Lending Institutions (PLIs) Number of active PLI clients. The social fund character of the project implies that specific sector and project choices will be made in the course of implementation. Indicators to reflect the specific conditions and achievements will be further refined as sub-project choices are made. 4. Project components The proposed IDP-EDS will replicate the Social Fund for Development of IDPs component of the Pilot Reconstruction Project, (Cr AZ). Accordingly, IDP-EDS will consist of three components: (a) micro-projects; (b) micro-credits; and (c) IDP/EDS implementation support. The table below provides a project cost estimate and indicative financing plan for the project components: Table 1 : Estimated Project Costs and Indicative Financing Plan (in USD million) I I E.1 IDA Government IDA%of total A. Micro-projects B. Micro-credits C. IDP/EDS Implementation Support %.5..5 % % * Numbers may not sum due to rounding. Total % 3

12 A. Micro-proiects (USD 1.5 million; IDA USD 1.2 million equivalent) The component will finance the preparation and implementation of up to about 2 small-scale projects (average cost about USD 5,) of rehabilitation, repair or reconstruction as well as the acquisition of related equipment, for: basic small infrastructure, such as water supply and sewage networks, electricity distribution networks, access roads, and drainage systems; social infrastructure such as schools, community centers; and temporary shelter facilities. To be eligible for SFDI financing all such micro-projects must be identified and selected by the beneficiary IDP communities themselves who provide a cash-contribution of 3% of the total cost as a demonstration of their commitment. A large number of such micro-projects have already been identified under the Pilot Reconstruction Project but could not be funded for lack of resources. All projects must demonstrate that they represent the least-cost approach to the problems they are meant to address in terms of both the actual cost of the investment and the resulting operations and maintenance costs (for a detailed description, see Annex 4). B. Micro-Credits (USD.5 Million; IDA. million equivalent) The component, which will be financed exclusively from counterpart funding resources, will provide financing to Partner Lending Institutions (PLIs) for the extension of micro-credits to IDPs. Geographically, the use of SFDI micro-finance resources will be restricted to the Greater Baku area (i.e. the Absheron Peninsula and the cities of Baku and Sumgait) in order to avoid any territorial overlap or conflict with the Bank s existing Agricultural Development and Credit Project (Cr AZ) and the proposed ADB Micro and Rural Finance Project, (for a detailed description, see Annex 4). C. IDP/EDS Implementation Support (USD 1.5 million, IDA 1.3 million equivalent) The component will finance (a) the operating costs of SFDI (including staff salaries, office consumables, utilities, in-country travel, office and vehicle maintenance, insurance, etc. as well as renewal of office equipment and vehicles), (b) SFDI staff training, (c) portfolio development activities, (d) annual audits, and (e) monitoring and evaluation surveys and studies (for a detailed description, see Annex 4). 5. Lessons learned and reflected in the project design The experience of social fund projects in ECA and other regions shows that the successful achievement of the objectives of this type of operation depends on a number of specific elements: (a) involvement of local communities in decisions on local investments generates local ownership and reduces the risk of post-project loss of purpose and commitment; (b) even though one-time investments in a community can be useful, a significant economic, social, or institutional impact can only be achieved through supporting the community over a number of years; and (c) adequate attention must be paid to the lack of local capacity and expertise in the 4

13 design of the implementation arrangements keeping them as simple and cost-effective as possible. These lessons were taken into account in designing the Pilot Reconstruction Project by (a)placing all decisions on the selection of SFDI investments into the hands of the IDP communities themselves; and (b) simplifying the implementation arrangements and investing SFDI with the exclusive responsibility for the actual management of implementation. Experience on the first project showed these elements worked well and they will be continued in the IDP/EDP project. 6. Alternatives considered and reasons for rejection No alternatives were considered for IDP-EDS. In view of the successful implementation of the Pilot Reconstruction Project, the Azerbaijan Government requested, and the Bank concurred, that an operation that would replicate the SFDI component of that project was the most effective solution to achieve the project objectives: namely improving the living conditions of IDPs and enhancing their economic opportunities and prospects for social integration. Repeating the Pilot Reconstruction Project in its entirety was considered unnecessary since the reconstruction of war-damaged larger infrastructure is by now largely completed and still existing reconstruction needs are covered by funding from Government sources. Extending another supplemental credit to the Pilot Reconstruction Project was deemed unfeasible as the proposed operation would not satisfy the requirements for supplemental lending as defined in OP C. IMPLEMENTATION 1. Partnership arrangements (if applicable) The project does not entail any co-financing or other form of support from other donors. However, the project was prepared, and will be implemented, in close coordination with other donors still involved in support to IDPs in Azerbaijan, namely, UNCHR, UNDP, and USAID, as well as the Asian Development Bank (ADB). 2. Institutional and implementation arrangements IDPiEDS will be implemented over a period of three years (thirty-six months), commencing on July 1, 25, the expected time of effectiveness of the Credit. The project is expected to be completed on June 3, 28 with the closing date o f the Credit set for December 31, 28. A Mid-Term-Review (MTR) is planned for October 26. IDP/EDS will rely without any major change on the implementation arrangements, including existing staff, agreed for the SFDI component of the ongoing Pilot Reconstruction Project. IDP/EDS will be implemented by the Social Fund for the Development of IDPs -SFDI. SFDI was created as an autonomous agency reporting to the cabinet of ministers for the purpose of implementing the SFDI component of the Pilot Reconstruction Project by Presidential Decree 5

14 No. 215 o f December 6, It is governed by a Board of Directors whose members are from the Azerbaijan Government, the donor community, and the non-governmental and private sector. In accordance with the Government Decree No. 151 of October 15, 24 the Government is represented by the Deputy Prime Minister (chair), and representatives of the Ministries of Finance, Labor and Social Protection, and the State Committee for IDPs. The International Donor Community is represented by UNDP, UNCHR and USAID. The non-governmental and private sector is represented by representatives of the Exxon-Mobil Corporation, the Azerbaijan Forum of Non-Governmental Organizations, and the Azerbaijan Union of Small and Medium Enterprises. The organizational structure and working procedures of SFDI are defined in an Operations Manual (OM). The OM has been revised prior to Negotiations to take into account the lessons learned and the experience gained from the implementation of the Pilot Reconstruction Project (for a detailed description of SFDI operating procedures, see Annex 6). The implementation of the micro-project component is based on the following arrangements: a a a a a micro-projects are identified by IDP communities, either directly or with assistance from NGOs in response to information campaigns about the project that are undertaken by SFDI through the media and direct contact; SFDI screens the applications received for their compliance with SFDI eligibility criteria and either accepts or rejects the applications or requests further explanations; in the case of accepted applications, SFDI prepares all necessary technical studies, final design and tender documents required for the micro-project; subsequently, SFDI carries out all procurement, hires contractors, and supervises the work implementation; upon completion of the works, SFDI transfers the assets into the ownership of the IDP community or the relevant local authority, as the case may be. The implementation of the micro-credit component will be based on the following arrangements: SFDI will on-lend IDP/EDSP micro-credit resources to Partner Lending Institutions (PLIs) that satisfy SFDI eligibility criteria and are selected through a transparent application and appraisal process, (for on-lending and PLI eligibility conditions, see Annex 4). a Eligible PLIs will extend micro-credits to IDP clients in accordance with their own credit policies, and credit terms and conditions. 3. Monitoring and evaluation of outcomes/results Monitoring and evaluation [M&E] will be the responsibility of SFDI. Monitoring project progress and achievements will require a continuous and systematic review of different aspects of project implementation. In keeping with this goal, M&E activities will focus on (a) ensuring that micro-projects are implemented in accordance with procedures and contracting arrangements defined in the OM; (b) providing information on project implementation 6

15 performance in terms of social benefits; (c) alerting SFDI managers to actual and/or potential problems in implementation so that remedial action can be taken in a timely fashion; and (d) providing a mechanism for SFDI to continuously self-evaluate its performance and explore possible improvements. The results of M&E activities will be reflected in SFDI s quarterly and annual progress reports. The progress reports will cover progress in micro-project implementation, and micro-credit extension. They will also include financial management reports (FMR). The fourth quarterly report will summarize the results achieved during the year and provide a work plan and a corresponding budget for the following year. 4. Sustainability By definition, the status of IDP is expected to be of purely temporary nature, as it assumed that IDPs either would eventually return to the disputed territories or integrate into the society at the places where they are currently living. The primary purpose of the proposed IDP/EDS is precisely to help achieve the latter objective: that is, to facilitate the rapid social and economic integration of IDPs into the host communities and contribute to creating the conditions for a better sustainability of their livelihood. As demonstrated by the experience of the Pilot Reconstruction Project, IDP communities can be expected to make a significant effort to adequately operate and preserve the assets provided to them under the proposed project. With the social and economic integration of the IDPs into the host communities, the investments financed under IDP/EDS will see a gradual transfer into the ownership of the local governments for the areas where the IDP communities are located. To this effect, attention will be paid by SFDI to prioritize dual use investments, that is microprojects that will be of use to both the IDP groups and the host community. 7

16 5. Critical risks and possible controversial aspects Potential risks and mitigation Risk Mitigation Strategy Micro-projects are selected without adequate social, economic and/or technical justification. Investments for IDP communities lead to tensions with host communities, especially in poorer areas. Partner Lending Institutions (PLIs) fail to responsibly manage extension of credits. SFDI management decisions are subject to political interference. Refinement of selection and evaluation criteria. Accessibility of IDP/EDS investments to non-idp social groups will be a key selection criterion. Adoption of strict eligibility criteria for Partner Lending Institutions. SFDI Board is composed of representatives of Government, donor community and private sector. Possible Controversial Aspects: There are no controversial aspects, nor are any controversies expected to develop during project implementation. 6. Loadcredit conditions and covenants 1. Effectiveness Conditions Standard Conditions and the Subsidiary Grant Agreement has been executed on behalf of the Borrower/Recipient and SFDI Adoption of a revised Operations Manual, satisfactory to the Association, by SFDI. 2. Other [classify according to covenant types used in the Legal Agreements.] None. D. APPRAISAL SUMMARY 1. Economic and financial analyses A traditional economic analysis is not feasible due to the social fund nature of IDP/EDS so a prior estimation of the net present value or the economic intemal rate of retum for the whole 8

17 project cannot be made. This is because all micro-projects will be identified during the lifetime of the project and may vary considerably in their objectives, technical nature, and types of benefits. Approval of micro-projects by SFDI will be based on rigorous selection criteria defined in the Operations Manual. This is a continuation of the practice under the Pilot Reconstruction Project, which has worked well. 2. Technical The objective o f IDP/EDS is to help improve the living conditions of IDPs and enhance their economic opportunities and prospects for social integration. Achieving the objectives requires the selection of investments that are technically sound and represent the least-cost solution - in terms of both investment and operation and maintenance costs - to the problems they are meant to address. 3. Fiduciary A procurement capacity assessment was conducted for the Project. Risk has been rated high and mitigation measures were agreed with SFDI (See Annex 8 for detailed procurement report). In addition, the Bank assessed capacity of SFDI to carry out its financial management (FM) responsibilities under the Project (see Annex 7 for detailed FM Assessment Report). Current SFDI staff are familiar with the Bank s fiduciary requirements relating to procurement, financial management, disbursements and audit. However, additional staff to be hired under the IDP/EDS will require some training on World Bank procedures for procurement, financial management and disbursement. A suitable accounting system, based on IC software, is in place and has capacity to generate Financial Monitoring Reports (FMR). Amendments to the SFDI Financial Management Manual, satisfactory to the Bank, have been made to accommodate the needs of IDP/EDS. Overall, the SFDI Financial Management will be responsible for the financial management processes of IDP/EDS, including budgeting, accounting, reporting and audit, and will ensure compliance with the World Bank audit requirements. 4. Social There are no involuntary resettlement issues raised by the project. There is an ongoing discussions on the relative merits of an exclusively IDP targeted approach vs. a general, poverty focused approach that would address the issue of IDPs as part of an overall poverty reduction effort, and not through systematic targeting of IDPs. While it is advisable to address communities with significant number of IDPs but extend the benefits of available income generation and community development programs to all members of the community, a diffused, poverty focused approach which would not target IDP communities will not help address the poverty and extremely poor living conditions of this poor and vulnerable group. If the various types of cash and other assistance provided to IDPs by the Govemment are not taken into account, the IDPs have significantly lower incomes and standards of living compared to other poor in Azerbaijan. Also, the trauma and relative deprivation suffered by them due to sudden displacement from stable communities with sustainable livelihoods does merit preferential assistance compared to the other poor of Azerbaijan. 9

18 5. Environment IDP/EDS is not expected to have any significant or irreversible environmental impacts, and is classified as Environmental Category "FI". Many of the micro-projects are expected to produce environmental benefits (for example reduction in erosion through proper road rehabilitation or small-scale wastewater treatment). However, because the micro-projects are not pre-identified, there could be unforeseen environmental impacts during implementation. An environmental review procedure for screening and assessing environmental impacts of micro-projects, as well as developing mitigation plans, has been developed in the Environment Management Plan (EMP), which describes the framework of procedures and measures to mitigate any adverse impacts to the environment and is part of the Operational Manual. Environmental assessments will be carried out for specific micro-projects and/or project sites as appropriate. The SFDI staff will include a qualified environmental specialist to oversee compliance with the EMP. Alternatives to specific micro-projects will be considered and assessed during micro-project preparation and appraisal, as per guidelines provided in the EMP. Experience under the first project has shown that environmental issues were adequately handled during micro-project preparation and implementation. SDFI has maintained detailed records documenting environmental issues that were addressed by the firms contracted to implement the sub-projects. The short-term impacts, which inevitably occur during construction, will be minimized by proper planning and application of preventive measures, and will be mitigated by restorative actions after the civil works are completed. Use of construction materials, which are hazardous to human health (e.g. asbestos) will not be permitted. SFDI will ensure that all investments obtain clearances as required per Azerbaijan national regulations. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.1) [XI [I Natural Habitats (OP/BP 4.4) [I [XI Pest Management (OP 4.9) [I [XI Cultural Property (OPN 11.3, being revised as OP 4.11) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.2, being revised as OP 4.1) [XI [I Forests (OP/BP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.6)* [I [XI Projects on International Waterways (OP/BP/GP 7.5) [XI [I Involuntary Resettlement. [World Bank OP IDP/EDS not trigger OP/BP 4.12 as the project will deal exclusively with rehabilitation/repair/upgrading of existing infrastructure and installations on existing premises or new routes on public rights of way which will not entail any land acquisition, relocation of population, or restrictions on access to resources. * By supporting the proposed project, the Bank does not intend to prejudice the final determination ofthe parties' claims on the disputed areas 1

19 International Waterways (World Bank OP 7.5). Some of the micro-projects supported by the project may be linked to trans-boundary waterways, as defined in OP 7.5. However, the project qualifies for an exception from notifying the governments of the other riparian countries of the Caspian Sea basin, since none of the project activities are likely to attempt to modify the course of waterways and to significantly increase the volume of water abstraction from, or the discharge of waste water to, trans-boundary water bodies as defined by OP7.5, thus affecting the water rights of the other riparians. A memorandum to the Regional Vice President seeking his agreement on the finding of the Project Team that the investment activities under the Project qualify for an exception from riparian notification requirement of OP/BP 7.5 was submitted to, and signed by, the Regional Vice President on November 16, Policy Exceptions and Readiness The project will not entail any policy exceptions and will comply with all applicable Bank policies. The project is a social fund type operation and therefore no investment program can be identified prior to Negotiations and Board presentation. SFDI, the implementing agency is fully operational and has developed a comprehensive Operations Manual (OM) under the Pilot Reconstruction Project. The OM has been revised for the proposed IDP/EDS to take into account the lessons learnt from the first operation. Adoption of a revised Operations Manual, satisfactory to the Association, by SFDI is a condition for Credit Effectiveness. 11

20 Annex 1 : Country and Sector or Program Background AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT Upper Garabagh is an area within Azerbaijan that was largely populated by ethnic Armenians. The territory was given autonomous status inside the Azerbaijan Soviet Republic in 1923 after disputes within the Soviet government over whether to attach it to Armenia or Azerbaijan. Tensions resurfaced in the last years of the Soviet regime. After some inter-ethnic clashes in Azerbaijan in 199, Upper Garabagh declared its independence in September 1991 and in early 1992 Armenia forces occupied the territory as well as a swath of surrounding areas originally inhabited by non-armenian Azerbaijanis. The armed conflict lasted from 1992 to 1994, left over 3, dead and over 1 million people displaced. About 575, people, or 15% of Azerbaijan s population, became internally displaced persons (IDPs). Discussions about a peace agreement are still ongoing and the prospects for a solution to the conflict remain uncertain. About 2, Azerbaijan nationals left Armenia. During the first post-conflict years the Government gave the highest priority to resettling these refugees since it was assumed that, even if there should be a peace agreement, they would never be able to retum to their original locations. IDPs were expected, at least in principle, to return to the places from where they came as soon as conflict was settled. Efforts to resettle them or promote their social and economic integration were therefore viewed as a lower priority and a purely temporary necessity. About 36, IDPs from the areas that were only temporarily occupied by Armenian forces at the time of their farthest advance into Azerbaijan could retum to their areas of origin in connection with the reconstruction efforts undertaken by the Government and the Intemational Donor Community. The majority of IDPs, however, could not retum. Many IDPs moved to the Greater Baku area (Le. the cities of Baku and Sumgait and the adjacent Absheron peninsula), where, in 23, 155, IDPs were officially registered as residents. Chances for a rapid settlement of the conflict have not materialized yet and the Government has begun to revise its strategies and approaches to the IDP problem. The Government s first priority has now become to resettle those IDPs living in tent camps and other temporary shelters outside Baku. To this end, a series of new settlements were built in previously unoccupied areas of the country. To date, about 25, such IDPs have been resettled and another 16, are expected to be resettled by the end of 25. However, even for those IDPs that do not have to be relocated immediately, living conditions are often abysmal. Large numbers are housed in run down school dormitories, former hotels and/or occupy public buildings. Others live in informal settlements in the periphery of the two cities which often lack most elementary services such as water supply and electricity, schools or health facilities. A report prepared in connection with the preparation of the proposed IDP/EDS showed that a significant number of large multi-generational IDP families lived in one single room of 18 to 2 square meters and relied on communal cooking and sanitary facilities. Together with UNDP, UNCHR and the EU, the World Bank developed in a USD 12. million priority program for the Resettlement and Reconstruction of Liberated Territories. To IDPs in Baku: A Qualitative Approach, Asen Balikci, University of Montreal (Canada), 24 12

21 ~ 29 finance the first phase of that program, the Bank approved in August 1998 a USD 2. million IDA credit (Cr. 319-AZ) for a Pilot Reconstruction Project. The credit was complemented by parallel financing from UNDP (USD 3.2 million), UNCHR (USD 12.1 million) and EU (USD 9.5 million), and supported by a Government contribution of USD 9.5 million. The purpose of the project was to help Azerbaijan rebuild economic and social infrastructure in the war ravaged regions and allow as many IDPs as possible to return to their places of origin. Even though some initial delays were experienced and some components had to be dropped, the efforts were relatively successful. A sizeable portion of transport, energy transmission, irrigation and social and educational infrastructure was rebuilt. As mentioned above, about 36, IDPs were able to return to their areas of origin, and economic activities there have resumed. A notable contribution of the project to the latter objective was the provision of about 7 head of new livestock to IDP households. To address the needs and help improve the living conditions of IDPs from other areas the Bank agreed in June 1999 to provide a USD 1. million Supplemental Credit to the Pilot Reconstruction Project in order to finance through the Social Fund for IDP Development- SFDI, micro-projects with social and economic objectives and to provide micro-credits to enhance the economic opportunities of IDPs. To date, this second component of the project, the SFDI Component, has financed about 19 micro-projects of an average cost of about USD 35, for a reported total of about 16, beneficiaries. The distribution of micro-projects by category of works is shown in Table 1, below Table 1 : Distribution of SFDI implemented micro-projects by category: Category of projects Rehabilitation of dormitories, and other temporary housing facilities Rehabilitation of wells and water supply and imgation systems number 44 Repair of sewerage systems j Extension of power distribution networks,, I Extension of natural gas distribution systems l 4 Repair and improvement of local roads Rehabilitation and equipment of schools I Rehabilitation and equipment of social facilities I In % of total About USD 1.9 million in SFDI funds have been used to finance micro-credits through Partner Lending Institutions. These funds are used for about 2,5 active clients. Funding for these micro-credits was channeled to Partner Lending Institutions (PLIs) including both Micro-Finance institutions (MFIs) and Credit Unions (CUs). All five MFIs participating in the project were established as local institutions (Limited Liability Companies licensed by the Azerbaijan National bank as non-bank financial institutions) by parent international NGOs that were operating micro-credit programs in Azerbaijan: Azer Credit (World Vision), Finance for Development (Oxfam), FINCA, NorMicro (Norwegian Refugee Council), and Madad (Relief 13

22 Intemational). In most cases SFDI-financed micro-credit represented only a small part of their portfolio. The seven CUs also existed prior to their participation in the project (and had been created in 1998/99 under a TACIS program), but in most cases SFDI funding became their primary source of funding. CUs are generally relatively weak institutions, lack adequate management, staff, lending procedures and data recording and are vulnerable to outside pressure. SFDI resources were passed on to the twelve PLIs under a total of thirty-eight loan agreements, which had the following key features: (a) the duration of the agreement was to be for a period of two years from the date of signature; (b) SFDI funds were to be disbursed in three successive tranches; (c) no repayment of the loan principal was due during the two year period; (d) onlending terms were specific for each PLI reflecting the lending methodologies of the PLI at the time of the agreement; and (e) 8% at least of the funding had to be lent to IDPs. MFIs and CUs took different approaches to lending. MFIs made mostly small short-term loans (average size about USD 275) to individual informal micro-enterprises, and provided access to continuous lending to borrowers with good repayment performances, making a total of about 6, loans to about 1,7 enterprises for a total amount of about USD 45,. CUs in turn made mostly larger and longer-tenn loans (average size about USD 1,9) to about 75 registered small businesses for a total amount of about USD 1.3 million. However, because of the longer term of these loans, CUs were only in a few cases able to make repeater loans. According to the data available, about 45% of all loans have been extended to women. Impact assessments carried out in Baku by the Norwegian Refugee Council and Oxfam demonstrated that micro-credits had a significant positive impact on IDP micro-enterprises. Enterprises in Baku showed a job increase of 46%, while profits and family consumption grew by 1%. Results in the interior of the country were similar with revenue growing by 35%, expenditure on food by 3% and expenditure for health and education by 35%. 14

23 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT Ongoing or planned operations 1. Agricultural Development and Credit Proiect (Cr AZ); SDR 22.2 million; approved 6/8/1999, effective 12/21/1999, expected closing date 3/31/25. The objective of the project is, inter alia, to support a network for financial services in rural areas consisting of local financial intermediaries such as credit cooperatives and rural branches of commercial banks to provide private farms and other rural enterprises with market based financial services. Current PSR rating is U. 2. Rural Investment Project (AZRP) (Cr AZ), SDR 1.2 million; approved 6/3/24, effective (expected) 12/2 1/24. The objective of the project is to improve living standards in rural areas and increase the use of infrastructure services through the implementation of micro-projects for economic and social infrastructure. Current PSR rating: N/A. 3. Agricultural Development and Credit Proiect I1 (under preparation) 4 ADB Micro and Rural Finance Proiect (USD 25. million) The project s objectives are to (a) increase access to financial services in regions, including services for poor households, through sustainable expansion of MFIs and banks; and (b) establish the legal framework necessary for the sustainability of micro and rural finance services. The project is expected to become effective in

24 Annex 3: Results Framework and Monitoring AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT Results Framework PDO Improve living conditions of IDPs and enhance their economic opportunities and prospects for social integration. Intermediate Results One per Component Component One: Improve the living conditions and access to basic services o f IDPs. Component Two: Increase the economic opportunities of IDPs. Component Three: IDP/EDS is implemented efficiently. Outcome Indicators Overall satisfaction of IDP communities. Results Indicators for Each Component Component One: Number of micro-projects completed Number of beneficiaries Component Two : Number of micro-credit loans extended by PLIs. Number of active PLI clients. Component Three: Project implementation progress and financial reporting is satisfactory and in line with agreed schedule. Auditors issue unqualified opinion on financial statements of project accounts. Use of Outcome Information To help the Azerbaijan Government improve its approaches to IDP issues. Use of Results Monitoring Component One: To check performance of SFDI and, if necessary, adjust micro-projects selection criteria. Component Two: To check performance of PLIs. Component Three: To verify SFDI compliance with its project management responsibilities. 16

25 m 3 PI * ill n d U m B a r r=;. hl CCI * vi e, 7.. E

26 Annex 4: Detailed Project Description AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT A. Micro-projects (USD 1.5 million, IDA 1.2 million equivalent) The component will finance the preparation (including required design and engineering studies) and the implementation (including necessary technical supervision) of up to about 2 small-scale projects of rehabilitation, repair or reconstruction, as well as the acquisition o f related equipment for: (a) (b) (c) basic small infrastructure, such as wells, water supply and sewerage networks, electricity distribution networks, access roads, and drainage systems; social infrastructure such as schools, community centers, etc.; and temporary shelter facilities, but limited to structural elements (roofs, etc) and common spaces (sanitary and cooking facilities, hallways, etc) and exclusive of any works inside dwelling units. To be eligible for SFDI financing all such micro-projects must be identified and selected by the beneficiary IDP communities themselves and supported by a cash contribution of 3% of the total cost from these communities as a demonstration of their commitment. Communities will also contribute labor for site preparation, etc. A large number of such micro-projects have already been identified under the Pilot Reconstruction Project but could not be funded for lack of resources. All projects must demonstrate that (a) they represent the least-cost approach to the problems they are meant to address in terms of both the actual cost of the investment and the resulting operations and maintenance costs, (b) they are self-standing and do not depend, in order to be operational, on the implementation of other micro-projects. Detailed eligibility and evaluation criteria to this effect are defined in the Operations Manual. B. Micro-Credits (USD.5 million, IDA. equivalent) The component, which will be financed exclusively from Government counterpart funding resources, will provide financing to Partner Lending Institutions (PLIs) for the extension of micro-credits. Use of SFDI micro-credit resources will be restricted, geographically, to the Greater Baku area (Le. the Absheron Peninsula and the cities of Baku and Sumgait) in order to avoid any territorial overlap or conflict with the Bank s existing Agricultural Development and Credit Project (Cr AZ) and the proposed ADB Micro and Rural Finance Project. For the same reason, IDP/EDS will also use the same terms and conditions as for the ADB project: 1 year repayment period, including 4 year grace period interest rate equal to average AZM deposit rate, adjusted every 6 months. 18

27 C. IDP/EDS Implementation Support (USD 1.5 million, IDA USD 1.3 million equivalent) The component will finance the following: SFDI operating costs (estimated cost USD 1.3 million) The sub-component will finance project-related operating and maintenance costs of SFDI, including staff salaries and eligible social charges, communications, utilities including electricity, bank charges, printing and publications, office rent, maintenance, repair and supplies, office security systems, vehicle operation, fuel and maintenance, transportation and field trip expenses, insurance for office equipment and vehicles, as well as acquisition of office, communication and transport equipment. SFDI staff training (estimated cost USD 1,) The sub-component will finance training of SFDI staffsin procurement, financial management, capacity building related activities (including business travel expenditures) with counterpart organizations and other professional matters, as well as participation in workshops and seminars in Azerbaijan and abroad. Annual audits (estimated cost USD 8,) The sub-component will finance the annual audits of project accounts and financial statements by independent auditors in accordance with World Bank guidelines. Micro-project portfolio development (estimated cost USD 25,) The sub-component will finance SFDI information campaigns and specific assistance to IDP communities for the preparation of project proposals. Social Assessments for monitoring and evaluation (estimated cost USD 5,) The sub-component will finance the implementation of surveys and other social investigations by local consultants to monitor and evaluate project outcomes. 19

28 Annex 5: Project Costs AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT The costs shown in the table below reflect the new Country Financing Parameters for Azerbaijan adopted in December 24. Table 1 : Estimated Project Costs and Indicative Financing Plan (in USD ) SFDI staff training Annual audits Portfolio development Monitoring and evaluation Total ,575 11,497 1,78 2

29 Annex 6: Implementation Arrangements AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT General IDP/EDS will be implemented over a period of three years (thirty-six months), commencing in July 25, the expected time of effectiveness of the Credit. IDP/EDS will continue the implementation arrangements, including existing staff, for the SFDI component of the ongoing project unchanged. IDP-EDS will be implemented by the Social Fund for the Development of IDPs-SFDI. SFDI was created as an autonomous agency reporting to the cabinet of ministers for the purpose of implementing the SFDI component of the Pilot Reconstruction Project by Presidential Decree No. 215 of December 6, It is governed by a Board of Directors whose members are from the Azerbaijan Government, the donor community, and the non-governmental and private sector. In accordance with the Government Decree No. 151 of October 15, 24 the Government is represented by the Deputy Prime Minister (chair), and representatives of the Ministries of Finance, Labor and Social Protection, and the State Committee for IDPs. The International Donor Community is represented by UNDP, UNCHR and USAID. The non-governmental and private sector is represented by representatives of Exxon, the Azerbaijan Forum of Non-Governmental Organizations, and the Azerbaijan Union of Small and Medium Enterprises. Originally, SFDI was created as an autonomous agency reporting to the cabinet of ministers for the sole purpose of implementing the SFDI component of the Pilot Reconstruction Project. Subsequently, it was given the additional responsibilities of managing the implementation of IDP projects financed from the Government Oil Fund as well as of projects financed by Turkey and Greece. However, the management of the projects financed from the latter sources is separate from that of the ongoing Pilot Reconstruction Project and the proposed IDP-EDS. The organizational structure and working procedures of SFDI are defined in an Operations Manual (OM). Micro-Proi ects The implementation of the micro-project component will be based on the following arrangements: e e e micro-projects are identified by IDP communities either directly or with assistance from NGOs in response to information campaigns about the project that are undertaken by SFDI through the media and direct contact. SFDI screens the applications received for their compliance with SFDI eligibility criteria and either accepts or rejects the applications or requests further explanations. in the case of accepted applications, SFDI prepares all necessary technical studies, final design and tender documents required for the micro- project. 21

30 subsequently, SFDI carries out all procurement, hires contractors, and supervises the work implementation. upon completion of the works, SFDI transfers the assets into the ownership of the IDP community or the relevant local authority, as the case may be. Micro-Credits Implementation of the micro-credit component will be based on the following rules: SFDI makes resources available to Partner Lending Institutions (PLIs) through a competitive process using transparent eligibility criteria and a prior assessment of the financial soundness of PLI operations. PLIs will be allowed to extend micro-credits to clients in accordance with their own credit policies i.e. setting set their own interest rates and selecting clients according to their own criteria. Credit resources will be on lent by SFDI to PLIs on terms and conditions similar to those that will be offered by ADB (ten year term, including a four-year grace period on principle, at a floating interest rate equivalent to the average AZM deposit rate). To be eligible for participation in IDP/EDS, PLIs will have to satisfy the following conditions: Be registered with the Azerbaijan National Bank. Already be lending in the Greater Baku area. Be able to demonstrate that the percentage of IDPs in their Greater Baku area portfolio is at least equal to the percentage of IDPs in the overall population of the Greater Baku area. Provide loans not exceeding USD 5,, with not more than 9% of loans exceeding USD 3,. Have at least 1, active clients. Have a sound and transparent credit policy, with loan products that meet the needs of their clients. Have a functioning MIS that provides financial reports in accordance with international accounting standards and appropriate domestic regulations, and that provides timely reports on total loan portfolio, including the portfolio classification. Have appropriate loan loss provisioning and write-off policies. Have a Board of Directors independent of management. Have a management team that possesses the skills needed for successfully running the institution. 22

31 e Be able to provide externally audited financial statements for the last two years (23 and 24), either as an independent entity or operating within an Intemational NGO. e Be able to provide pro forma financial statements for 3 years that demonstrate increasing financial sustainability and increasing numbers of IDP and other lowincome clients. With regard to financial criteria, to be determined by an examination of the 23 and 24 audited financial statements, PLIs would have to: e e e Show a portfolio at risk over 3 days of less than 5% for the last two years. Show loan losses equal to less than 3% of the average outstanding portfolio for the last two years. Show an equity to risk assets ratio not exceeding.2, where equity is defined as capital grants and retained earnings. 23

32 Annex 7: Financial Management and Disbursement Arrangements AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT I. Project Financial Management Executive Summary and Conclusion An assessment of the adequacy of the project financial management systems of the Social Fund for Development of IDPs (SFDI) was carried out during project preparation to assure that the systems can provide to the Bank accurate and timely information regarding project resources and expenditures. Such systems include accounting, financial reporting, internal control, staffing and auditing arrangements. A. Proiect Accounting Based on the overall assessment of the adequacy of the project financial management systems, the existing systems meet minimum requirements for recording transactions and balances, supporting the preparation of regular and reliable financial statements and safeguarding assets. The existing IC Accounting system is already producing the required Financial Monitoring Reports for the ongoing Pilot Reconstruction Project and is considered capable of accounting and financial reporting for the IDP/EDS Project. B. Country Issues The Azerbaijan Country Financial Accountability Assessment (CFAA) diagnostic work carried out in 22 recommended accounting and auditing regulatory and institutional reforms to increase accountability and good governance in the country. Most of the key CFAA recommendations on legal and regulatory reforms and institutional capacity building are addressed in the proposed three Poverty Reduction Strategy Credits (PRSCs), and the recently approved Institutional Development Fund Grant on Accounting and Auditing Reforms. A new Accounting Law and related secondary regulation mandating use of International Financial Reporting Standards (IFRS) for public interest entities and governmental enterprises, and International Public Sector Standards (IPSA) for the public sector has been approved by Parliament. The Accounting Law would assure greater transparency and accountability of public funds. In parallel, the enactment of the new Audit Law currently under preparation, and establishment of regulatory and institutional frameworks for the Chamber of Accounts, the Country s Supreme Audit Institution and the Chamber of Auditors, the audit profession regulator and standard-setter would provide greater transparency and comparability of financial Reporting. C. Risk Analysis Risks associated with the Project s financial management systems are summarized below, and outlined in a report available in the Project files. 24

33 ~ Description 1. INHERENT RISK 1. Country Financial Management 2. Project Financial ManagemenKounterpart funds 3. Banking Sector 4. Accountability and Governance Overall Inherent Risk Risk High Moderate High High High Comments Legal and regulatory reforms conducive to increased accountability and efficiency addressed in the ongoing PRSC 1 and proposed PRSC 2 and 3. Overall borrower improvement in providing countemart fundine on timelv basis. Banking Policy reforms under way. PRSC 1 addresses regulatory and institutional reforms on accountabiky and governance. 2. CONTROL RISK 1. Implementing Entity 2. FundsFlow 3. Staffing 4. Accounting Policies and Procedures 5. Internal Audit 6. Extemal Audit 7. Reporting and Monitoring 8. Information Systems Overall Inherent Risk Low Moderate Low Moderate High Moderate Moderate Moderate Moderate The PIU has experience in implementing the ongoing Bank-financed Pilot Reconstruction Proi ect. No issue on counterpart funding. The proposed project will be implemented by the existing staff of the PIU who are already implementing the ongoing Pilot Restructuring Project. Procedures documented in an Operations Manual. The Updating of the Financial Management Section of the existing Manual is comdeted. There is no internal audit function in SFDI. Extemal auditors will be selected under TORS cleared with the Bank. Format and timing of Quarterly FMRs were 25

34 D. Strengths and Weaknesses SFDI has successfully implemented the ongoing 'Pilot Reconstruction Project' financed by the Bank. In addition, it has managed other intemational donor and Government funds. An additional Accountant will be recruited to support the current Chief Accountant. E. Implementation Arrangements SFDI will have the overall responsibility for coordination with all donor agencies and implementation of all project activities, project accounting, financial reporting, Credit disbursements, auditing arrangements, procurement activities and project monitoring under the leadership of the SFDI Director. F. Staffinn The key staff of SFDI include: director, financial managerichief accountant, microprojects appraisal manager, procurement manager, income generation manager, office manager, management information systems manager, promotion and public awareness manager and infrastructure micro-projects implementation manager. In addition, SFDI is supported by seven support staff including assistants to the financial manager and procurement manager. The accounting staff are experienced in implementing Bank projects, and have received local and intemational training in financial management, disbursements and auditing of Bank projects. Additional training will be provided during the implementation of the project. G. Flow of Funds The total project cost of USD 12.6 million will be financed with an IDA Credit of USD 11.5 million, and counterpart funding of USD 1.1 million. Of the counterpart funding, about USD.3 million will come from cash-contributions from IDP communities. Disbursements of the IDA Credit to finance works, goods, consultants' services and audit, training and incremental operating costs would be transaction-based as described in Annex 7 of the PAD. H. Existing Accounting Structure, Svstems and Controls The SFDI Financial ManageriChief Accountant assisted by an accountanticashier has the overall responsibility for project accounting, financial reporting, disbursements and auditing arrangements. They will work closely with the micro-project and micro-credit implementing managers to ensure all accounting transactions and related documentations are submitted to the chief accountant for processing to ensure consolidated project accounting and reporting. The SFDI staff report to the SFDI Director, who authorizes, assigns and delegates responsibility. The accounting and financial reporting duties are well segregated to assure safeguarding of assets, accuracy and completeness of the accounting records, including timely preparation of financial reports. The accounting and administrative controls are documented in the Operational Manual. 26

35 I. Proposed Accounting Svstem, Financial Reporting and Monitoring The existing 1 C Accounting software is already customized to automatically produce the required quarterly Financial Monitoring Reports for the ongoing project. SFDI uses cash basis of accounting in maintaining and preparing project accounts. Quarterly Financial Monitoring Reports (FMRs) will be prepared and submitted to the Bank no later than 45 days after end of each quarter. The FMRs will comprise of: (i) Financial Reports; (ii) Project Progress Report; and (iii) Procurement Management Report. These reports will provide information on the progress of the project in terms of financial activity, key output measures and procurement for the relevant quarter. The format and reporting requirements were confirmed at negotiations. J. Auditing Arrangements External Audit. The Project and SFDI will be audited each year by external auditors in accordance to auditing standards and terms of reference acceptable to the Bank. The audit report would be submitted to the Bank no later than six months after end of each year audited. The scope of the audit would include audit of the project financial statements, and arrangements surrounding use of the Special Account and the Statements of Expenditure (SOEs), and the audit of SFDI s financial statements. The cost of the audit will be eligible for financing under the Credit. The audit arrangements were confirmed at negotiations. Internal Audit. There is no internal audit function within the SFDI. K. Impact of Procurement Arrangements Based on diagnostic work carried out under the Country Procurement Assessment Report (CPAR) issued in 23, the legal framework, enforcement regime and procurement capacity were identified as areas that require strengthening. Azerbaijan has introduced a new Public Procurement Law (PPL) that is based extensively on the United Nations Commission for International Trade Law (UNCITRAL) model. The PPL has set up a three-tier review system that consists of an internal administrative review by the State Procurement Agency (SPA) and judicial review. Perception of the courts ability to deal with procurement disputes is poor, thus jeopardizing the SPA S level of confidence and overall transparency in the review process. The SPA has been vested with the procurement regulatory functions and has shown a willingness to ensure compliance with the Public Procurement Law (PPL). Procurement risk has been rated high for this project (see Annex 8). Mitigation and capacity building measures include reinforced staffing with the addition to the existing staff of a new procurement assistant, and the inclusion in the procurement plan of a training program on procurement according to World Bank guidelines and procedures. Both existing staff and additional procurement staff would benefit from the training program, at an early stage of project implementation 27

36 L. Supervision Plan During project implementation, the financial management staff would: (i) conduct risk based financial management assessment to ascertain that: (i) financial accounting and reporting is adequate; (ii) funds flow arrangements of the project effectively support the project s objectives; and (iii) the quarterly FMRs and the annual audit reports (with accompanying Management Letters) are submitted on time, and meet legal requirements. 11. Disbursement Arrangements The table below, which reflects the new Country Financing Parameters adopted in December, sets forth the Categories of items to be financed out of the proceeds o f the Credit, the allocation of the amounts of the Loan to each Category and the percentage o f expenditures for items so to be financed in each Category: Category Amount of the Credit Allocated (Expressed in USD) % of Expenditures to be Financed Works and Goods 8,95, 97% Consultants Services including Audit (a) Audit under Part C 6, (b) Other Consultants Services 375, Training 9, Operating Costs 92, 8% 1% 1% 8% Unallocated 1,15, TOTAL 11,5, Disbursements from the Credit will be transaction-based to finance eligible expenditures for goods, works, and operating costs based on the standard disbursement percentages pertaining for Azerbaijan. To facilitate timely project implementation, the borrower will establish, maintain, and operate a Special Account denominated in U S dollars, under terms and conditions acceptable to the Bank. The Special Account will be held in a commercial bank acceptable to the Bank. Applications for replenishment of the Special Account will be submitted regularly, preferably monthly. The Special Account will have an initial allocation of USD 1 million. Payments in excess o f 2% of Special Account may be made through direct disbursement from the Credit Account. Available Credit disbursement methods include reimbursements with full documentation, reimbursements on basis of Statements of Expenditure (SOEs) for small expenditures within agreed threshold (see Annex 8, Section V) and payments against Special Commitments. Large contracts may be paid by direct payment from the Credit Account. 28

37 Statement of Expenditures (SOEs). IDA funds would be disbursed under transactionbased procedures including SOEs and direct payments. Supporting documentation for SOEs, including completion reports and certificates, would be retained by the Borrower and made available to the Bank during project supervision. All disbursements would be made on the basis of full documentation for (a) contracts for works and goods under part A of the project costing more than USD 2, each; and (b) services under contracts of more than the equivalent of USD 1, for each consulting firm and more than the equivalent of USD 5, each for individual consultants. Disbursements below these thresholds, as well as for training and incremental operating costs would be made according to certified Statement of Expenditure (SOEs). This documentation would be retained by SFDI for at least one year after receipt by the World Bank of the audit report for the year in which the last disbursement was made. Disbursements for expenditures above the SOE thresholds would be made against presentation of full supporting documentation relating to those expenditures. 29

38 I. General Annex 8: Procurement Arrangements AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT Procurement for the proposed project would be carried out in accordance with the World Bank s Guidelines: Procurement Under IBRD Loans and IDA Credits dated May 24; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 24, and the provisions stipulated in the Legal Agreement. The general descriptions of various items under different expenditure categories are described below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A. Procurement of Works: Works procured under this project would include: at least one contract procured under NCB procedures (total amount USD 2, equivalent), and up to about 2 contracts for micro-projects (estimated to cost about USD 5, equivalent per contract) procured under Shopping procedure based on three written quotations. The procurement will be done using ECA Regional Sample Bidding Documents for National Competitive Bidding of Works. B. Procurement of Goods: Goods procured under this project would include equipment for communities under micro-projects (for example equipment for schools, hardware, etc.). Equipment for SFDI (information technology goods and ready-made software, furniture, vehicles, etc.) would also be procured. The procurement will be done using (a) National Standard Bidding Documents agreed with the Bank for NCB, and (b) Shopping of goods under the specific threshold for this method. C. Procurement of non-consulting services: Survey services and mapping services may also be procured under the project. D. Selection of Consultants: Consultants services would include Design Services for the micro-projects, undertaken by firms, within packages of ten micro-projects per contract as an average (Selection based on the Consultant s Qualifications), supervision services, and audit services awarded under Least Cost Selection procedure. Social Assessments (One Selection under Fixed Budget and one based on the Consultant s Qualifications) would also be included. Supervision would be awarded to individual consultants according to the selection procedures described in section V of the guidelines. Short lists of consultants for services estimated to cost less than USD 1, equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. NGOs having experience of similar projects in the region may be selected, as well as United Nations Agencies and Training Institutions, such as the ILO (Turin Center) for training in procurement and financial management. 3

39 E. SFDI Operating Costs: Operating costs which would be financed by the project would be procured using SFDI s administrative procedures which have been reviewed and found acceptable to the Bank. 11. Assessment of SFDI capacity to implement procurement All procurement activities will be carried out by SFDI. SFDI s Procurement unit is staffed by one procurement officer who has experience with the Pilot Reconstruction Project. The Bank has recommended to reinforce this unit with the addition of a procurement assistant, and to train these two staff members in procurement according to the Bank s procedures at the beginning of implementation. Standard Bidding Documents for each procurement method, as well as model contracts for works and goods, are included in the Operations Manual. An assessment of the capacity of SFDI to implement procurement actions for the project was carried out by Salim Benouniche on November 3, 24. The assessment reviewed the organizational structure for implementing the project and how sampled procurement procedures under the previous similar project (not subject to prior review) were conducted by the project s staff member responsible for procurement. Most of the issues/risks concerning the procurement component for implementation of the project have been identified. These risks include the fact that only one SFDI staff member has experience in procurement according to the Bank s procedures. To mitigate this risk, it has been agreed that a procurement assistant will be hired and training for both staff members will be carried out. The overall project risk for procurement is rated high Procurement Plan SFDI, at appraisal, developed a Procurement Plan for the first eighteen months of project implementation which provides the basis for the procurement methods. This plan has been agreed between the SFDI and the Project Team on January 6, 25 and is available at SFDI s offices (5th floor, # 65 Fizuli Street, Baku, Azerbaijan). It will also be available in the Project s database and in the Bank s external website. The Procurement Plan will be updated in consultation with the Bank annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. IV. Frequency of Procurement Supervision In addition to the prior-review supervision to be carried out from Bank offices, the capacity assessment of SFDI has recommended two supervision missions per year the first year, which could be reduced later to one per year, to visit the field to carry out post review of procurement actions. 31

40 V. Thresholds for Procurement Methods A. Procurement of Works. Civil works estimated to cost less than USD 3, equivalent per contract may be procured using National Competitive Bidding procedures (NCB) using the Bank s ECA Regional Sample Bidding Documents for Procurement of Works (NCB). Minor Works contracts estimated to cost each less than USD 1, equivalent may be procured using three quotations under the Shopping procedure (S). B. Procurement of Goods. Shopping (S) will be used for Goods estimated to cost less than USD 1, equivalent per contract. Contracts for the supply of goods estimated to cost more than USD 1, will be procured under ICB. C. Procurement of Consulting Services. Services for surveys, design and studies, training or similar activities may be procured based on qualifications of consultants (CQS) for estimated contract value of less than USD 2, equivalent. Audit services will be procured using the Least Cost Selection method (LCS). A Single Source Selection ((SSS), of I.L.O., Torino s training facility of the International Labor Organization) is foreseen for the provision of training services in procurement and financial management estimated to cost the equivalent of USD 35,. Social Assessments may be procured using the Fixed Budget Selection method (FBS). The short list may comprise entirely national consultants if the estimated cost of the assignment is below USD 1,. Contracting of consulting firms estimated to cost more than USD 2, equivalent would be carried out normally under the Quality and Cost-Based Selection method (QCBS) in accordance with the Bank Guidelines VI. Suggested Thresholds for Prior Review Thresholds for prior review are shown as an additional table in the procurement plan for the starting year of implementation, and may be revised after one year of implementation. Thresholds for prior review are set as follows for the first year: A. Goods and Works. The following contracts are subject to the Bank s prior review as set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines: (a) (b) (c) all ICB contracts; all contracts estimated to cost the equivalent of USD 2, or more; and the first two contracts procured under NCB (regardless of contract value), and Shopping or Minor Works. B. Consultina Services. With respect to consulting services, prior Bank review will be required for all terms of reference for consultants. Contracts for services estimated to 32

41 cost the equivalent of USD 1, or more for firms and USD 5, or more for individuals, and the first two contracts under CQS, FBS and LCS are subject to Bank s prior review as set forth in paragraphs 2 and 3 o f Appendix 1 to the Guidelines. All other contracts are subject to post review, in a ratio of one contract in five, except for micro-project contracts, which are subject to post review in a ratio of one contract in twenty. 33

42 d m m m * - A Y i 2l i; $ - n n? -4 n m Q 3 m P M I % e e e i! 2 E M.- M e n P n P 5 75 I :t.- E &.- Y

43 Annex 9: Economic and Financial Analysis AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT An a priori economic analysis is not practical due to the social fund nature of IDP/EDS not is a prior estimation of the net present value or the economic internal rate of retum for the whole project. This is because all micro-projects will be identified on an on-going basis over the lifetime of the project and may vary considerably in their specific objectives and technical nature. Approval of micro-projects by SFDI will be based on criteria that will ascertain that the proposed investments: are technically sound and represent a least-cost alternative to the problems to be addressed; are self-standing and do not depend, in order to be operational, on the allocation and implementation of other micro-projects; and are supported by a financial contribution of 3% of the project cost from the beneficiary community as well as a contribution of labor for site preparation, etc. 35

44 Annex 1: Safeguard Policy Issues AZERBAIJAN: IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT Involuntarv Resettlement (World Bank OP 4.12): IDP/EDS will not trigger OPiBP 4.12 as the project will deal exclusively with rehabilitation/repair/upgrading of existing infrastructure and installations on existing premises or new routes on public rights of way which will not entail any land acquisition, relocation of population, or restrictions on access to resources. Intemational Waterways (World Bank OP 7.5): IDP/EDS may inter alia, finance microprojects (of an average cost of about US$45,) to upgrade, replace, and/or repair water supply and sewerage installations in buildings or neighborhoods occupied by small IDP communities that could result in marginally increasing water abstraction from, or waste water discharges to, transboundary rivers as defined by OP 7.5. However, the project qualifies for an exception from notifying the governments of riparian countries, as the proposed activities will neither attempt to modify the course of waterways, nor significantly increase the volume of water abstraction, thus affecting the water rights of other riparians, nor have a detectable impact on the Caspian Sea. Procedures laid out in a Project Operations Manual will be used to ensure that investment proposals developed during the implementation of the proposed project will be properly screened for applicable World Bank safeguard. SFDI will approach Bank for additional guidance on what actions as per OP 7.5 are applicable to any particular investment that could raise this issue. Environmental Assessment (World Bank OP 4.1): The project triggers environmental operational policy 4.1 and has been assigned environmental category FI, as it is a social-fund type project without predetermination of specific micro-projects. The following measures have been or will be taken to mitigate possible problems: (a) (b) The studies or assessments that have been, or aye proposed to be, carried out to help identifi, minimize and address safeguards-related ' impacts. The organizations that prepared and will prepare the studies should be listed. An environmental review procedure for screening and assessing environmental impacts of micro-projects as well as developing mitigation plans will be developed as part of the Operational Manual. Environmental assessments will be carried out by SFDI for specific micro-projects and/or project sites as appropriate. SFDI staff will include a qualified environmental specialist to oversee compliance with the EMP. Any safeguards-related risks, perceived or substantive, and measures taken or proposed to be taken to address the risks. IDP/EDS is not expected to have any significant or irreversible environmental impacts, and is classified as Environmental Category "FI". Many of the micro-projects are expected to produce environmental benefits. However, because these projects are not pre-identified, there could be unforeseen environmental impacts during implementation. 36