Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB1243 Project Name IDP ECONOMIC DEVELOPMENT SUPPORT PROJECT Region EUROPE AND CENTRAL ASIA Sector Other social services (70%);Micro- and SME finance (30%) Project ID P089751 Borrower(s) GOVERNMENT OF AZERBAIJAN Implementing Agency Government of Azerbaijan/Ministry of Finance Baku Azerbaijan Tel: (994-12) 493-30-12 Government of Azerbaijan Azerbaijan Social Fund for Development of IDPs (SFDI) 65 Fizuli Street, 5th Floor Azerbaijan 370010 Tel: (994-12)495-30-23 / 495-83-86 Fax: (994-12)495-70-47 office@sfdi.net Environment Category [ ] A [ ] B [ ] C [X] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [ ] S 2 [] S 3 [ X] S F [ ] TBD (to be determined) Date PID Prepared November 23, 2004 Date of Appraisal Authorization December 2, 2004 Date of Board Approval February 15, 2005 1. Country and Sector Background Azerbaijan’s armed conflict with Armenia over the Nagorno-Karabakh region which lasted from 1992 to 1994, left over 30,000 dead and over 1 million people displaced. Azerbaijan lost close to 20% of its territory and about 575,000 or 15% of its population became ‘internally displaced persons’ (IDPs) (in addition to the about 200,000 Azerbaijani refugees 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 return to their original places of residence. IDPs were expected, at least in principle, to return 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. Some IDPs from the so-called ‘liberated territories’ (i.e. 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 Page 2 in connection with the reconstruction efforts undertaken jointly by the Government and the International Donor Community. For the majority of IDPs, however, returning home was – and remains - an elusive hope as the places of previous residence continued – and continue to date - to be occupied by Armenia. 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 100 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. Hopes for a rapid settlement of the conflict have faded away in recent years 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 resources primarily from the State Oil Fund, established in 2000. To date, about 25,000 of these IDPs have already been resettled and another 16,000 are expected to have moved by the end of 2005. 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. Objectives The proposed ‘IDP Economic Development Support Project (IDP-EDS)’ is a ‘repeater project’ that replicates part of the ‘Pilot Reconstruction Project’ (Cr. 31090/31091-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: Given the social fund character of the project (and hence the impossibility to know ex-ante the nature of the investments to be financed, defining outcomes (and corresponding indicators) for the project as a whole would not be meaningful. Performance indicators for specific sectors or project areas could be developed in the course of implementation to reflect specific conditions and achievements. 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 Page 3 consistent with the Third Strategic Goal of the 2003 CAS which focuses on improving social services and infrastructure. 3. Rationale for Bank Involvement Together with UNDP, UNCHR and the EU, the World Bank developed in 1997-98 a USD 120.0 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 20.0 million IDA credit (Cr. 31090- 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. The efforts were relatively successful. A sizeable portion of transport, energy transmission and other infrastructure in the liberated territories was rebuilt. About 36,000 IDPs were able to return to the liberated territories, and economic activities there have resumed. To address the needs and help improve the living conditions of IDPs from the regions still under Armenian control, the Bank agreed in June 1999 to provide a USD 10.0 million ‘Supplemental Credit’ to the ‘Pilot Reconstruction Project’ (Cr. 31091-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 190 micro- projects of an average cost of about USD 35,000 for a reported total of about 160,000 beneficiaries. About USD 1.8 million in funds have been used to provide funding to partner lending institutions that, in turn, are using the funds for about 3,400 active clients. The ‘Pilot Reconstruction Project’ will close on June 30, 2005. 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. Most other donors that previously provided support to IDPs have significantly reduced their involvement, or limited it to purely humanitarian assistance, and many of the humanitarian organizations have left Azerbaijan altogether in response to demands from areas of more recent conflicts. At this point, the Bank is the main donor left that has the operational experience and expertise required for the implementation of large-scale assistance programs to IDPs, and it is for that reason, that the Azerbaijan Government has asked the Bank to continue its support to IDPs through a new operation. 4. Description The proposed IDP-EDS will replicate the ‘Social Fund for Development of IDPs’ component of the ‘Pilot Reconstruction Project’, (Cr. 31091-AZ). Accordingly, IDP-EDS will consist of three components: (a) micro-projects; (b) micro-credit resources; and (c) IDP/EDS Implementation Support. Page 4 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) Total cost IDA Govern ment IDA % of total A. Micro-projects 11.3 10.1 1.2 90% B. Micro-credits 0.5 0.0 0.5 0 % C. IDP/EDS Implementation Support 1.6 1.4 0.2 85% Total 13.4 11.5 1.9 86% A. Micro-projects (USD 11.3 million; IDA USD 10.1 million equivalent) The component will finance the preparation and implementation of about 225 small-scale projects (average cost about USD 40,000) 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 and natural gas distribution networks, access roads, drainage and irrigation systems, etc.; social infrastructure such as schools, community centers, etc.; 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 5% 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. B. Micro-Credits (USD 0.5 Million; IDA 0.0 million equivalent) Using about 25% of the expected reflows from the repayment of micro-credits extended under the ‘Pilot Reconstruction Project’ the component 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 Page 5 Bank’s existing Agricultural Development and Credit Project (Cr. 32360-AZ) and the proposed ADB Micro and Rural Finance Project. C. IDP/EDS Implementation Support (USD 1.6 million, IDA 1.4 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, 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. 5. Financing Source: ($m.) BORROWER/RECIPIENT 1.9 INTERNATIONAL DEVELOPMENT ASSOCIATION 11.5 Total 13.4 6. Implementation 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 –albeit primarily humanitarian – support to IDPs in Azerbaijan, namely, UNCHR, UNDP, and USAID, as well as the Asian Development Bank (ADB). IDP/EDS will be implemented over a period of three years (thirty-six months), commencing on July 1, 2005, the expected time of effectiveness of the Credit. The project is expected to be completed on June 30, 2008 with the closing date of the Credit set for December 31, 2008. A Mid-Term-Review (MTR) is planned for October 2006. IDP/EDS will rely without any major change on the implementation arrangements 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 No. 215 of December 6, 1999. 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, 2004 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-Mobile Corporation, the Azerbaijan Forum of Non- Governmental Organizations, and the Azerbaijan Union of Small and Medium Enterprises. Page 6 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’. The implementation of the micro-project component is based on the following arrangements: · 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. · Eligible PLIs will extend micro-credits to IDP clients in accordance with their own credit policies, and credit terms and conditions. 7. Sustainability By definition, the status of IDP is expected to be of purely temporary nature, as it assumed that IDPs either will eventually return to the “freed” 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 micro- projects that will be of use to both the IDP groups and the host community. Page 7 8. Lessons Learned from Past Operations in the Country/Sector 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 design of the implementation arrangements keeping them as simple and cost-effective as possible. In designing the ‘Pilot Reconstruction Project’ as well as the IDP/EDS these lessons have been taken into account 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. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP / GP 4.01) [X] [ ] Natural Habitats ( OP / BP 4.04) [ ] [X] Pest Management ( OP 4.09 ) [ ] [X] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [ ] [X] Involuntary Resettlement ( OP / BP 4.12) [ ] [X] Indigenous Peoples ( OD 4.20 , being revised as OP 4.10) [ ] [X] Forests ( OP / BP 4.36) [ ] [X] Safety of Dams ( OP / BP 4.37) [ ] [X] Projects in Disputed Areas ( OP / BP / GP 7.60) * [ ] [X] Projects on International Waterways ( OP / BP / GP 7.50) [X] [ ] Involuntary Resettlement . [World Bank OP 4.12] 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. International Waterways (World Bank OP 7.50) Some of the micro-projects supported by the project may be linked to trans-boundary waterways, as defined in OP 7.50. 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 OP7.50, thus affecting the water * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 8 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 7.50 was submitted to, and signed by, the Regional Vice President on November 16, 2004. 10. List of Factual Technical Documents 11. Contact point Contact: Ellen Hamilton Title: Urban Planner Tel: (202) 473-6583 Fax: (202) 614-0983 Email: Ehamilton@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop P:\AZERBAIJ\INFRA\IDP-ECON-DEV-SUPPORT\2LENA\Project Information Document - Appraisal Stage.doc