2jo { /4,/ -aL/3 Document of The World Bank FOR OFFICIAL USE ONLY 1.t.jOFIL.HE t'-PY --,p r t N). :;14 C.5--n! A T[pe: (5AR) Report No. 11405-ALB T it 1 e: R[tJRL POVURTY ALL FI T TION P i 1J C' AuthoSr . C' SULL IV(N2, RfAY F,.t.: 17',62 forno:Hi1(' 4, Dept. :EC2gW STAFF APPRAISAL REPORT ALBANIA RURAL POVETY ALLEVIATION PILOT PROJECT FEBRUARY 2, 1993 Agriculture and Water Supply Operations Division Central Europe Department Europe and Central Asia Region This document has a resticted distribution and may be used by recipients only in the performance of their ofllcW duties. Its contents may not otherwise be disclosed without World Bak authorizailon. CURRU'JCY EO AIJSALE Currency Unit = IL AVERAGE EXCHANGE RATES (Lek per US$) Jan-Aug Sept-Dec Jan-June Nov 1987-90 1991 1991 192, 1992 US$1.00 - lek 8.00 10.00 25.00 50.00 90-100 VIGHTS AND MEASURES Metric System ALBANIA - FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ASAC Agricultural Sector Adjustment Credit ABAD Albanian Bank for Agricultural Development EC European Community Ha Hectares IFDC International Fertilizer Development Center MTS Machine Tractor Station NGO Son-Governmental Organization RDF Rural Development Fund FOR OMCUAL USE ONLY RULAL POVRIT ALLEVIATIONPILOT PROjni.i RTAWŁ APRASAL DREzRT Tbb Of C bonts Cred and Pojet SUma . . . . . . . . . . . . . . . . . . . . .(i)-( L U#?MODU1=BN . . . . .1 11. ALANIS RURAL SECTR . . . . . . . . . . . 2 A. Main Features of the Rural Sector .. . . . 2 S. The Impact of Land Reforms Return to Subsistence Farming . . . 3 C. Thel Safety Net an Rural Areas . . . ........................ ... 4 D. Local aovernmnt in Transition . .. .5... . S B. Deterioration of Rural Infrastructure and Natural Resources . . . . S IIL THE GOVERNMMENS RURAL POVERTY AlLEVIATION PROGRAM . . . . . . . . 7 A. Overall Strategy ...... . . . . . . . . .. . . . . . . . . . 7 S. The Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . a C. Methodology: A Particlpatlve Process Approach . . . . . . . . . . . 12 D. Implementat.ons Creating a Rural Development Fund . . . . . . . . . 13 Z. Rationale for lDA Involvement ............ . 17 P. Applicable Lessons fro Bank/IDA lxperience .... . . . . ... . 17 IV. THE PROJEC:r THE RURAL POVERTY ALLEVIATION PROGRAM'S PILOT PHASE . 18 A. Project Objeatives . . . . . . . . . . . . . . . . . . . . . . . 18 B. Project Descr4ption and Components . . . . . . . . . . . . . . . . 19 C. Prograa_lng An4 Dstribution of Resources . . . . . . . . . . . . . 20 0. Pilot Project Costs . . ..... . .22 B3. fnancang Plan for the Pilot Phae ............... . 22 P. Procurment . . . . . . . . ................... 23.. . . 23 0. Disbursements . . .. .. . .25 H. supervision Id Reporting . ......................... . . . . ......26 I. Accounts and Audits . . . .................... . 26 J. Benefits and RLisks . . . . . . ............... . . . . . 2626 V. AGRUMEIS REACHED AND RECOZMENDAON . . . . . . . . . . . . . . 27 Annex 1 oovernment Decision Zstablishing the Albanian Rural Development Fund Annex 2 . . . . . . . . . . . . . Draft Rural Development Fund Regulations Annx 3. . . . . . . . . . . . . . . . . . . . Rural Works Project PrLorLties Annex 4 ... . . . . Targeting Methodology For Ral Works Cmponent Annex 5. . . . . . . . Albanian Rural Development Program: Credit Component Annex 6. . . . . . . . . . . . . . . . . . . . . . Bstlmated Project Costs Annex7.. . . . . . . . .stLiated Disbursement schedule Annex 8. . . . Studies, Technology, Technlcal Assistance and TraLnLng Annex9 . . . . . Lessns tuearned fro the Bank's Experience with Social Funds Maria Novak (Ral Develop_mt Specaiut MC2AW) we th Task Mangr, amisted by ?iee-Mam ewand, Koad Elms, and Joost Polak (Co1t). Aadw Mr (AFITW and Michae Nihtinaple (MN2AG)we the po pw mviwe Th Diviion Chief is Rosy OSHvan (SCZAW), and the Dertmt Dimtr Kel Dew (EC2DR). This document has a restricted distibution and may be used by recipients only in the performance of their oMclal dutie. Its contents may not otherwise be disclosed without World Bank authorization. RURAL PmJERTY AllEVIATION PMIMT PROJECT ChoPtand PaIed t S mnn Government of Albania C>dut Axnouot 8DR 1.80 million (US$2.4 million equivalent) Standard, with 40 years maturity p"zS The proposed pilot project's objective is to help the Qbh"frjof Government begin implementing its Rural Poverty Alleviation Program by establishing and making operational an autono- mous Rural Development Fund and testing approaches in rural public works and small-scale credit. The Program has three main objectivess (a) to create employment for the rural population and inject cash resources into rural households, (b) to repair basic rural infrastructure, and (c) to use small-scale credit to promote private sector activities and help create a rural market economy. It would also provide feedback for developing a rural policy and the on-going local government and finance reform, and implement a new economic and financial approach at the local level. froM Within the general objectives of Albania's Rural Poverty Demflp0 Alleviation Program, the proposed pilot project would test approaches to the implementation of the Program during its first year of operations. It would: (a) Create the institutional capacity needed for program implementation by establishing the Rural Development Fund (RDF) and training a first group of local staff. (b) Develop RDFIs operational procedures and mechanisms of technical and financial control. (c) Evaluate, design, finance, and implement approximately 142 rural infrastructure projects, and establish and fund some 50 village credit funds. (d) Establish and implement, using technical assistance as necessary, training programs to improve local capacity to identify, appraise, and implement small public works projects; the ability of village credit funds to evaluate and administer small loans, and programs to transfer appro- priate technology to farmers and small rural entrepreneurs. mmmi: The project's direct and immediate benefits would come from the rural works projects it would finance and the S,000 small loans expected to be disbursed from the village -ii- funds. Wages paid workers on infrastructure subprojects would also inject much-needed &s,h into Albania's rural economy* The project's monitoring and evaluation components would result in further benefits by providing feedback to adjust and shape the countrywide Rural Poverty Alleviation Pro- gram. RBIah The main risks are comon to social or rural development funds, and include start-up problems, weak local institu- tional capacity, and political interference. Test and pre- pilot phases that included significant input from the commune and village levels should greatly reduce project start-up problems. While local, particularly commune, organizations are weak, the experience of the pre-pilot phase shows that good professional staff are available and training and technical assistance should provide them adequate support as institutional strength is built up. RDF's autonomous status will help prevent political inter- ference. The other major risk is inherent to the learning by doing aspect of the pilot project; this would be min- imized by strong supervision and technical assistance sup- ported by built-in monitoring and feedback components. Estmad rme Costs Local Foreign Total ---S---------S'000… Rural Works 1,510.5 79.5 1,590.0 Small-Scale Credit 675.0 75.0 750.0 Studies, Technology and Training 153.7 212.3 366.0 Equipment for RDF 18.4 350.6 369.0 RDF Recurrent Costs 478.5 195.5 674.0 Technical Assistance 3SS.6 660 4 12016-0 TOTAL 3,191.7 1,573.3 4,765.0 maludag rim, (US$ nmion) IDA (SDR 1.80 million) 2.4 EC 2.0 UNDP Qs4 TOTAL 4.8 hAmated IDA smeantsk FY93 FY94 FY95 - ------US$ million------ Annual 0.2 1.0 1.2 Cumulative 0.2 1.2 2.4 Ecomomie Rate of Rethujj Not applicable. MMa IBRD 24351 RURAL POVERT- 1 ALL STAFF Sffi PPOL L IVTRODUCTnON 1.1 Albania is the poorest country in Europe - 1992 CDP per capita is likely to be below US$400. The 45 years of highly autocratic central planning that ended in 1990 have left its 3.3 million people with a stagnant economy caught in a low level productivity trap. Economic and political turmoil at the beginning of the decade led to the breakdown of the centrally planned economy and the election in March 1992 of a fully democratic government dedicated to continuing and expanding the economic and social reforms begun in 1991. A macroeconomic framework for those reforms was established in August 1992 when the Government embarked on a stabilization and restructuring program under an IMF Standby Arrangement. While the reform program can, if successful, lay the foundation for significant medium-term growth, its initial phases will cause considerable hardship a large segment of Albania's people, 65% of whom live in the rural areas. 1.2 Revolution and reform have transformed Albania s rural population, changing some 380,000 collectivized agricultural worker families into a new class of private land owners whose average holding is a very small 1.4 ha per family. While these new farmers have great potential for productivity and income growth, they face a daunting set of obstacles. Many of their tiny new holdings - often scattered among two or three plots - are too small to provide the food needed to foed a family unless credit is available to buy inputs and other supplies. Roads, electric lines, water supply and irrigation systems, and other rural infrastructure, already in poor shape under the old government, were devastated during the revolution - which also destroyed the rural organizations in charge of infrastructure development ano maintenance. The network of economic infrastructure - input suppliers, and transport, market, and credit mechanisms - that was dominated by state-owned enterprises is in disarray, or has disappeared. 1.3 The Government's immediate objective in agriculture is restoring production to assure food security while providing the rural employment and incomes that will be the key to economic recovery in the sector. It has already taken significant steps on the macroeconomic side - culminating in the August 1992 Standby Arrangemnt with the IMF - and has removed price controls from all but four items: wheat and flour, sugar, rice, and vegetable oil, freed almost all agricultural prices and removed import and export restrictions. Because of the critical food supply situation and market imperfections, price and trade liberalization for these key foodbasket items - now largely provided through donor aid - will need to be phased in. In July 1992 the government substantially raised prices for these commodities, though the new prices were held below world market levels to mitigate their effects on consumers; it recognizes the need to liberalize them completely in the mediun term to induce a supply response. 1.4 However time will be needed for the Government's reform program to bear fruit. The proposed Rural Poverty Alleviation Pilot Project would address the immediate emergency of lack of income in the rural areas through a rural public works program that will provide a source of desperately needed income to farm families while rebullding basic infrastructure. it would also provide village- based credit for small-scale economic activities, studies that will help the -2- Government develop rural development policies, appropriate technology develop- ment, and training. IL ALIBNIANS RURAL SECrOR A. MIan Ebm osOf ft Rid Setor 2.1 Albania in predominantly an agricultural countryp 6S% of its popu3*tion lives in rural areas. The agricultural sector, which generated close to 35% of GDP during the 1980s, and 40% in 1991, accounts for more than 50% of employment. About 705,000 people were employed in agriculture and forestry in 1990, and an additional 100,000 in related sectors. 2.2 Food and industrial crops lead agrlcultural productlon with 38S of output; the other major subsectors are livestock (27%), and fruits and olives (5%). Forage and forestry products account for the remainder. The maln food crop. are wheat and maize; Lidustrial crops. are led by tobacco, sunflower seeds, cotton and sugar beets. 2.3 The principal feature of the rural sector is the scarcity of land in relation to the rural population. The area of agricultural land per family varies from 0 6 ha in the Puke District to 2 8 ha in Kolonje; the nationwide average li 1 4 ha per family (Annex 4, Table 1). Almost 900,000 ha of natural and improved pasturage are, however, avallable for livestock production to supplement agrlcultural incomes. Although a signifLcant reclamation program has lncreasd arable land from 400,000 ha in 1950 to 702,000 ha, and irrigation development has been extensive, population growth - encouraged by government policy - has been even more dramatic, and the number of Albanians rose from 1.2 mllion in 1950, to 3.3 mllion in 1990. Zalg_ll RURAL HOLDINGS AND INCOMES IN ALBANIA Avo Holdina Per Famil Per Caita Aaricultural (ha)-! (ncom (1986 lek) Nationwide 1.4 3,933 Coastal Districts 1.44 4,624 Mountain Districts 1.22 2,623 (of whlch, 10 poorest) 1.10 2,326 80urces 1991 StatLstical Yearbook of Albania, Ministry of Finance and Economy, Statistics Department 1/Projected holding per famlly after June/July 1992 land distribution. 2.4 The second major feature of the rural sector stems from Albania's geography. Most of the country beyond the coastal plain (57% of arable land) is hilly or mountainous (43%); in these regions only valleys are available for the development of agrLculture, when they are not occupled by kines or heavy industry. The old central planning system stressed income equalisation, using prlce subsidies to raise incomes in disadvantaged agricultural regions. According to their location in plains, hLily or mountain area, agricultural cooperatives and state farms were charged a decreasing price for inputs and -3- recelvd an increasing price for production.1 Thus, ariculture in the hilly and mountain areas was heavily subsdized. 3L e Mm lma of Ld Bib= Rd= to Snbuisda anaIg 2.5 Until 1991 agricultural production was dominated by the cooperatives - which held 76% of arable land - and state farm, with 24%. The cooperatives, using fund allocated by the central goverment, had an Important role in rural Lnfrastructur investmnt, accounting for a third of natiaml invostmet in ruwal construction (irrigation, farm buildings, tfeder roads, etc.) ad halt of national lnvestmnt in land improW _em (land reclamation* water and soil conservation, permanent drainage, etc.). The cooperatives also undertook almost all maintenance of rural infrastructure. Their dissolution in 1991 has left a vacuum in infrastructure development and maintenance that the Government is moving to fill by developing local organizations. 2.6 Agricultural inputs were distributed by state enterprises (Agro-Tregtare). MechanizatLon services were provided to the cooperatives by the state-owned Machine Tractor Stations (ZTS). The state ensured agricultural marketing and processing. Govermnent privatized the cooperatives and distributed their land* to cooperative workers in 1991; it is still drawing up a privatization program for the state farms and agricultural state enterprises. 2.7 The 1991 land reform led to the creation of 380,000 small farms: the average allocation was 1.4 ha per family (Annex 4, Table 1), but in tour of the 13 mountain districts it falls below 1.0 ha, far below subsistence level2. While the land reform has been carried out rapidly and efficiently - only 10% of the ex-cooperative land remains to be distributed - nothing has been done to provide the new private farmers with working capital, except to dlitribute, in a very uneven way, the assets of the cooperatives. Thus, the farms lack basic inputs, and it has been reported that 90% of farmrs did not use fertiliser in 1991/923. They have little equipment, and most of those who use mechanical cultivation hire Ws services to disc and plow their fields. While the Government intends to privatize the tractor stations, the small sizo of the new private holdings will also require significant changs in mechanization approaches. The same kind of structural change is needed to adapt irrigation systems to the new land-ownership structure. 2.8 On the market side, the situation is not much better. Although the state collection centers (GrumbullLmW) still exist, only 5% of private wheat production was delivered to them in 1992. Because of the small size of plots and the uncertain economic and institutional environment, most farmer are subsistence- oriented and prefer to keep their wheat and make their own bread. They are also unwilling to specialize according to thelr comparative advantage, or to grow agroindustrial crops that require off-farm processing. j/tn Jwe 1"1, the pre wor paid und th flttlowing conitioms: cofficient for friuts price for cetls(leWquintal) tam area 100 210 hilly ares 91 2 muntain 85 320 &I TM ptlmd dissolution of the state fatm will not make r lan atable for foo eativ wrkerws they are ostly in differnt eas and their tln resuces ore tlkely to be distriuted to state fa1m wokrkes. 3/00OC, "*ertf iter in Albanfa: Situation, Analysis, and Recomasndations,N February 199. -4- 2 9 The first impact of the land reform has been, therefore, a regression toward subsistence farming. Three steps must be taken to reverse this trend and begin the transition to a market economys (i) Employment outside agriculture must be created to provide income to rural families and reduce their dependency on their farm plots so that a process of consolidation into more economic units can begin4; (il) Credit must be made available to give rural households access to the capital they need to develop both on- and off-farm enterprises; and (1ii) Rural infrastructure must be re-established; this must include the development of a new rural market structure. C lhe Safeb Net In Rurad Ams 2.10 The new private agricultural soctor'e regression toward subsistence farming has left most farming families, with the exception of some in the more productive plains, unable to build sufficient stocks to survive through the 1992/93 winter until the next harvest, mainly because of lack of access to inputs and credit; many farms in hilly and mountain areas cannot meet their food needs for more than three to five months. The Government is fully aware of this problem and has set up a rural safety net based on two programs: A land-based compensation program included in the Land Reform Act. The amount of benefit depends on the per capita land allocation and the fertility of the land. The program reaches less than 98 of Albania's rural population and is limited to hilly and mountain areas. The amount paid monthly varies from lek 60 to l-k 120 per person, but many eligible beneficiaries are not yet getting these stipends because of unclear land titles or because funds have not arrived in their districts; A wheat subsidy that was initially intended for the whole country, with the level of subsidy depending on location. This program has been put into effect- only in mountain and hilly areas, and wheat is being dispensed without regard to income levels or holding sizes. In some districts part of the subsidized wheat has vanished in transport. 2.11 The safety net program was revised in October 1992 to target it toward landless families and farms with less than 2,000o2 per capita. The new program excludes families that have members with full or part-time employment outside agrlculture. While the number of beneficiaries is about the same as the 185,000 covered by the earlier land-based program, the budgetary impact of the combined program is considerably les than the lek 100 million a month spent on its predecessors. 2 12 Although similar income support programs have been used in other countries (e.g., in Ireland durlng the 1930s), it is clear that Albania's budget resources are too meager to provide this support through subsidies for an extended period. A significant change in the socioeconomic situation of the people living in the */thts reastrwturins is not likely to take plim before 3 to, yw5 as the Land Refora Act doe not allow fMrs to selt thir land, prectuding vol&tuary conoltdation thrwoh private transactions. sefore lntrodocln a land market, th govempnt Intencs to cuptet. the reistry and c eqt. former land ONers. -5- mountain ares is necessary. Programs need to be introduced that combine poverty alleviation with economic development while moving away from pure gubgidy programs. The Program described in Chapter 3 would achieve this. It is likely that in the medium term, the only solution for some of the more poorly endowed mountain areas Is migration of a part of the population and specialization of those remaining in livestock, especially sheep and goat breeding that takes advantage of extensive community grazing areas. D. Loal Govmen In Trason 2.13 In addition to its direct effect on land distributLon, dismantling the cooperatives had a secondary effect on the management of local resources and the organization of rural life. The cooperatives had been established in 1946 as a voluntary program and expanded - and quickly made mandatory - to cover the whole country by the late 19609. The cooperative policy's main ebjectives were to organize a collective system of production and replace the traditional local government system - which had successfully withstood four centuries of Ottoman rule - with centralized authority. The process had a positive side in that the new system took charge of developing and ma4 ntaining rural infrastructure. The share of the cooperatives in rural infrastzu. are investment was very important. Over 1985-90 roughly 1/3 of national investment related to rural construction (irrigation, farm buildings feeder roads) and half of national investment related to land (land reclamation water and soil conservation, permanent drainage) was undertaken by the cooperatives. This shows the vacuum left by the dismantling of zhe cooperatives and the urgent necessity to build new institutional and financial solutions for rural infrastructure maintenance and development. 2.14 The June 1992 local government reform abolished the old centrally oriented organization. The number of districts was increased from 27 to 36 to diffuse the regional distribution of power. The 530 "joined villages" created under the old regime have been replaced by 314 slightly larger "communes." The 2,700 village councils have been abolished, but Parliament enacted in Se.-tember 1992 a complimentary bill providing for the election of village chairmen, who would not be members of commune councils, but would be responsible for articulating village needs to those councils. The institutional gap created by dismantling the cooperatives has not yet been filled, and the organization of commune services is still underway. Although the legal situation is not yet clear, management of local resources (irrigation, pasture, forests) and maintenance of local infrastructure is expected to become the responsibility of the communes and their constituent villages. L Deterioadon of Rul nfrastucture ad Natural Resources 2.15 Albania's rural areas face particularly acute problems as regards rural infrastructure and natural resource degradation. The cost/efficiency ratio of public investment under the previous system was low for several reasons. A lack of financial evaluation and cost-plus reimbursement for projects led to expensive and capital-intensive technical designs. Compulsory labor led to low execution standards, while the state enterprises carrying out the projects had high administrative costs and margins. A scarcity of budget resources stretched the entire investment process, and led to poor maintenance that was exacerbated by a lack of user interest in preserving what was seen as state property and a minimal investment in the protection of natural resource*. 2.16 Albania's already poor ruraml infrastructure was severely damaged during the unrest in 1990, and there was considerable scavenging of materials for private use. The present situation can be summarized as follows: Roads: Around 10,000 km of rural roads need to be rehabilitated. They are maLnly dirt roads connecting village. and communes, and many are seasonal roads that cannot now be used in winter. They are, however, essential to the village inhabitants and for the development of effective rural markets. These roads were a village responsibility and were maintained with bulldozers from the now defunct cooperatives. SettLig up a new structure to rehabilitate them and keep them maintained is an urgent necessity. Water *uDMlys A national village water supply scheme was begun in the 19809 with the goal of aupplying all villages one tap per 60 people by 1992. All but 400 of scme 2,700 villages now have systems, but a third of these systems need rehabilitation or extension. Enjovsg While rural areas were electrified 20 years ago, power per household is limited to 200 watt-, which is only enough to provide light. about 25% of Albania's 30,000 km electricity network has been destroyed. Besides immediate repair of the electrical network, the system's capacity needs expansion. Irriaations The irrigation infrastructure, which includes 313,000 ha that have been distributed to private farmers, is one of the agricultural sector's major capital assets. Here also, the dissolution of the cooperatives created a organizational vacuum. The subsector needs to be rehabilitated, adapted to the new land structure and reorganized on the basis of water user associations. Telecommunications: Albania has 1.4 telephones per 100 inhabitants compared with 10 per 100 in Hungary and 38 in Greece. While each village had at least one telephone, a large part of the network was destroyed during the land reform, as farmers used telephone wires to fence the new property boundaries. At least 1,000 villages no longer have telephone access. Schoossa Most of the schools in the rural areas are in poor physical condition. Moreover, during the unrest in 1990 around 875 village schools were damaged, and about 50 burned, while in urban areas the destruction was limited. Mrket Infrastratures Most cooperative buildings have been destroyed and there is a great need for small murketplaces with adequate facilities for live animals and perishables, such as stalls, weighing stations, and cleaning equipment. Afforestation Forests cover 1 million ha, 48% of Albania's land area. Forests close to villages provided fuelwood and timber for the villages under the supervision of the cooperatives, which controlled some 60% of the forests. Since the dissolution of the cooperatives there has been no control over farmer wood cutting. Water and Soil ConservatLon: Works have been carried out over the last 40 years over an estimated 400,000 ha. These works were mainly to put new land under cultivation, and little, if an,, attention was paid to environmental concerns. In areas of high slope some of these works increased erosion problems when fragile soils were put under cultivation. 7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2.17 Repairing and rehabiltating rural lafratructure iL both, thus, an urgent necessity and an employment oortunity for the rural population. IlL TM GOVERNMTS RURAL POVEY ALLEVIATION PROGRAM A. Q SW" 3 1 The October 1992 World Bank-IC report *An Agricultural ftrategy for Albania" ldentlfLes the maln short- and mdium-term measurea required in price and trade policy, land market, privatlsation of the state farms and state enterprises, and rural fLaance. The Government has endorsed the report' analyaLs, and to complement the policy changes called for in the strategy, li formulating a comprehensive rural development approach aimed at rebuLlding the rural economy - on a free-market basls - from the bottom up. The program has emphasized poverty alleviation. Thli rural development approach seeks to integrate and improve the programs already in place and develop and implement new programs to flll in the gaps while assasting farm families through a difficult transltion process. The strategy focuses ons Acetlvely all.viatlng rural poverty: The first challenge for the Ju" Government ln the rural sector is to develop employment and food * '"";sproduction. Sven if emigration prospects improve and the services sector expands, the rural sector will havo to absorb a large part of the AlbanLan labor force for at least the next few years. Given the very high land/labor ratlo, this means the development of off- farm full- and part-time actLvities. Restorlng food security: While Albania is givLng no consideration to returning to its old policy of food self-suffLciency, it recognizes that incentive mechanisms, adequate physical infra- structure, and working food processing and transport systems must be established to restart the food production and marketing chain. Price and tarlff policies that will address the problem at a mAcroeconomic level must be supplemented with programs that help small farmers intensLfy production of cereals and other basic foods to cover their own needs and produce surpluses to feed the cities. A significant factor in this process will be the injection of cash resources into the rural economy. * Promoting the smll private sectors PrLvatizing state enterprises will requlre time, capital, and management capabilitLes. Privatiza- tlon must be complemented by a self-employmont policy that helps people not to fall out of the employment market so that they have to be supported by the safety net. This pollcy would help prepare for the coming market economy in whlch most of the services up- and downstream of agrLculture will be prlvate. * Repatirng baslc rural lafrastructure: Adeqruate rural infrastructure is a procondition for economLc and soclal development. A large part of thLi rohabLlitation work can be done under the aegis of the - communes using local labor and generating local incomes. 2 An Agrifutltual Sector Stnmctwt dJustmt Credft, tbich tos beirl prepued, wfilt focu on feplementfng the cwrrspnwfia sectoral polefes suppwted by a hybrid lownf hat will neludc a qLuick disbursfri coepont anda co*pmot altecated to apfeulttal credit. Strengthening local governmentst The main weakness of the newly created communes is thelr lack of financial resources and experilence in financial and economic management. Making financial resources t - ilable for infrastructure investment responds to their immediate -dst technical assistance and training will introduce improved vfproaches to project evaluation, investment financing, and implementation and maintenance. * Rooting rural development pollcies ln local tradition and culture: For 45 years local governance traditions were purposely pushed toward oblivion in favor of collectivist dogma that have now been discredited. The credibility of the rural development policy depends on its capacity to merge local culture and new orientations coming from the West. 3.2 This rural development strategy calls for creating a transition institution that would establish and direct labor-intensive rural works, and provide small loans that meet the needs of the poorest part of the population, while the Dank for Agricultural Development expands its activities for larger loans. This proposed institution is the Rural Development Fund (RDF) described in paras. 3.21-3.24. B. The Prmm 3.3 The Government's Rural Poverty Alleviation Program responds to the deep concern of President Berisha, expressed during his July 1992 visit to Washington, and to the Government's two stated priorities: employment and food security. The idea of the program arose from the agrlcultural strategy sector study that identified the main issues facing Albanian agriculture. The interest expressed by several international and bilateral donors including a French Noo, which provided the first seed money for a rapid action initiative against poverty, helped to formulate and initiate it. 3 4 Albania's Rural Poverty Alleviatlon Program has three main objectivess (a) creating employment for the rural population and inject cash resources into rural households, (b) repairing basic rural infrastructure to facilitate economic growth, and, (c) promoting small private sector activities to help create a rural market economy. careful monitoring of progress toward these objectives will provide feedback to the Government for developing rural policy, including improving on-going local government and local financing reforms. The program avoids the multi-sectoral integrated rural development approach, which gave mixed results in many countries ln the 19609, and focuses instead on bringing capital and training resources to the bottom level of rural society, leaving full initiative to villages, comunes, and farmers themselves. PrEoaMn Desoaldom and Cmuonns 3 5 The Government's Rural Poverty Alleviation Program has three components: (a) a rural works program, (b) promotion of small economic activities through a credlt program focusing on very small loans, and (c) studies, technology and training. 9 3.6 The rural works program focuses on financing basic local infrastructure rehabilitation. The rehablILtation projects will be initiated by the villages and executed under the control of the communes. The types of infrastructure to be financed will be chosen under priorities deflned by the communes withln a framework of the avaLlability of materials and equipment. Three maln criteria wlll be used to select subprojectst economic and soclal Lmpact; the labor intensity of works, and their potential contribution to local instltution building. Selection criteria are described in detail ln Annex 3. 3.7 The types of projects that meet these criteria are, ln the first stages (a) rehabilitating ex-cooperative dirt roads, (b) repairlng or extending water supply systems, (e) rehabilitatlng small village irrigation schemes and adjusting them to the new land-ownershlp structure, (d) repairing and rebuilding schools and possibly health centers, and (e) establishing new market facilities. Examples of project requests already submitted by rural communities are presented in Annex 3. 3.8 Blectricity and telephone rehabilitation and extension have not been included in the first stage (except in special cases such as repairing the electrical network needed for the functioning of a pumping station) for two main reasonss (a) the dimension of works and the change of technical norms require a country-wide approach, and (b) these two types of infrastructure are not regar%;ed by the villagers themselvee as having priority. Reforestation, and water and soil conservation have high labor content and positive environmental effects but relatively low economic and social impact in the short term. Above all, the legal aspects of forest ownership must be clarified before the communes or villages accept any responsibility in this sector. 3.9 In all cases, local subprojects will be limited to a size and number compatible with the capacities of the communes in terms of execution, maintenance and recurrent cost coverage. The 142 subprojects anticipated under the p$iot phase reflect a cautLous appraisal of the capacity of RDF and local organixations to implement infrastructure projects. Contracts will be signed with the communes deflning work programs, timing, cost estimates, and future maintenance (for details of the proposed "project cycle" see Annex 3). The communes will then hire technical and supervisory personnel - drawing on the pool of technicians from the former cooperative farms - and village labor to carry out the works. Basing financing declsLons on simple technical and economlc crLteria is expected to introduce a new approach in public investment and give more responsib$lity to local government. 3.10 Rehabilitating rural lnfrastructure will create employment opportunities .;.d generate cash income desperately needed not only to buy basic farm inputs but also, in many cases, to ensure famlly survival. Prnommt Economik Acso* Thnnuh SmlS1e Credt 3.11 Albania s rural environment is ln a state of great uncertainty as regards prices, input supply, access to markets, privatization of irrigation, mechaniza- tion, etc. The rural credit system Ls still rudimentary, and few farmers have - 10 - access to either seasonal credit for inputs or longer-term loans. Farmers have reacted by adopting a subsistence risk-avoiding strategy that concentrates on the food security of their own families rather than producing marketable surpluses. 3.12 The main institutLon for formal credlt to agrlculture is the Albanian Bank for Agricultural Development (ABaD) which was spun off from the State Bank of Albania in 1991. It rmains far from fully operational. ABAD has a portfolio of some lek 4 billion in loans to state frxms and state-owned enterprises. With total private sector loans of only lek 320 million, MAD is still at a very elementary stage of lending to farmers and rural entrepreneurs. It lacks the institutional capacity to develop small credit, or to cover the high transaction costs of small-scale rural lending. The Parliament is still debating whether to place AMAD under the general banking law approved in 1992. This places ABAD In a difficult position as regards mobilizing Central Bank resources, while pressure on it to lend to state farm is crowding out private sector credit. 3.13 While aBAD is expected to be capable of providing credit to commercial farming operations once its legal status under the banking law has been clarified, it lacks the mechanisms to service the credit needs of small farmers. MAD procedures are roughly the same for small and large credits, which raises the transaction costs of smaller loans and discourages small farmers from asking for loans: loan requests must be accompanied by an imposing number of documents and certificates and take at least three months to process. In this context, it is necessary to design and test a system of rural credit that can addkss this group's needs while ABD concentrates on larger loans and develops the- ep.rtise to process small ones. Such a system has been worked out with farmers themselves and AMAD local staffs it is based on the creation of village credit Sunds that will enable financial intermediation to take place at the local level. 3.14 The Village Credlt Fund component of the government's Rural Poverty Alleviation Program is designed to fill the gap left by ABAD's present inability to meet the seasonal and Lnvestment credit needs of farmers. As the average number of households per village varies between 100 and 200, and the average size of loan would be approximately $l507, the amount of a village fund should be approximately $15,000, normally starting wlth a first tranche of $5,000. Short- term loans would be used for inputs, while medium-term lending would be used for livestock or equipment purchazes by farmers and micro-entrepreneurs. 3.15 The Village Credit Funds will be supervised by Village Credit Committees made up of the village head and at least two other villagers, elected by the villagers, and representatives of AMAD and the Rural Development Fund. RDF will deposit funds in an interest-bearing account earmarked for the village in the local AMAD branch, and sign standard contracts with ABAD and the Village Credit Committee to manage and supervise the funds. 3.16 While IMF will retain ownership of these accounts, the comdittees will act as its agents in deciding on credit allocations and controlling the repayment of loans; ABAD will keep accounts and handle the money. RWF and ABAD will be remunerated for their services, while the village cammlttees will operate on a non-remunerated basis. Security pledges will be deflned by village committees, IV An IFDC survey dArng the 1991/92 season showed that 25m of farmers borrowed money. Howevor, only 1X borrowed from AMAD, with the rest borrowing from fndly or triends wthout interest. Average loan stz was SSO, wnd the mf uses of credit wer to pay for tractor servioes, or bWy seedb, fertillaro, manure and pestfcides. The credit uas repad after the harvest. ZiThe mOsimm loan nunAt woutd be USS300 equivalent per family during the Pltot Phase. t. -11l- and can be based on crops, equipment, or personal or group guarantees. Assurance of repayment should be mximized by bringing loan decisions to the village level, where they will be made by neighbors who both know potential creditors and are in a position to exert social pressure for tlmely repayment. A second level of security would be added by having RDF stop all new commitments from a village fund if there are defaults. An Umergency Fund financed from a 0.5% fee added to loan repayments would be built into the system to help borrowers who face axe-optional repayment difficulties. Detailed arrangements for the operation of t'e a mexency Fund, and mechanisms for mobilizing rural savings to make village funds self-sustaining, inoluding mandatory savings account deposits tied to loan repayments, will be tested during the Program's pilot phase. 3.17 As in all credlt schemes, the main problem is to ensure the sustainability of the system by covering the cost of capital - including laflation - and transaction costs. The villagers themselves suggested creating an inflation index bas-ad on the price of crops or animals, but this would be diffic, t to apply. The seven ongoing Phase Two credit schemes (para. 3.19 and Annex S) use an alternative approach to ensuring that interest rates are positive in real torms: loans have been expressed in leke but repayments fixed in constant-dollar equivalent terms, thus approximately capturing the effects of inflation.8 This has been accepted by the villagers, and it is proposed to apply the same system to the.pilot project. Initial fees to cover transactions costs, which will be reassessed as the credit program progresses, have been set at: village Committee 0.0% ABAD 2.0% Total 4.5% Rund Sftdi lesedmol! sad Tnhd e 3.18 One of the challenges faced by the Government is to define rural development policies rooted in local culture and, at the same time, open to new technologies and market mechanisms. This will not be easy in a country where local traditions and historical community organisation have been deliberately destroyed for 45 years and where all relations with the outside world were cut. This program component will begin with studies to understand better the basic structure of rural Albanian society and the contributions it can make to rural development. It will have three subcamponents: (a) A rural studies subcomponent will collect information on local traditions and farmer attitudes on such issues as land ownership, labor organization, off-farm activities, village organization, and informal credit before collectivisation. The survey will also inventory village problems, such as access to markets, water and energy supply, land use, managment of local resources such as irrigation, pastures, and forests which, for the moment, still belong to the state, and farming methods and conditions, including cropping choices, Input use, and household budgets. The purpose of these studies will be to establish profiles of farms and villages where villag credit funds can be established. The surveys will be complementary to existing IFDC surveys. They will also help monitor Lek ftppayuts witl be calculated according to the curret dollar cchae rate to capture the dollar equivalent of the original loan. - 12 - the credit program and provide valuable Information for rural development policy. (b) A technology subcomponent will seek small-scale technologies appropriate to local resources and markets, test them, and facilitate the proeurement of small equipment for private entrepreneurs. This could be organiLed in collaboration with the SC funded Small and Medium Enterprise Support Unit, which is expected, in the near future, to have seven regional agencies.9 (c) The training component will consist of training courses for local government technical staff in project evaluation, financial management and market economics, courses in business planning and management for farmers and rural entrepreneurs, and professional exchanges with local governments or enterprises in other countries. C Mefhodelotwy A Parduathe. Press Auprob 3.19 The Government program is being implemented in four phases: a.ase ls Early test actions, already underway, comprise the execution of two small rural works projects, and the first village and farm surveys. They are being financed by Fr&res d'Esp6rance, a French NGO, for a total amount of US$20,000. Pbase 2s Pre-pilot phase which started in November 1992, is testing the organizational and technical approaches possible for eight more rural works projects and seven Village Credit Funds. This phase (US$100,000) ls being financed by UNDP. Phase 3s Pilot phase, involving an IDA-financed project. This is the project described in Chapter 4. It is scheduled to start in early Spring 1993. The year-long pilot project financed by IDA and other donors will cost approximately US$4.8 million. Phuse 4: Full-scale project, amounting to approximately US$32 million over three years could be co-financed by IDA and other donors if the pilot phase is successful. It was agreed at negotia- tions that RDF would undertake evaluation of the Pilot Project eight months after effectiveness of the Credit for the Pilot Project for the purpose of designing the Full-Scale Project, which would extend the project to the whole country. 3.20 This process approach allows the program to be adjusted to local needs and constraints as lessons drawn from each phase are used to prepare the next one. St will also allow for - in fact, encourage - participation by loc4l people and institutions. During the pre-pilot phase, the organization of the rural works and the village credit fund concept were worked out in continuous dialogue with commune and the village representatives to maximize their chances of success. This included contractual arrangements between communes, village councils, and the Bank for Agricultural Development that define their responsibilities and the relationship between them and the pre-pilot project. This participative approach 2/The Support init organizes business training progra, finances invstment credit and Insures procurement of equipment tor smatI- and asdi.m-scal enterprises. The average toan awounts to $6,000, 4r above the average *2 of the intended vil lage tund loans ($20 to $300). Although their target populations are not the saf, the program .flt run In parllel, and coordination should not be difficult. - 13 - is an application of modern management methods (e.g., quality circles) to the rural sector. D. hJDuIlentgatO: CrestiI, A Rur Develogment Fund 3.21 The Rural Poverty Alleviation Program outlined above cannot be carried out efficiently and rapidly by Albania's administrative services - which are themselves in a period of adjustment and reform - or by ABAD, which is not yet able to carry out a full-fledged rural credit program. Following the experience of other countries, the Government has established a small independent agency outside the normal government structure - the Rural Development Fund (RDF) - to implement the program. RDF was established by the Council of Ministers in January 1993 (Annex 1)t its major features are summarized below: RMDF Oraniaion 3.22 The RDF is an agency under the oversight of the Council of Ministers, established as a juridical person with the authority to enter into contracts, and with administrative, technical and financial autonomy. Local institutions (e.g., village credit committees or water user associations) will contract with RDF to carry out the credit and public works components of the program, and standard contracts with these local institutions will be included in RDF's Operational Guidelines. 3.23 The Fund's orientation, during the pilot phase, will be poverty alleviation in rural areas through the program described above. During this phase the target population of the Fund's rural works component will be the poorest part of the rural population; those with limited, if any, cash income and whose farming is by necessity now oriented toward self-sufficiency. The rural credit component will be broader, addressing farmers and rural micro-entrepreneurs who do not have access to banks. RDF resources will mainly be those assigned It by multilateral or bilateral aid agencies. RDF's governing bodies are: (a) A Board of Trustees, chaired by the Deputy Prime Minister, and comprising the deputy ministers of Agriculture and Food, Economy and Finance, Labor, and a representative of the Office for Local Governments. (b) An Executive Committee formed by the Executive Director, the two Deputy Directors and the financial director of RDF. The Executive Director will be named by the RDF Board Chairman, in consultation with, and with the approval of, IDA. Any successors to that post during the project period will also require IDA approval. The appointment of an RDF Executive Director will be a condition of project effectiveness. 3.24 The Board defines and oversees RDF's main policy and program objectives, while the Executive Committee is responsible for its management. The proposed organization of the RDF is set out in Annex 1. It consists of an administrative and financial department, and operational departments for infrastructure projects, rural credit, and studies, training, and technology. An internal audit unit will report directly to the Chairman of the Board. Technical assistance will be provided for an initial period of two years by two full-time advisors, one for the rural works component and one for the credit component. These field specialists will be supported by short-term missions by other specialists as required. RDF staff requirements have been estimated at 35 persons in the first year, rising to 79 in the fourth year as the number of subprojects financed increases (Table 2). - 14 - bti 2: RtF STAFF PROJECTIONS Ofr.ct@i* 1 1 1 t Senir _nant staff 4 6 8 9 Englnsrs/ersdft off eers 18 28 3? 45 Accomtuants 1 2 2 2 Se@tertes 2 3 4 4 Driver/uscmnfca 9 13 16 18 TOTAL 3S 53 68 79 3.2S Within the framework of the decreo establishing RDF (Annex 1), the agency's wperations will be governed by its Regulations (Annex 2) and comprehensive operational Guidelines covering procurement and implementation of the rural works and credit components, and the criteria under which districts and communes would be selected for eligibility. These Regulations and Guidelines will support the approaches to each component set out in paras. 3.6-3.18 above, detailing, inter alias For the Rural Credit Component: The relationship between RDF, village credit committees, and beneficiaries, including eligibility criteria for villages and beneficiaries and model agreements for the contractual relationships between RDF, ABAD, village committees, and beneficiaries. The Guidelines will also cover village credit committee membership and credit procedures, including lending and collateral criteria and the indexing methodologies used for loan repayments, ABAD supervision of loan accounts and default procedures. For the Rural Works Component: The regional and sector distribution of public works subprojects. The project cycle, including subproject iden- tification, selection, appraisal, approval and implementation. This would include technical criteria and specifications for the works to be carried out and evaluating their economic impact. The Guidelines would also cover procedures and model contracts for contracting with subproject implement- ing agencies - usually the communes - including their counterpart contcributions, maintenance, and user-fees, where applicable. The establishment of an information system/database to provide subproject implementing agencies with nationwide price information that will allow effective purchasing of the goods and services needed to carry out subprojects. Payment, accounting, and auditing procedures. 3.26 A working group to implement the Test and Pro-Pilot phases was established in September 1992 under the sponsorship of the Minister of Agriculture. UNDP and the Fr4res D'Esp6rance provided funding to hire local professionals, who have worked with expatriate consultants to set up village credit committees - seven of which are already operational (Annex 5) - and train commune leadership in developing the mechanisms to define and select local public works subprojects. Local support for, and participation in, this process has been strong, and very encouraging. The working group's training and experience in implementing these arly phases has created a potential nucleus for the Rural Development Fund's staff. 3.27 Implementation of the major project components would build on the experience of the first two phases, which are described in Annexe 3 (rural publi˘ works) and 5 (small-scale credit). RDF?' Infrastructure Operations Department will evaluate rural orks subprojects proposed by the communes to - 15 - ensure that they are in line with Project priorities and local needs as expressed by the villages. The experience of Phases 1 and 2 has shown that technical staff are available at the local level and capable of preparing cost estimates and work programs. RDF staff will work with local staff to ensure satisfactory subproject design and supervise implementation, which will remain a commune responsibility. For the credit comoonent, RDF's Credit Operations Department will work with village credit committees and ABAD staff as described ln paras. 3.11-3.17. These arrangements appear to have worked well in the oarly test phases of the Program. CeemaUhl Area of intw tlou 3.28 The Fund will ultimately (under Phase 4) finance subprojects in the 313 rural communes, including 24 small rural towns, although priority will be given to the poorest areas for labor-intensive rural works. Given the importance of urban unemployment - which rose to S08 during early 1992 - and the political concern of the Government, the Fund may try to organize the participation of town inhabitants in rural works around the cities and experiment with a credit approach for urban self-employment in parallel with the village funds. 3.29 The Rural Development Fund is not intended to be a permanent institution. Its program will be adjusted as it evolves from a rural poverty alleviation focus to become a rural development program. rt is hoped that the village credit fund system, after being tested and shown to work on a broad scale, can ultLmately be handled directly by a strengthened Bank for Agricultural Development, or become the nucleus of a rural cooperative banking system. The rural works component is designed to strengthen local government capacity to select, design, organize, and implement infrastructure projects, and it is anticipated that responsibility will progressively be transferred from RDF to the communes. Ea_*d Pram Adevment ad Cost 3.30 The proposed Rural Poverty Alleviatlon Program would take four years. During this period, the total investment of the Rural Development Fund (i.e., separate from administrative costs and studies), estimated at $31,800,000, would be divided approximately between the rural works program (70%), small scale credit (25%), and rural studies, technology, and training (5). This would allow for the realization of more than 800 infrastructure projects, the average cost of which has been estimated at $11,000, rLsing to $32,000 in the fourth year on the assumption that small rehabilitation projects will progressively be replaced by new projects and that exceedLngly low labor and local supplies costs (monthly wages amount to $12) will tend to rise toward international market levels. On the average, the program would finance 2.6 projects per commune, enough to have a significant impact, but still far below the real needs. 3.31 During the four-year program period RD? is expected to finance 500 village credit funds, estimated at an average size of $15,000 the first year and reaching $24,000 ln the fourth year. The village funds are expected to cover less than 20% of Albanian villages. ThL represents a very prudent approach that takes into account the considerable time and effort nueded to set up each village fund and ensure its proper supervLison. If the system works well, which also requlres a well-functLoning banking sector, thLs component could expand more rapldly. 3.32 The rural studies and technoiogy component has been designed on the assumption that it will include 500 village profiles and 70 pilot operations introducing and testing small-scale production equLpment in rural areas. - 16 - Technical assistance missions in Albania and technical support abroad are included in this component. 3.33 The training component includes six-week preliminary courses for RD? staff, who w11l also receive on-the-job training, 140 study trips abroad, and training for 870 commune staff and 420 rural micro-entrepreneurs. This component includes technical assistance. 3.34 Program design has been carefully based on the implementation capacity of the RDF and other executing agencies - communes, vlllages, the Albanian banking sector, and local contractors - rather than on the potential demand. 3.35 The four-year program would cost about $36.0 millioni a cost summary is shown in Table 3. Except for the increase in dollar prices of local labor and supplies, which has been estimated at 30% for the first year and at a decreasing rate thereafter, no other contingencies have been provided. Any further increase in average subproject costs would result in a reduction in the number of subpro- jects. Table3: ALBANIA RURAL POVERTY ALLEVIATION PROGRM. EST114ATED FOUR-YEAR COST' (US$ milIion) Lgo_1 Foreilon Total XU %EBass Cost Rural Works 18.1 1.0 19.1 5 53.1 Smll-Scale Credit 9.5 1.1 10.5 10 29.2 Studies. Technolo- 0.9 1.3 2.2 58 6.1 gy. and Training ROF Equipment 0.0 0.6 0.6 95 1.7 ROF Recurrent Costs 1.6 0.6 2.2 29 6.1 Technical Assistan- 0.5 0.9 1.4 65 3.9 ce, Monitoring & Evaluation Total 30.6 5.5 36.0 15.3 100.0 1 Estimates are not given in lek because of uncertainty about Inflation 3.36 Recurrent costs have been kept to a minimum. Recurrent costs represent about 6.1% of total cost, and equLpment costs 1.7%. A significant part of expenditures (1.2*) would be used to cover transport and travel expenses, as RDF staff wlll have to make frequent field trips. The rural works officers, located in Tirana will share cars, whlle the credit offliers, located ln distrLet towns, will use motorcycles. Informatlon and promotion expenses (0.7%) t-ave been included In operating costs. 3.37 Toechnical assistance will be important during the Program's first and second years. It includes two full time expatriates for two years (terms of reference in Annex 8), and regular follow-up and support miLssons by a rural works engineer and a credlt specialist. Monitoring and evaluation missLons and international auditing once a year are also lneluded in this category, which amounts to 3.9% of the program's four-year cost. Except for training- and technology-related costs, which have been included ln the corresponding programs, technlcal assistance has been listed separately to avoid dLatortLng recurrent costs. -17- L IaUOfl,JorLIDAIDYjIIDIUS 3.38 it is proposed that IDA support Albania's Rural Poverty Alleviation Program, starting with the Pilot Project described in Chapter 4 below. IDA involvement is justified because the proposed project is fully in line with the Bank Group' overarching objective of addressing poverty in economically officient ways. it is now urgent for the Government to start directing resources toward activities that foster economic development while alleviating poverty. Albania's Rural Poverty Alleviation Program would achieve these goals by providing incomes in very poor rural areas while improving infrastructure and provLdLng small-scale credit to allow increased economic activity. The Program wlll also begin the critical task of creating new locally based institutions to take over the infrastructure development and maintenance functions of the dissolved cooperatives. 3.39 IDA involvement in the program would provide for urgent measures to be taken whlle mainline IDA interventions are being designed to help bring about structural change, such as the proposed FY93 ASAC and the FY95 Rural Roads Project. The program would also be linked with the proposed Education Project, which could use the Rural Development Fund as an executing agency for repairing and rebuilding schools. F. &Mikft Lmsos frm BankaDA 3.40 The design of the proposed Rural Poverty Alleviation Project builds on past experience with public rural works and credit projects by the Bank Group and lts antecedents stretch even further back in time. Rural development and reglonal investment funds exist in many countries with the basic objective of decentraliz- ing public investment decisions and giving more initiative to those who know best about their needs: local government or the beneficlaries themselves. Since the mid-1980. the need to counterbalance the negative social impact of structural adjustment programs has led many countries to create social funds dealing with this specific problem. The lessons the Bank/IDA and its borrowing member countrLes have learned from their experience with social funds are described in Annex 9. These lessons offer important guidance for Albania 's Rural Poverty Alleviation Programs * the program's target populatLon should be well defined, and it should focus on assisting small private farmers and the rural unemployed. * to ensure its transparency, effectiveness, and ability to disburse funds rapidly, the RDF should be autonomous, authorized to adopt flexible procurement practices and offer private sector salaries to its staff. to enoure RDF accountability, it should report regularly on its activities to the Government, Parliament and the press, carry out regular audits of its financial statements and physical investments, and have a management informatlon system that tracks the implementa- tion of each subproject. * the selection of subprojects proposed by the local level for support from RDF should be made after full consultation within the concerned communities - 18 - 3.41 Howevert the main recommendation that can be drawn from the Bank/IDA experience is that no program can be replicated from one country to another. One of Albania's hallmarks is that it is a wmall country in which subprojects can be at once decentralized and controlled from the center. Although local government has just been reformed, the comunes have inherlted the administratlve experience accumulated by the former joined villages. The financial and economic approach has to be adapted to market principles, but the educational level of the population and the technical capacities of local staff are good. Even though the communist regime attempted to bury local traditions, there are vivid memories of the village organization, and the will to become once again self-governed and self-suffLcLent. Finally because of the recent land reform, which dletributed land equally between the former cooperatlve workers, rural wealth in each village is relatlvely level - although that level is quite low - wlth the differences between vlllages arising according to thelr access to land and lrrlgatlon. IV. THE PROJECTf: THE RURAL POVERTY ALLEVZTION PROGRAM'S PILOT PHASE 4. 1 The proposed project would provide financing for the Rural Poverty Alleviation Program's Pilot Phase, which would establish and staff the Rural Development Fund and begin implementing rural credit and public works programs. This pilot approach is seen as a means to combine quick action to meet urgent problems in rural Albania with a flexible incremental approach that will allow testing of each component as it is put into place and implementation begins. The project, thus, Lncludes a strong monitoring and evaluatlon component that will be used to provide feedback that will allow continual adjustment as the program develops. 4.2 Phases 1 and 2 of the Program (par&. 3.19) have provided implementation experLence that has been used to design the more ambitious Pilot Phase described in this chapter. Two rural works schemes were executed in Phase 1, and five more in Phase 2: they have demonstrated a high level of interest among villagers and local government officlals in participating in the works program, and confirmed the capacity of local technical staff to design and organize construction work using labor-intensive techniques. They have also served as a training ground for local staff in subproject design and evaluation. The seven village credit funds established under Phase 2 (para. 3.26 and Annex 5) have provided valuable feedback; contractual arrangements have been worked out with village credit committees and the logistLcs of credit distribution tested on some 120 separate loan packages. Results have been highly favorable, giving considerable confidence that the Pilot Project can be launched successfully. 4.3 The proposed project's objective is to establish Albania's Rural Development Fund and provide financing for its first, pilot, year of operations. Test and pre-pilot phases of the program have already been carried out with funding from a French NCO and UNDP. As a pilot project lt would have a strong monitoring and evaluation component, so that immediate experience in both institution-building, and subproject financing and implementation, would provide feedback to fine-tune and improve program effectiveness. This oversight would include a mld-term review (para. 3.19) eLght months after Project start-up that would evaluate whether progress was sufficient to warrant moving ahead to IDA support of the Government's proposed full scale Phase 4 Rural Poverty Alleviation Program. The review criteria would include evaluating the performance and Lnstitutional capaclty of RDF, the communes (for public works subproject - 19 - selection, design, and implementation), and the village credlt funds (lacluding their repayment performance). While elght months may see" a relatively short tlme to begin this review, the vlllage credit funds, comtune public works programs, and a precursor RDF organization are already operatlng under the test and pro- pllot phases, and project atart-up should be quite rapid. IL PoEet Desadion -ad c2anpouat 44 Withli the general objectlves of AlbanLa's Rural Poverty Alloviatlon Program, the proposed project would: (a) Creato the institutional capaclty needed for program implementation by establishlng the Rural Development Fund and training a first group of local staff. The project would provlde qulpment for the establishment of the RDF, 56 man-months of technical assistance, including full-timo expatriate adviors for two years for the rural works and credit components, and recurrent costs lncluding transport costs. (b) Develop RP0's operational procedures and mechanims of techalcal and flnancial control. Ic) Evaluate, design, finance, and lmplement approximately 142 rural lnfrastructure projects, and establish and fund some 50 vlllage credit funds. (d) Istablish and $mplement, using technlcal asslstance as necessary (about 4 man-months) training programs for commune staff, farmers, and local technlclans and entrepreneurs to improve the capaclty of village credit tunds to evaluate and adinister small loans, and programs to transfer appropriate technology to farmers and small rural entreprenours. UsL &rAMlo hmoflm 4. S As the p$iot project corresponds to the first year of the planned four-year Rural Poverty Allevlatlon Program, its descriptlon and components are basically the same as those descrLbed in Chapter 3. The Government has agreed to conclude, prior to effectiveness, an agreement acceptable to IDA under which it would pass the proceeds of the Credit to the project implementlag agency, RDF, as a grant. RD?, with the asslstance of consultants, will carry oat the Project through lts infrastructure, rural credit, and studies/technology departments. 4.6 RDF0a will implement the Project under lts Regulations and Opez. cional Guldellnes. It was agreed at negotiations that the Regulations and GuLdellnea, and any subsequent changes to them, will be subject to Associatlon approval; production of the Regulations and GuLdelLnes acceptable to IDA are be a conditlon of Project effectiveness. 4.7 The project's pllot nature provides the opportunlty for its approaches to be continually tested so that they can be adapted to lncrease their effectlve- ness. For that purpose, close monitoring of the followlng elements will be carried outs - 20 - For rural works componentst * Types of works, their technical design, unit prices and cost estimate0 and methods and organization of construotlong thli should allow RDF to build a database and establish a standard list of projects and costs. * ProJect beneficiaries at COun, village and farm level. Thls will enable better targeting of the program toward the poorest part of the population. * Local partners, including supervision engineers and technicians, public and private subcontractors, enterprises supplyLng materials and services including the bankLng sector. IncludLig this informa- tion in the RDF database will help organize the local market and facLlitate the selection of subcontractors. * Financial organization and control, which has to be organized and tested. For the rural crodit component: * The organization and functloning of village funds and their cooperation with ABAD. * Loan amounts, and economic activlties financed. * Repayment rates and reasons for defaults. zLoan beneficiaries, by age, sex, and education and income levels. 4.8 Data from the monitoring program will be used to revlse and adjust the village credlt fund component before extending lt to a larger scale. Studh 4.9 Rural studies wlll improve understanding of village and farm problems, monitor the overall program, and evaluate its impact. Technology transfer will be tested with a limlted number of equipment types corresponding to the main needs of the rural populatlon. TraLLng, in the first stage for the EDF staff, will expand progressively toward commune staff and rural mLcro-entrepreneurs. It will be progressively adjusted to integrating a better knowledge of the RDP needs and the proflles of traLnees. C. Pramnmmhw and Diofrudon of ReSouU 4.10 The RDF would program lts financing separately for the rural works and rural credit components. The rural works, which are to be a grant program, would focus maLnly on poor areas, seeking to generate Lncome rapidly, but avoiding uneconomic investments that would sseentially serve as subsidies to support people who might otherwise migrate from the rural areas. The ruraL credit component, whose loans would bear real positive interest rates, would start in areas representing all types of development situations. - 21 - 4.11 The rural works program will be limited during the pilot phase to Albania s 10 poorest districtO10. The funds would be allocated to the districts based on a formula (for details see Annex 4) taking into account district population and three poverty lndlcatorst arable land per capita, percentage of hilly and mountain land, and the rate of unemployment. Within the district, the funds will be allocated to the communes under the same criteria. This distrLbution formula will be re-examLned after nine months and allocations can then be changed, not exceedLng 10% of the total budget. 4.12 The rural credit component would begin in fLve districts in the plalns, hilly, and mountain ares representing Albania's different regions. These are likely to be Mirdite in the north, Mlbasan, LLbrazhd, and Gramsh in the center, and Kolonjo ln the south. Focinan di Rurt Per 4.13 The proposed project would target the poor in two specific ways in addition to its allocation of funds for rural infrastructure works to poorer areas. Workers on rural infrastructure projects will be selected according to poverty criteria, and only one nember of eaih family will be accepted. The credit component will Laclude a $300 per family lan ceiling during the first year. Farmers or rural entrepreneurs who need larger loans will submit their requests directly to A8aD. Women In Dveoumet 4.14 Albania's rural women are now eAtirely absorbed by farm tasks, as their overriding concern ls to ensure family food security until next harvest. They do most of the manual work, which has increased because of the mechanization crisis brought on by a lack of operating tractors, the inadequacy of tractors for preparing small plots size, and the cost of tractor services. They often work 1S- hour days, and have few opportunities to develop other actlvities. 4.15 The project's pllot phase would address thLs issue in a number of ways. Increasing rural incomes and providing credit would allow an increasing amount of cultivation to be carried out with mechanical or animal power bscause farmers would have cash to hire rented services. Water supply subprojects carried out under the project would reduce the very heavy and time-consuming task of carrying water, which is mainly carried out by women. The project could also finance hand tillers, which could be used by groups of farmers to reduce cultLvation time and effort. Project preparation also included discussions with village women's assc.iations, which are preparing specifLc credit programs for women that could be financed by the RDF. These programs could be organized on the basis of the solidarity group approach inspired by the experience of the Grameen Bank in Bangladesh. Emfronnatn Efecs 4.16 The project has been assigned an environmental category IBS rating, and does not require an environmental assessment. Given the types of subprojects to be financed under the project, no significant environmental impact is expected, and in some cases these subprojects would promote improved natural resource management. For example, it may be possible to include onvironmentally positive jQ/ The 10 poorest dfstrfcts are Puke, Ntrdite, TropoJe, Nat, Ku"es/Ras, LUbra2hd, rmsai, skrapar, Diber/utlkiae, and Pcgradec. - 22 - reforestation. works in the list of projects to be contracted with the communes, and village credit funds could be used to finance seedlings or nurseries to plant fruit trees along the boundaries of farm plots. A set of environmental criteria would be developed and applied to each subprojeoct through a standard subproject checklist. These criteria would be drafted by a consultant specializing in natural resource management and included in the RD? Operational Guidelines. Public facilities to be built or repaired would include proper waste disposal facilities, and rural roads and irrigatiqn systa_ would be designed to mitigate eroslon potential. With regard to the rural credit component, XDA is providing support to the Government of Albania under the June 1992 critlcal Imports Project in the selection of appropriate fertilisers, pesticides and related safety equipment. D. Pilot Protect Costs 4.17 Within the total cost of the program, presented In Chapter 3 and amounting to $36 million, the pilot phase represents $4.8 million - first-year costs of $3.9 million, plus recurrent costs, technical assistance, and monitoring for 12 additional months ($0.87 million). This additional funding will allow for the continuity of the program during the appraisal of a possible next phase. 4. 18 The pilot phase will cover the financing of 142 rural infrastructure projects for a total cost of $1.6 million, the creation of S0 village credit funds for a total amount of $0.75 million, and studies, technology and training for an amount of $0.4 million. The breakdown of the pilot project's costs is shown in Table 4: Tabte 4: COST ESTIRATESL' L5BL fon Tota igaLoaL FrLifn 1Ttal PerfeftU -..--.(ltek mfittln) -------- ...........(S 000)........ B1e FE Cost Rural Works 151.05 7.95 159.00 1,510.5 79.5 1,590 5 33.4 Smtll-Scale Credit 67.50 7.50 75.00 675.0 75.0 750 10 IS.? Studies, Technology, 15.37 21.23 36.60 153.? 212.3 366 S8 7.7 and Training Equipment for RDf 1.8O 35.06 36.90 18.4 350.6 369 95 7.7 ROf Recurrent Costs 47.85 19.55 67.40 478.5 195.S 674 29 14.1 Technical Assistance 35.56 66.04 101.60 355.6 660.4 1,016 65 21.3 Total 319.17 157.33 476.50 3,191.7 1,573.3 4,765 33 100.0 Y More de*ul ce UMe VA be f*md in Amex.. S. 5. en L Finadne Pla for Mm Pfilt Phase 4.19 Given Albaniags very serious budgetary situation at present it is proposed that, at least for this pilot phase, the Government's contribution be mainly in kind - office space, participation of administrative services, etc. Subsequent- ly, for the main project, counterpart fLnancing of at least 5S of the investment cost should be required from the communes for the rural works financing. Given the lack of local investment budgets and the decapitalizatiao lof the rural population, thls rule cannot be applied in the pilot stage. Thus, during the pilot phase, comunes will be only requested to take charge of recurrent costs, which will be covered malnly by taxation in labor of the village inhabitants. -23- In the case of projects for which operatlng expenses are nonmally covered by line ministries or specialized agencies (e.g. schools or water supply), a formal agency comitment would be required before RDF signs a contract with a commune. 4.20 The wages paid on RDP financed rural works subprojects will be defined ,according to unskilled sectoral market rates. For moms types of projects where the social impact is more important than labor intensity, salaries will be below market rates to allow for a village contribution to subproject financing. This may be the case for water supply projects, especially in the plains, where additional cash inacome is less an absolute necessity. The contribution of the villages to the credit fund component will consist of the voluntary work of the village cosuittees. 4.21 Several donors have indicated their readiness to cofinance the pilot phase and expressed intentions to contribute to the full-scale project. The ZC has financed consultants for project preparation, and UNDP financed the pre-pilot phase. Both have indicated their intention to continue their support to the RDF. The financing plan is suimmarised in Table 5. Table St PZIACING PLAY (USS million) IDA (80R 1.80 million) 2.4 BC 2.0 USDP 0.4 TOTAL 4.8 F. Procurent 4.22 Procurement arrangement are suumarized in Table 6. Abl 6: PROCNREET ARAN6EIETSU (US$000) QLtesof gf EMndi- inL Other S I Share of tur IDA Civtl oiks - - 1,590 l,S90 69 (1,130) (1,130) Equipoent & Naterials - _ 369 369 100 (369) (369) Technical Assistance, - 1,342 1.342 39 Studies, Tedhnology (400) (400) and Training Credit Fuds - - 750 750 33 (300) (300) Recurrent Costs - - 674 674 34 (201) (201) Total Financng 4,765 4,765 50 Requirements (2,400) (2.400) ROF14tites In paresesare the mounts to be ffnr%d by IDA. Civil vorksl ould be procred by hfrfng local technicians and vorkers equipment and materfals through local and internatonal shopping procedbres; fnternational consultants would be selected fn ccordance with IDA guidelines an consultant selectfon. - 24 - 4.23 The Rural Works Program would finance about 142 infrastructure subprojects at a total estimated cost of about US$1.6 million, with an expected average cost per subproject of about US$11,000 and a maximum cost per subproject of $25,000. These subprojects would finance small civil works needed for rehabilitating dirt roads, repairing water supply systems, rehabilitating small village irrlgatlon schemes, repairing and rebuilding schools and health centers and establishing market facliLties. Glven the small value and diLpersed locations of the contracts, international competitive bidding or limited international competitive bLdding are not considered suitable. The potential cofinancers have agreed that procurement procedures should be as simple as possible, and that the procurement of eivil works, equipment and materials would be carried out in the following manners * Rural grfkn: RD?, the project implementing agency, will sign contracts with communes and other local institutions (e.g., water user associatLons) for the execution of subprojects. In most cases, these works wlll be organized and carried out directly by the communes, which will hire local technielans to supervise the works. As small-scale contractors do not yet exist in rural Albania, the communes will also hire local workers to construct the works under regulations and wage rates spelled out in their contracts with RDF and the RDF Operational GuidelLnes. RDF bookkeeping and oversLght procedures will also be set out in lts Operational GuLdelLnes. It is anticipated that by the time the pilot project Ls completed local contracting capability will be more developed and some communes will be able to use local shopping procedures based on Lnviting and comparing bids from several contractors. This situation will be carefully monitored during the pllot project, and every effort made to introduce local shopping procedures as this optLon becomes available. The aggregate amount to be procured under direct hirLng is not expected to exceed US$1.13 million, with a limit of USS25,000 on any indivldual subproject. e? 3Bagiiment and Materials: Contracts for equipment and materials not available in Albania (e.g., office equipment, vehicles), for an aggregate mount estimated at US$350,000 will be awarded through international shopping procedures based on comparing quotes from at least three suppliers from three eligible countries. All contracts above $40,000 will be reviewed by IDA. It Ls expected that individual contracts for the purchase of equipment will not exceed $S50,000. Local shopping procedures would be utilized for minor equLpment and supplLes to be procured locally for an aggregate amount estimated at US$20,000. * Technical Aseistance. Studies, Training. and Technoloovs Local consultants will be hired for rural studies at an aggregate cost not expected to exceed US$100,000 many qualLfied former cooperative personnel are available. international consultants will be hired in accordance with IDA guldelLnes on consultant selection. This is expected to comprise 48 person-months for two two-year consultancLes to assist the rural public works and small-scale credit project components, and an additional six months of short-term consultancies, for an aggregate amount estimated at US$300,000. * CredLt Funds: Procurement under village credlt funds, which would lnvolve very small amounts (US$20-300), typlcally for purchase of minor farm inputs and supplies, would be organLied by the farmers concerned Ln accordance wLth their traditional purchasing practLces for an aggregate amount of $300,000. - 25 - RE1urxmtCSoates The Credit would finance recurrent costs of US$201,000 consisting of the salaries and operating costs of RDF. The RDP staff would be recruited on the basis of minimum education standards, satisfac- tory to IDA. The ADF staff would be recruited initially for a probationary period of six months and would be confirmed after the successful completion of this period. 4.24 Procuremnent suuorision and Review Process. To safeguard propriety in procurement, the details of the above procurement practices would be included in RDF Operational Guidelines; a indicated earlier (para. 3.25), it was agreed at negotiations that these GuLdelines, and any subsequent changes in them will be subject to approval by IDA; production of the Guidelines will be a condition of effectlveness. In addition, training would be provided to REF and commune staff in procurement and dLsbursJment. In particular, the RD? staff would be trained in project management and supervision. IDA staff, during supervision missions, would review procurement actions to ensure that they are carried out In accordance with the agreed procedures. G. Wsbnnens 4.25 The proposed IDA credit is expected to be disbursed over a period of 30 months. The closing date would be June 1995. The disbursement schedule would be as follows: Period Cumulative Amount $SS million June 1993 0.20 December 1993 0.70 June 1994 1.20 December 1994 2.00 June 199S 2.40 Disbursements would be made as follows: (i) 100% of foreign and local expenditures for civil works; (li) 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and 85% of local expenditures for other items procured locally, for equipment and materlals. (iII) 100% of credits extended to village credit committees, and, (iv) 100% of local and foreign technical assistance and training. 4.26 All disbursem nts would be made on the basis of statements of expenditures certified by the RDF Executive Director. The required supporting documents would be retained by the RDF for at least one year after receipt by the Bank of the audit report for the year in which the last disbursement was made. This documentation would be made available for review by the auditors and by visiting IDA staff upon request. 4.27 Scecial Account. To facilitate timely project implementation, it was agreed at negotiations that the BDY would establish, maintain and operate, under tern and conditions acceptable to the IDA, a Special Account denominated in Us dollars in a local or foreign bank acceptable to IDA, to which IDA would deposit - 26 - an initial amount of up to US$300,000 which is judged adequate to cover about four months of expenditures under the pilot project. The Special Account would be replenished as appropriate when the undisbureed balasce of tho account falls below an amount equal to 50% or lese of the amount of the Special Account. Documentation requirements for replenishment applications would follow the same procedure as described in preceding paragraphs. In addition, monthly bank statements of the Special Account, reconciled by the borrower, would accompany all replenishment requests. IL Sunervslo and _,oifag 4 28 The project would require intense follow up and supervision from the Association, given its pilot nature. The Association would undertake regular supervision missions including field vlsits and spot checks of a sample of projects. 4.29 It was agreed at negotlatlons that RD? would wbmit to the Assoclatlon quarterly reports includlng the followlng lnformatlon by distrlit and sectort (a) rural works projects presented by the communes, appralsed, ln execution, completed and evaluated ex-post, lncluding number of projects and boneflciarles, amounts committed and executed, average cost per beneficLary and the percentage of labor ln the investment cost; (b) village credlt funds created, number and total amount of loans distributed, activities financed, outstandlng, repayment rate; (c) rural studies carried out, pllot project in new technology implement- ed, tralnlng courses performed; (d) RDF's key personnel and consultants indicating the changes that have taken place during the reporting period; and (e) operating costs of the 3DF. L Accounbs and Audits 4.30 The Internal Audit Unit, whlch reports directly to the RDF Chairman, will undertake quarterly audits of RD? operations combining financial assessment wlth physical inspection of works in the fleld done on a sample of subprojects. The auditors will prep-are quarterly reports for the RD? Board and for the Assoclation and other donors, as well as an annual sunmary of audlts. 4.31 Prlvate internatlonal lndependent audltors, acceptable to the Associatlon, will also undertake annual audits of the 3D?. Not later than six months after the end of flscal year, RD? will submit to the Assoclatlon certLfied copies of audit reports contaLaing balance sheets, income statements and the auditor's opinion on whether the RDF is achievLng its objectLves ln a cost-effectlve way and whether internal controls are adequate to mLnimize the possibilLty of misuse of funds. 1 Beneft and Risks 4.32 The proposed proJect's direct and lnimedlate boneflts would come from the approximately 142 rural works projects lt would finance, and the 5,000 small loans expected to be disbursed from the 50 Village Funds that would be created. Payment of some 542,000 person-days of wages to workers on public works subprojects would also lnject much-needed cash Lato Albania's rurdi aconomy. 4 33 The proposed project'a monltoring and evaluatLon components would result in further beneflts by providLng feedback to adjust and shape the countrywide Rural Poverty Alleviation Program of which this pilot li only the first phase. - 27 - These lessons will include information on communes and individual farmers needs, institutional and practical constraints, priority types of projects, prices and costs, and methods of work. 4.34 The proposed project is expected to have another set of benefits, which are important, but difficult to evaluatet At the center, commune, and village levels it would provide hands-on practice in evaluating projects and credit proposals, managing investment resources, and planning and overseeing project implementation and maintenance. The rules and practices of a market economy will, thus, be introduced at a local as well as a macroeconomic level, strengthening new government Lnstitutions and preparing them for a continuing role in rural Albania's development. 4.35 Test and pre-pilot phases that included significant input from the commune and village levels should greatly reduce project start-up problems. While local, particularly commune, organizations are weak, the experience of the pre-pilot phase shows that good professional staff are available and training and technical assistance should provide them adequate support as institutional strength is built up. Moreover, the process approach allows for continuous adjustment of the program. The pilot phase to be supported by the proposed project would build on the experience of the test and pre-pilot phases and would be evaluated after one year to appraise the feasibility of a successor full-scale project. The main risks are common to all ocial or rural development funds, and include political interference, which would be minimized by RDFes autonomous status The other major risk is inherent to the learning by doing aspect of the proposed pilot projectj thls would be minimized by strong supervision and technical assistance supported by the project's built-in monitoring and feedback components. 4.36 While the risk of not obtaining cofinancing is relatively small, as the cof inancers have all expressed their intentions to fund the project, aligning its timing with the effectiveness of the proposed IDA project may be difficult. As this cofinancing, while $mportant, is not critical to the Project's success - the IDA-funded portion alone would make a significant contribution to poverty alleviation and institution-building in Albania - securing it has not been made a condition of Board presentation or effectiveness. V. AGREEMENlS REACHED AND RECODMMTNDATION 5.1 It was agreed during negotiations that: (a) Appointment of an RDF Executive Director and any subsequent successors during the project period will be subject to consultation with, and approval by, IDA (para. 3.23) (b) RDF will draw up Regulations and Operational Guidelines acceptable IDA, and any changes in these manuals will only be made in -o ultation with, and with the approval of, the Association. (para. 4.6) (c) The RDF will establish a Special Project Account denominated in US dollars in a local or foreign bank acceptable to IDA. (para. 4.27). - 28 - (d) RDF will establish accounting procedures acceptable to IDA, have its accounts audited internally every quarter, and submit reports of t1hese audits to the Association. A full audit of project accounts, by private inter-national independent auditors acceptable to rDA will be submitted within six months of the end of the fiscal year. (paras. 4.30-4.31). (e) RDF will submit to the Association quarterly progress reports on subprojects approved for financing, the progress of village credit funds, and monitoring and supervision results (para. 4.29). (f) RD? will undertake evaluation of the Pilot Project for the purpose of designing the Phase 4 Full-Scale Project eight months after effectiveness of the proposed Credit (para. 3.19). 5.2 Conditions of effectiveness include: (a) Execution of an agreement under which the Government would make the Credit proceeds available to RD? on a grant basis (para. 4.5). (b) Compilation of RDF Regulations and Operational Guidelines acceptable to the Association (para. 4.6). (e) Appointment of an RD? Executive Director acceptable to the Associa- tion (para. 3.23) 5.3 On the basis of the above-mentioned agreements and the staff appraisal, the proposed project is considered suitable for an IDA credit of US$2.4 million, on standard IDA terms with a 40-year maturity. ANNX I Page 1 of 5 IRURA1L?OVERTYALlMVATINDEMM PODC GOVERNMENDECISION ESTABI1SHING THE ALBANIANRURALDEVEOPMENT FUND CHAPTER 1- General Article 1. The Rural Development Fund, hereinafter referred to as the Fund, is hereby established as a juridicial person for a period of four (4) years with administratlve, technical and financial autonomy. The Fund will be under the supervision of the Council of Ministers. The Fund shall perform its activities pursuant to this Decree, implementing Regulations and its Operational Guidelines. The headquarters of the Fund will be the city of Tirana and it may open offices in other jurisdictions within Albania. Article 2. The Fund's objective shall be poverty alleviation in rural areas through the financing of rural works and the promotion of economic activities through credit, studies, technology transfer and training. The initial target population of the Fund for rural works will be the poorest part of the rural population, having limited, if any, cash income and oriented mainly towards self sufficiency. Its rural credit initiatives will address more widely farmers and rural micro- entrepreneurs who do not have access to banks. CHAPTER2- Gulding Principles of Fund Actiities Article 3. The Fund's objectives shall be accomplished as follows: As regards rural works: The Fund will promote and finance, through grants, labor intensive rural infrastructure construction and rehabilitation projedts. Projects willl be initiated by the villages and submitted to the Fund by the communes. They will be selected and financed by the Fund according to its Regulations and Operational Guidelines. As regards promoting economic activities through small-scale credit: The Fund will, in accordance with its Regulations and Operational Guidelines, establish loan accounts in the Bank for Agricultural Development in favor of Village Credit Funds to flnance small loans to farmers and other rural residents favoring the productivity of agriculture, development of off- Page 2 of 5 farm activities, self-employment, rural micro-enterprises, and other productive activities undertaken by the target population. As regards studies, technology transfer and training: The Fund will carry out studies on Albania's rural economy, sociology and history to assess the new situation of the rural areas, orient the activities of the Fund, and provide basic information for development policies. It will carry out training, technology transfer, and advisory work activities needed to further the main activities of the Fund. The Fund will carry out its rural public works and credit activities by forming contractual partnerships with local institutions. In the case of public works activities, the Fund's partners would be elected commune councils, elected village credit committees, and other bodies. In each case, these contracts would make provision for the operation and maintenance of subproject public works. In the case of rural credit initiatives, the Fund's partners would be elected village credit committees. Regulations governing the establishment of these institutions, unless ot:aerwise covered by Albanian law, will be promulgated separately. CHAPTR 33- Revenues and Resources of the Fund Aticle 4. The Fund's revenues comprises * resources assigned by multilateral or bilateral aid programs, * grants provided by the Government of Albania, domestic and foreign donations and legacies, X resources derived from contracted soft loans, * capital recovery from the loans granted and the Literest earned, * other revenues and income that may arise. Article S. The resources of the Fund are deposited in independent bank accounts in Albanian and foreign currency. CHAMTR 4 - Fund's Organiational Structure Article-6. The governing bodies of the Fund ares * the Board of Trustees, * the Executive Committee Artikle-7. The Board of Trustees, hereinafter referred as "the Board" shall be composed as follows s * The Deputy Prime Minister; The Deputy Minister of Agriculture and Food; * The Deputy Minister of Economy and Finance; * The Deputy Minister of Labor, and, ANNEX I Page 3 of 5 I Representative of the Office for Local Governments Board members shall receive no remuneration for their service. Article A. The Board shall be chaired by the Deputy Prime Minister and during his absence by ministers in the order indicated in the preceding article. Artice 1. The Board shall have the following dutiess *Approve the policies and general guidelines regulating the Fund's activities; •approve the Fund's annual budget; •approve the Annual Financial Report; . authorize negotiations and enter into agreements with the Government of Albania and international financial institutions necessary to achieve its purposes; *authorize negotiations to contract the loans required by the Fund for its operations; *approve the necessary Regulations for the implementation of this Decreel *hold ordinary meetings every three months and extraordinary meetings as often as necessary on the initiative of the chairman; * all other duties assigned under the corresponding regulations. AWi˘Il IQ. Meetings will be held with the attendance of at least four (4) board members and the decisions will be taken by the majority of the votes. The Board may invite the representatives of other public and private agencies to its meetings, who should have voice but no vote. Article 11. The Executive Committee shall be formed by: the Executive Director two Deputy Directors and one Financial Director Article 22. The Executive Director shall be named and removed by the Deputy Prime minister and shall meet the professional requirements related to his function. The other members of the Executive Committee are appointed by the Executive Director subject to the approval of the Board. Article 13. The Executive Director shall be the highest executive authority of the Fund and shall have the following dutiest *hold the Fund's legal representation; *direct the operations of the Fund and implement Board d- sions; *manage the resources of the Fund; *select and appoint the staff; *sign the pertinent contracts for professional and technical services; *prepare and propose to the Board the Regulations governing the Fund's activities; Page 4 of 5 * request the Board's authorisatAon to contract external auditorsl * all other duties assigned by this Decree, its Regulations and Operational Guidelines. Artiele. The Executive Committee shall have among its duties the approval or disapproval of all requests for financing submitted to the Fund. For this purpose only, the decisions of the Executive Committee shall be taken by the majority of votes. If the votes are equal, the vote of the Executive Director will prevail. Article 1I. The work relations of the staff shall be regulated by the clauses of the signed professional or technical contracts, which shall be subject to Albanian law. Artill1. Staff expenses shall be financed with the Fund's resources. The salaries of the Executive Committee and professional staff members will be fixed by the Board of Trustees. CHAPTERS- Aud;ing Articlq_lU. Internal Auditors shall be responsible for monitoring the Fund's budgetary implementation and financial operations. The Internal Auditors shall be headed by an Auditor designated by the Prime Minister and will report directly to the Board in accordance with the Fund's Regulations and Operational Guidelines. Article 18. The Fund shall be subject to external auditing by independent international auditors acceptable to the World Bank. Reports from the External Auditors shall be reviewed by the Board for the corresponding legal actions. CIAPER 6- Fna and Temporay Provisions Articlo 19. The Fund should be exempt from any taxes, fees and charges, or from any other national or local revenue contributions, present or to be established in the future. Artcle 20. The four-year lifespan of the Fund may be extended by decree, in accordance with Albanian law. If the continuing existence of the Fund is not determined, two months prior to the end of the term indicated in Article 1 of this decree, the Prime Minister shall constitute a Committee to liquidate it, which shall have the following duties: * transfer to the pertinent governmental bodies or Institutions, the programs or projects not yet completed to comply with all the pending responsibilities; •transfer all the financial resources and all other assets from the fund to the corresponding governmental bodies; * submit the report of its activities to the Prime Minister and to the agencies he deems convenient. 7~~~~~~~~~~~~~~~~~~~4 r F re3=55~~~~~~~~~~~~~~~~~~~~. F., .. ......................r5l5i3q ; ~ iE ........ .. ...... M ~~~~~~~~~~.. !!. ... l EŁ......: HH'iH"H'iiHHŁ']E*'.H~~~~Miil pun_j juewdojeAea lei~nU ueiuL2qly )JULIO84 IUUOI1UZIUUBJO ANNIX 2 Page 1 of 12 RURAL POVERTY U'LRM PILOT RJI DRAFT RURAL DEVELOPMENT FUND REGULATIONS A. Rural Public Works 1. Programming and Distibution of Resources The RDF programs its financing according to regional distribution and distribution by sectors. 1.1 Regional Distribution The program will be limited during the pilot phase to the 10 poorest districts, then extended progressively to the whole country. The funds will be assigned in two stages. In the first stage, funds are allocated to the districtsl in the second stage, and using the same procedure, funds are allocated to the communes of each district. The funds are allocated on the basis of a formula taking into consideration population by commune corrected through three poverty indicators: arable land per capita, percentage of arable mountain and hilly land and the rate of unemployment. Within the commune, mountain and hilly areas will be considered as priority areas. These distribution guidelines will also be used to distribute the budget between the communes of each district. The distribution will be revised before the end of each year and the allocations can be changed, not exceeding 10% of the total budget. 1.2 Distribution by Sector During the first year, 60 to 70% of the financing of the RDr is allocated to rural works and mainly oriented towards - repairing cowmunal dirt roads; - rehabilitating village irrigation schemes; extending and repairing existing water supply system; in some cases completing water supply investments started before 1991; - repairing or reconstructing school buildings; - implementing new marketing facilities. ANNEX 2 Page 2 of 12 This program will be revised at the end of the first year, based on the needs expressed by the villages and the communes, and technical and financial considerations. 2. Th Pojec Cycle 2.1 promotion As it is important that the Rural Development Program be demand driven, with the initiative being taken by the villages, a media information campaign will be andertaken and special documentation will be sent to the communes. 22 Request from the Viage Villages interested in Rural works Program subprojects will present requests including general information about the village and an application form for the specific type of rural works to be financed. This request, signed by the head of the village, has to be approved and transmitted to the Fund by the commune, which sends a copy to the relevant district institution for reviewing the design and replying on a non-objection basis in a period no greater than six days. Eligible subprojects are registered in the database of the RDF and filed according to their geographical location in order to optimize technical appraisal visits. 23 Appraisal of Subprojects 2.3.1 Technicl Visits Through its filing and planning system, the RDF ensures that all subprojects are adequately visited by its engineers. During these technical visits, the appraisers verify the information contained in the request for financing and complete this infornation if necessary. They meet the village committee, the commune representat4ve, the designer, the contractor and the technical supervisor of the subproject. 23.2 Cost The RDF engineers inquire also about the price of materials and labor in the region of the subproject in order to control the cost estimates based on this information. The RDF will prepare progressively a cost database for the entire country. Unit costs tables will be prepared on a regional basis, for the most representative types of rural works subprojects financed by the RDF and updated periodically. AMEX 2 Page 3 of 12 23.3 Appraisal The RDF will design report formats for each type of subproject including basic information necessary for the analysis of each project such as labor force, target population, cost per job generated, operation or maintenance guarantees. The main objective of these appraisal report forms is the collection of basic information in a systematic way for each subproject to facilitate the decision process. 2.4 Subproject Approval on the basis of the appraisal report presented by the appraiser, the Executive Committee approves, rejects or request the reformulation of the subproject. The Executive Committee meets according to the needs, at least once a week. 2S Contract Signing After a subproject is approved by the Executive Committee, the RDF prepares a contract to be signed by the chairman of the commune and the Fund. The contract will be co-signed by the village head and the technical supervisor. Within the financial limits set in the contract, the commune signs agreements with subcontractors for labor, equipment, and materials. The two conditions for RDF financing are that: - a village Council be elected by the village, even on a nonformal basis in order to constitute a partner for the RDFs = An agreement is reached between the village council, the commune and the RDF about the maintenance and the recurrent costs of the subproject. 2.6 Disbursements According to the type of subproject and amount to be financed, the RDF disburses a percentage of the total sum as an advance to the commune. Subsequently, the commune requests periodic disbursements in accordance with the progress of the work being carried out. - Regarding the purchased materials and equipment the RDF covers the invoices presented and signed by the village council, the chairman of the commune and the technical supervisor. - As regards labor costs, payment will be done every two weeks according to a daily list of working people. ANNEX 2 Page 4 of 12 2.7 Supervision The RD? implements a follow-up system with the assistance of its engineers who periodically visit the subprojects in execution. Bach engineer is responsible for a region of the country. 3. Appraisal Criteria 3.1 Types of Subprojects A preliminary list of different types of subprojects eligible for RDF financing has been established. Priority will be given to repairing existing infrastructure rather than to new investments, and to subprojects having an important social impact, high labor intensity and local organization impact. 3.2 Target Population The resources of the Fund will be allocated to the communes according to poverty indicators. These general indicators will be confirmed by RDF officers during their field visits on the basis of village questionnaires. The workers are selected by the village council on a voluntary basis along the following criterias (i) inhabitants of the villages concerned, (ii) minimum legal age, (iii) priority given to the poorest families, (iv) one member per family employed. 3.3 Contractors In most of the cases especially as regards roads repairing, water supply and school repairing, the contractor will be the commune. The subcontractors can be individual local specialists, or public or private enterprises. In some cases (e.g., new construction), the contractor can be a private or state enterprise. In the first stage, the choice of contractor will take into account the price and access to the necessary materials. As a private contracting market develops, bidding procedures will be applied. For the first year of the program, given the relative simplicity of subprojects and the lack of private operators, they will be prepared and executed under the supervision of the commune with the assistance of hired local technicians. AMNEX 2 Page 5 of 12 3.4 Salaries and Fees For the manual labor, the salaries to be paid on RDF-financed subprojects will be defined according to unskilled sectoral market rates. For some types of subprojects where the social impact is more important than labor intensity, salaries will be below market rates in order to allow for a contribution of the village to the financing of the subproject. This may be the case for water supply and school repair subprojects, especially in lowland areas where an additional cash income is not an absolute necessity. The preparation of subprojects and technical supervision, will be remunerated according to the amount of time spent by local technicians and engineers rather than on a percentage basls. The RDF will constrain the adminlstrative expenses and profit margins allowed under subprojects. These should be however adequate enough to interest contractors and ensure quality of works. 3.5 Labor Content Labor content is one of the criteria of the subproject approval. Although the use of machinery, such as bulldozers, could lead to cheaper investment cost, prLority will be given to manual work. 3.6 Materials To help Albania's balance of payments and avoid supply problems, the RDF will favor subprojects with high local material content. Ixceptions will be made for subprojects with large social impact, such as water supply. Although contractors will be directly responsible for the supply of materials, some assistance of the RDF may be needed in the organization of imports. 3.7 Counterpart Financing Counterpart financing of at least 5S of investment cost should normally be required by the RDF to ensure thats - Good quality subprojects are presented by the communes, - That the cost of the subprojects is as low as possible, - Subprojects will be sustainable beyond RDF financing. However, in the present situation, given the lack of local investment budgets this contribution may be not applicable in the first stage. ANNEX 2 Page 6 of 12 3.8 Cost Control Given the extreme diversity of prices on local markets, one of the important tasks of the program is to ensure that the prices of materials and transport are as low as possible. EDF will collect and disseminate information about the nationwide supply and prices of materials and servicos. This may have an important effect on the organization of local markets. Progressively, a computerized cost control system, based on standard unit regLonalized prices, will be implemented and safeguard that selection of subprojects is undertaken according to transparent criteria. in an inflationary situation rapid and efficient execution of subprojects will help protect against cost increases. In some cases (e.g., when the execution of a subproject must be organized over a relatively long period, due to climatic conditions) subprojects may have to be re-evaluated. 3.9 Teical Viability Subprojects will be appraised according to standard engineering, environmental, and other technical specifications. Technical design will be done by local technicians (usually at district level), and technical and environmental norms, as set out in the RDP Operational Guidelines, will be used. The following recommendations are guidelines in project design. - Roads will be only earth roads, 6m width (including shoulders and drainage ditch). Special attention will be paid to road drainage (ditches and related pipe culverts); graveling (3.5m width) can be done in the worst parts (muddy or sloping) of the road. - water supply will be based on public fountains, the average being one per four families. As most of the works will concern repairs and/or completion of existing galvanized steel pipes networks, this technique will be used, but new materials such as polyethylene pipes could be tested. - irrigation will be based on rehabilitation of the existing works, improvement of distribution networks (field outlets) and minimizing water losses (lining of the canals). Priority will be given to small gravity networks. The key question in irrigation works will be the Water User Association which will be the local partner, and creation of such associations will be a prerequisite for subproject intervention. - Schools repairs (or construction) will be done according to the norms of the Ministry of Education. As far as possible, local craftsmen (brick layers, carpenters), will be hired. ANNEX a Page 7 of 12 3.10 Economdc appraisal (Cost Efectiveness) In the present situation, the economic rates of return on different subprojects would be purely artificial and very difficult to calculate. The RDF will therefore apply a very simple methodology to evaluate the economic impact of each kind of subproject. The main parameters used will be - The cost per man/month employed, - The unit cost per type of infrastructure subproject, - The investment cost per capita and/or per beneficiary, - The percentage of labor in the total investment cost. These unit costs will be used to establish standard profiles for each type of subproject and will help define maximum and minimum parameters acceptable. Cost effectiveness will be controlled in all cases through the elaboration of prototypes for each type of infrastructure subproject financed by RDF. The impact of the investment on the village economy and the standards of living of the population will be assessed through a survey made before and after subproject execution. 3.11 SusStaabillty and Cost Recoveiry The inter-institutional agreements between the RDF and ministries or line agencies should ensure that subprojects are within the sectoral priorities of the responsible institution. In most cases the maintenance of the local infrastructure will be taken in charge by the commune. Creation of village councils responsible for the preservation and the daily maintenance of the infrastructure will help to ensure the sustainability of subprojects. Cost recovery for some type of subprojects, such as water supply, should be considered within the framework of general tariff reform. Users fees should be progressively introduced. 4. Techical and Financial Oversight 4.1 TechIcal audit Technical supervision of the works will be the responsibility of the local partner (commune), but the RDF will send technicians (infrastructure inspector) to check the quality of works done. Page 8 of 12 At least two oversight missions will be undertaken according to the payment schedule: - Medium term payment will be made after a Technical Audit of the works done and supplies delivered on site. - Flinal payment will be made after subprojects are completed and operating and local organizations have provided acceptable assurances that they will maintain the subproject works. This technical audit will be carried out by RDO. 4.2 Payments The RDF will finance and check the construction works according to detailed cost estimate of the works. Payments will be done in three stages: - ~.Advance payment calculated on the basis of supplies, transport and labor costs, not exceeding 60% of the total cost (This figure will be only for the works with high supplies component). 3 Medium term payment will be made on the request of the commune according to the actual expenses and justified by certified invoices. Both advance and medium term payments will not exceed 80 to 85% of the total cost. - Final payment will be not less than 15 to 20% of the total cost and paid according to the actual expenses of the commune and justified by certified invoices. Reductions in final payment can be made by RDF according to the actual works performed 4.3 AccountIng The local partner (commune) will keep records and provide all justifications for the expenses related to the works. For supplies and transport, it will provide: - At least two proposals before purchasing the goods or services, - Detailed invoices of the goods and services purchased. - For manpower, the local partner will provide payrolls. AM a2 Page 9 of 12 4.4 Brealdng of the Contact RDr reserves its rights to break the contract if the local partner fails to fulfil its duties or it appears that the works cannot be properly carried out in due time and cost. In these cases, a detailed account of th. expenses will be made and delivered goods and supplies will remain the property of the RDF, the local partner being responsible for them by keeping them in safety until the RDF decides their new allocation. Moreover, if the failure comes from the partner's side, it will lose eligibility for any other funding under the program. B. Village Credit Funds 1 Description and Objecthres The Village Credit Fund Program is a partnership between the Rural Development Fund (RDF), the Albanian Bank for Agricultural Development (ABAD), and individual rural villages and towns represented by Village Credit Committees, to provide small-scale credit for farmer and micro-entrepreneurs The Village Credit Funds represent capital deposited by RDF in accounts in ABAD for the benefit of farmers and micro-entrepreneurs in individual Albanian villages and towns. They are administered by Village Credit Committees, who act as agents of RDF in authorising subloans to individual villagers or groups of villagers. The objective of the Village Credit Funds is to provide poor rural producers opportunities to undertake or strengthen economic activities. All profitable economic activities, agricultural and non-agricultural, are eligible for subloans from the credit funds. 2. EligibilIty of Villages To be eligible for the Village Credit Fund program, villages must: Create a Village Credit Committee in accordance with Article 4 of these regulations; Remain in good standing under the program's rules and regulations, including timely repayment of all subloans. ANUX 2 Page 10 of 12 3. Eligble Sub.bomwers Access to credit will be available to both men and women, and to groups of borrowers. Individual and group borrowers musts Have a real need for credit; village credit funds will not be used to finance initiatives that applicants could finance from their own resources$ P-me the technical knowledge and land and/or labor resources needed to carry out the initiative proposed for loan financLng; Provide the guarantees or collateral required by the Village Credit Committee under Article 4. 4. Village Credlt Committees Vlllage Credit Committees will be created to administer Village Credit Funds. These committees will consist of: ,VU1l. Representatives, who will eithe be the elected village council or a specially elected group of three r more villagers. The Village Representatives will undertake a training program to learn the program's rules and regulations; A representative of the Bank for Agricultural Development; . .. a representative of the Rural Development Fund. Within the context of it. contract with RD?, The Village Credit Committee has the following decision-making powers: Selection of loan beneficiaries, interest rates, loan amounts, and collateral or guarantees and other conditionalities needed to secure loans; Loan repayment amounts and schedules; The sanctions to be enforced for late repayment of loans, or defaults; Follow-up on loan performance. 5. Lan Consideration and Approval Village Credit Committees will meet regularly at least once a month to consider loan requests from village residents. Loan requests will be considered in the order submitted, and all requests must be acted upon within six weeks of their submission. Village Credit Committee decisions must have the approval of a majority of the Village Representatives present, and the representatives of the RDF and the AtNEX 2 Page 11 of 12 Agricultural Bank. Their decisions will be delivered in writing and will specify the borrower or torrowing group, the amount and duration of the loan, the interest rate and fees to be charged, the amortization schedule and any anti-inflation mechanism to be applied to repayments, and the loan guarantees to be applied. 6& Loan Guarantees Loan guarantees will be established by the Village Credit Committee for each loan granted. These guarantees will take into account the size and duration of the loan, the Committee's assessment of the risk involved. Loans may be guaranteed, inter alia, by goods (e.g., land, houses, livestock, equipment, crops) owned by the borrower or the borrower's family or other persons or groups of persons. 7. Amount and Duration of Loans The amount and duration of each loan will be fixed by the Village Credit Committee. In order to limit risk and maximize the number of people with access to the Village Credit Fund's limited resources, loans will, as a matter of principle, be kept as small - and their duration as short - as possible. 8 Interest Rates and Fees The Village Credit Committee will fix interest and other charges at a level that, at a minimum, maintains the real value of credit proceeds and fully covers loan administrative and management expenses. Mechanisms for maintaining value can include, inter alia, a fixed interest rate high enough to compensate for anticipated inflation, indexing to such norms as the price of livestock or the lek-dollar exchange rate. 9. Role of the Bank for Agricultural Development The Bank for Agricultural Development (AMAD) is a partner to the Village Credit Committee and Rural Development Fund in administering and managing the Village Credit Fund. ABAD, through its local branches, is the repository of Village Credit Funds opened in the name of participating villages by the Rural Development Fund. An ABAD representative is a member of each Village Credit Committee. ABAD is responsible for the financial management of the Village Credit Funds, and will receive fees, set by the Village Credit Committee, adequate to cover its administrative and management expenses. ABAD will report regularly, and at least quarterly, to each Village Credit Fund on the status of the Village Credit Fund and all subloans issued. ABAD disburses subloan proceeds to - and collects subloan repayments from - beneficiaries designated by the written decisions of the Village Credit Committee. Disbursements will be contingent upon the execution of a subloan agreement between the Village Credit Committee and the sub-borrower, the Page 12 of 12 provlsion by the sub-borrower of the guarantees required by the subloan agreemant, and adequate repayment performance on all outstanding subloans by the Village Credit Fund. 1Q. Deault and Late Payment Prosions Any delay or default in repayment of a subloan issued under the Village Credit Fund will result in an imnedLate stoppage of further MAD diLbursements against the Fund. The Village Credit Fund will be responsible for investlgating such delays or defaults and devising methodologLes brLnging repayments up to date, or calling in the subloan or guarantees made against it. AMX 3 Page 1 of 7 ALBANA RU4 POERTY ALLVOnO " PR RURAL WORKS PROJECIS PRIORITIES 1. Setng Priorides Priorities for the Rural Development Program's public works subprojects will be set in accordance with the program's key objectivess to improve rural infrastructure, create employment and provide support to local government and organizations. Table 1 ranks various types of works under these criteria, assigning a weight from 0 (No Impact) to 3 (Good), with the total setting the priority for each type of subproject. Table 1. Priority of Works Rutal Empl%mui Loca hfastcture Goneaon Oranzatow ToWa rrpaion/Drinae 3 3 3 9 Roes 2 3 2 7 Secoob 2 1 3 6 WterSupply 2 1 2 S Ekadity 3 0 0 3 Alfgoreatin 1 2 0 3 WatrSi Conservadon 1 2 0 3 Telephoe 2 0 0 2 1.1 Priority works Given these rankings, the infrastructure component of the project will focus ons * Rural Roads (Total Impaet: 7), which have good social impact, high labor input and involve a high level of input at the communes level in choosing, designing, and supervising subprojects and organizing their maintenance. * Irrigation/Drainage (Total Impact: 9) have even higher community involvement, as their implementation will involve organizing water user associations. As these organizations do not yet exist, however, subprojects in this category are likely to be started later in the program cycle than roads liitiatives. AMpEX 3 Page 2 of 7 * Water supply (Total Impacts 5) and Schools (Total Impact: 6) have significant social impact, but less labor input. Local organizations (commune and village) will be in charge of the works and safeguarding the equipment. * other facilities not listed above can be selected at the request of the local population, including health centers, market yards or other social facilities. 1.2 Non-Pority Works other types of projects will have lower total impaet: * Electricity (Total Impact: 3) and Telephone (Total Impact: 2) subprojects have good social impact, but very low labor input and no impact on local organizations. . Afforestation and Water/Soil Conservation works (both 3) have high labor inputs, but low immediate social impact, and, above all, the landholding aspects are not yet clear. 2. Poposed Works The Public Works component of the Rural Development Program will, thus, focus on rural road repairs, water system repairs and completion, school construction and repair, and such other subprojects as building new market facilities. Table 2 shows the possible scope of such works that could be financed through RDF over the four years of the Rural Development Program. Table 2. Potential Scope of Works Woks/ Yeas list 2nd 3rd 4th TOTAL Road 1S 25 35 40 115 WaterExteion 30 S0 70 90 240 WaterRepqW 40 60 70 70 240 Iri/Drainag 2 10 15 20 47 School Repars 40 20 10 70 140 School Buiing 2 5 10 1S 32 Others 13 17 21 24 75 TOTAL 142 187 231 259 819 These estimates are based on a cautious appraisal of the capacity of RDF and local organizations to implement infrastructure projects. In the Program's first years, the number of operations will be limited as technical staff has to be trained; priority during this phase will also be given to AmLI Page 3 of 7 repairs, which usually involve smaller and easier tasks. The size of operatlons will grow with tmes irrigation projects and school building will be undertaken mainly in the second part of the project. A total of 819 operations can be undertaken in four years, an average of one operation per 3.3 villages, which should have a significant impact on rural infrastructure and employment. 3. RDF Stafng Requrements The RDF will hire two categories of technical staffs infrastructure field inspectors who will be in charge of identifying and supervising subprojects, and chief inspectors in charge of coordinating the field inspectors. The staff will be based in Tirana, and field trips be organized to identify and supervise projects. Inspectors will work in one to three districts to minimize transportation time and develop knowledge of local conditions. Table 3 shows detailed staffing requirements. The calculation is based on the number of field days required for a single project (from 10 days for a school repair to 20 days for an irrigation project), and the number of field trips per inspector (16S days per year). The number of chief inspectors is calculated on the basis of one chief for 5 inspectors; 21 infrastructure field inspectors (10 the first year) and 4 chief inspectors (2 the first year) will be required to manage the works program described above. Table 3. ADF Technical Staff Requirements Wotks Days/Project Ist 2nd 3rd 4th TOTAL Road 20 300 500 700 800 2V00 Waw Extendon 15 450 750 1,050 1,350 3,600 Wae Repais 10 40 600 700 700 :Z0 IrtrgDrain 20 40 200 300 400 940 School RepWi 10 400 200 100 0 700 Scwol uidng 1S 30 75 150 225 480 Others 15 195 255 315 360 1,125 TOTAL Inpetor das 1,620 2,3S 3,000 3,475 1,0420 Numb. Inpect (Cum) 16S 10 14 18 21 Numb. Inmpct. (New) 10 4 4 3 Numb. Chifs (Cum) 5 2 3 4 4 Numb. aCefs (New) 2 1 1 0 Staff will be selected according to technical experience (at least 5 years). it would be advisable to choose various kinds of technicians as the project will deal with various kinds of works. We would propose the following specializations: ANNEX 3 Page 4 of 7 Road speclalists . . . . . . . . . . . . . . . . 6 Water supply specialists . . . . . . * . . . . . 6 Irrigation/drainage specialists . . . . . . . . 4 Building specialists . . . . . . . . . . . . . . s Although each inspector will specialize in a specific geographic area (1 to 3 districts), they will all exchange information about their projects and, thus get technical advice through their colleagues. For specific problems (such as pumping stations or hydrogecology), the fund can hire technical consultants (short term mission) available in Albania. In addition to their technical backgrounds, these inspectors will be trained by the project in the fielde of local organization and intervention in rural areas% three two-woek courses will be held each year to train project staff. 4. Investment Costs 4.1 Undt Costs Given the economic changes under way in Albania, unit prices for works and supplies are difficult to estimate. As an example, the first cost estimates prepared by local technicians (on the basis of former official state prices) were multiplied by six to estimate roughly the actual prices Prices of works listed in Tables 4-7 are based on actual prices discussed with local technician and, for road and water supply extension, these are the prices of contracts signed in September in the pre-pilot testing phase of the Rural Development Program. Table 4 gives September 1992 prices for works and a breakdown by categories such as labor, local and imported supplies, traxsportation, and other. Table 4. Breakdown of Costs for Public Works in September 1992 (In Percentage) Water Watr I School School Road (5 km) Extndon Repar Dnangp Rqain Euldig Labor 55 19 27 55 20 30 LocR Su&plies 5 33 15 60 50 lmportdSufle 28 S0 5 5 3 TrManpo 28 8 8 13 3 5 Other 12 12 15 12 12 12 Tota 100 100 100 100 100 o10 The 1992 prices cannot be kept for the whole project duration and Table 5 shows expected price increases for each cost component. A-EX 3 Page S of 7 Table 5. Assumed Inflation Rates For Program Period Yeaw 1st 2ad 3rd 4th Labor 30% 30% 30% 20% Local supplies 30% 20% 10% Iprted supplies Trasport 30% 20% 10% Othr 20% 10% 10% 4.2 Totl Cost Direct investments cost are shown in Table 6 for the number of projects proposed and the yearly cost of each type of work. The total investment cost will be US$19.12 million (first year: US$1.59 million). Out of this total, roads will represent 51%, water 18%, irrigation-drainage 14%, schools 7% and others 9%. The unit cost per subproject will rise from US$11,000 in the first year to US$32,000 in the last year (average US$23,000) due to local inflation and the increasing size of the projects financed. Table 6. Cost of Works Over the Program Period (US$ 000) Year works 1st 2nd 3rd 4th TOTAL Perceltg Road 850.5 1,762-5 2985S5 4,12.0 9,7265 51% Water mesion 252.0 485.0 756.0 1,080.0 2,M73.0 13% Water Repais 136.0 228.0 294.0 322.0 980.0 5% lrrig Drain 76.4 471.0 852.0 1,368.0 2,767A 14% School Repairs 76.0 46.0 26.0 0 148.0 1% School Building 51.2 155.0 359.0 622.5 1,187.7 6% Other 147.9 3125 5275 749.5 1,737.4 9% TOTAL 1,590.0 3,460.0 5,800.0 8,17.0 19,120.0 100% Costperprojed 11 19 25 32 23 4.3 Break-down of the Investment costs 43.1 Foreign Currencies Foreign currency cost has been estimated for each type of work. Table 7 gives the yearly foreign currency cost for each type of project; for the four years of the project, foreign costs will be about US$l million, 5% of total cost. AXMh3 Page 6 of 7 Table 7. Foreign Currency Costs (US$ 000) Yea Wok Unit costs 1st 2nd 3rd 4th TOTAL Road 0 0 0 0 0 0 Water ExtensIon 1,%60 58,0 98,000 137,200 176,400 470,400 Water Repais I,50 60,000 90,000 0lS,000 105,000 360,000 * Drain. 1,500 3,000 15,000 22,50 30,000 70,500 Scho Repas 75 3,000 1,500 750 0 S,250 Sdwl Buildig 600 1,280 3,000 6,000 9,000 19,200 Other 12,600 20,750 27,145 32,040 92S535 TOTAL 138,600 228,250 298,S9M 352,440 1,017,885 43.2 Labor Cost Labor is the main component of the cost, and its share of costs will Increase as wages rise from USS1/day in 1992 to an expected US$2.60/day in 1996. Table 8 shows labor cost for each type of project over this period. Table 8. Labor Cost Increases Over the Program Period unit prices Work 92 93 94 95 96 infaon 30% 30% 30% 20% Dail wage (US) 1 1,3 1,7 2,2 2,6 Road 24,200 31,460 40,900 53,170 63,800 WaterEtaenon 1,330 1,730 2,250 2,930 3,520 Water Repas 810 1,050 13 1,780 2,140 krg Dain. 16,500 21,450 27,890 36,260 43,510 School Repais 300 390 S10 660 790 School Building 6,000 7,800 10,140 13,180 15,820 The total labor cost of the project is shown in the table below. This cost will be US$10.1 million i.e. 53% of the total investment cost (US$19.1 million). Page 7 of 7 Table 9. Total Labor Cost (US S) Wor is 2ad 3rd 4th TOTAL Road 471,900 122,500 1,860,9SO 2,500 5,907,350 Water Eseaslon S1,900 112,500 205,100 316,800 686,300 WatereRpaks 42,000 82,200 124,600 149,800 398,600 ltg Dran 42,90 278,900 543,900 870,200 1,73S,900 School Repaprs 1,600 10,200 6,600 0 32,400 Sool Buufa O5,600 50,700 131,80O 237,300 435,400 Other 63,99 1SS,700 27,29 412,610 gi99, TOTAL 703,90 1,714700 3160,24S 4,38710 10,11S,545 Rouned to Thouad 704 1,713 3,160 4,539 10,116 Mandays In Thousan S42 1,008 1,436 1,746 4,732 The total labor hired will be 4.7 millions mandays, i.e., 16,700 years of works. Assuming that each subproject will last 2.5 month in average (65 days), 72,800 workers will be hired by the project during the 4 years. Annex 4 Page 1 of 4 ALUANA R1RAL POVERY ALLEVIATION PILOT PRQ. TARGETING METHODOLOGY FOR RURAL WORKS COMPONENT Objective Poor families mainly residing in mountain and hilly areas with very small plots of land and without non-agricultural employment are most at risk during the transition period. Without a marketable surplus and unable to meet their subsistence needs with their own production, these families depend upon an unreliable ration system to purchase the staples of their diet (wheat, sugar and oil) at official prices that are 3 to 4 times higher than before the reforms. When these commodities are not available through the official ration system, they must purchase them in private markets at prices that are 2 to 3 times the new official prices. The Rural Development Fund (RDF) will operate in all areas of rural Albania. However, the Fund will target a disproportionately greater share of resources towards the poorest families. An index of marginality is used to identify the districts where the poorest families reside and to rank the districts into 5 categories. The RDF's resources are then divided among the 36 -istricts on a per capita allocation weighted in favor of the poorest districts. The process is then repeated to divide the district's resources among the various communes. However, the marginality index is only based on the land and topography indicators, as the unemployment rate is not broken down by coamune. Selection of Variables for Margnality Index The index incorporates 3 variabless arable land per rural capita; percentage of hilly and mountain arable land; and the official unemployment rate. The first indicator evaluate the amount of arable land per capita among the rural population (ex-cooperative members and state farm workers). The larger the per capita availability of arable the more likely a family will be to satisfy their subsistence requirements and produce a marketable surplus. The second index is the percentage of arable mountainous and hilly land per district. This index reflects the level of marginality in a district as mountainous and hilly land is less fertile and farmers living in these districts have less access to inputs (especially water, pesticide and fertilizer) as well as higher transactions costs to market their produce. The third index is the official unemployment rate per district. Theoretically, the rate is the number of people registered at the unemployment office who were previously employed and are without work. Students who graduated in 1990, 1991 and 1992 and have never worked are also included in the unemployment rate. The July 1992 unemployment rate, which is used to prepave the preliminary index, was not properly constructed as some districts include only individuals receiving social assistance (unemployed as a result of the July/August reforms) and exclude reglstered unemployed who are not receiving any compensation. Annex 4 Page 2 of 4 Methodology The marginality index was formed by combining the above three indices. The first two indices are more heavily weighted as they are better estimates of rural poverty; people registered for unemployment are more likely to live in urban areas and secondly regietration on the 1Lst enables them to receive unemployment compensation (during the first year of unemployment). consequently, the land and the topography indices are more heavily weighted in the marginality index than the unemployment rate. Based on the marginality index, the districts were divided into 5 categories of poverty: poorest; very poor, poor; less poor; and better-off. The per capita allocation of the RDF5s resources among the 27 districts was then weighted in favor of the poorer distxictss 120% for the very poor districts; 110% for the very poor; 100 % for the poor; 90% for the less poor and 70% for the better-off districts. Ann 4LA Page 3 of 4 Table 1. Agricultural Production, Land Holdings, and Incomes by District, 1990 (In 1986 prices) 1990 1990 190 Rund Per Capita Agri. Ag4i Pllo bn Ar2 Agicukulr Otput Ld I (ha/fmlly) Income (m ha (000 perso") ('.k) Coasta Dbics 624 1,090,263 1,9.0 1.44 4,624 Shkoder 821 163183 157.1 1.1 3,963 Lezhe 236 37923 50.8 12 4,68 Kie 330 4872 67.0 1.3 492 Tlran 486 8826 120.4 13 4,037 OuKas w29 62871 125.7 1.5 5,004 Elbaesan 623 103232 1442 1.3 4320 Lushnje 712 55141 106.1 1.9 6,711 Fier 821 90652 178.3 1.8 4,605 Berat 400 78438 110.1 1.7 3,633 Vlore 389 114404 92.2 1A 4,219 Sarande 335 83552 62.7 1.6 5A43 Koros 702 163119 144.1 1.8 4,872 Mountin Dtits 1=3 1,060,134 71&0 1.22 2,623 G*dklwater 226 9Q277 39.8 1.8 5,678 TePelne 121 60774 36.7 1.6 3297 Permet 141 76468 30.7 2.2 4,593 Kolonje 102 67878 17.6 2.8 5,796 Skraa 109 88741 30.5 1.9 3,574 Gransh 101 55505 36.7 1.6 2,752 Pograc 148 50700 30.1 1.4 4,917 Ubrazhd 116 77384 64.9 1.1 1,787 Dlbe 251 114762 13.8 0.9 16 Mat 129 75323 6&0 1.1 2.048 Mldte 100 74168 43.9 0.7 2,278 Kukes 189 100986 86.9 0.9 1945 Puke 80 91072 67.4 0.6 1,187 Tropoje 90 72316 35.8 0.9 2,514 Tatal/Averae 8167 2158397 207.7 1.4 3,933 Souce: 1991 Stlads Yeabook of Albanf, Ministy of Finance and Ecoormy, Sattcs De_amm 1 ndudes arabi, pasture and forest lndL 2 Projected area per family fogowin 1f1u dibution of ex-coopwatve land, scheduled for June/July 1992. Table 2. Albania District Poverty Ranking UN#EPLOT. ARGIN- PoPULATION NEIHtE UE16HTED X Of LAND RATE %a TOPOGRAPHY ALIT? ALLOCATION ALLOCATION SHARE Of SARE Of PER CAPITA DISTRICT INDEX Nc (C) INDEX Nd INDEX RANKING (US$/district) USSIdistrict) POPULATION RESOCUCES ALLOCATION ............... ..................... ... ....._....... ........... _,......... ... ............. ....... .........._ ...... .......... ..................., .............. .......... ....................... ..... Puke 0.82 0.18 0.87 0.78 Poorest 127533 153039 18X 22X 1201 Nlrdite 0.77 0.12 0.80 0.72 Poorest 126122 1S1347 Tropojo 0.67 0.17 0.85 0.70 Poorest 103S72 124286 Not 0.65 0.16 0.87 0.70 Poorest 182185 218622 Kukes/Has 0.68 0.12 0.80 0.68 Poorest 251996 302395 LibraZhd 0.65 0.20 0.80 0.67 Poorest 187423 224908 raush 0.55 0.14 0.89 0.66 Poorest 105672 126806 Skraper 0.37 0.22 0.96 0.62 Very Poor 87437 96181 30X 33X 1101 Dlber/Outqize 0.66 0.23 0.66 0.62 Very Poor 385111 423622 Pogradec 0.48 0.13 0.86 0.62 Very Poor 153499 168848 Tepelene 0.44 0.04 0.86 0.59 Very Poor 105609 116169 Tirane 0.57 0.08 0.71 0.58 Very Poor 350052 385058 Elbasan/Peqin 0.49 0.14 0.75 0.57 Very Poor 42592? 4$8514 Sorat/Kucove 0.41 0.11 0.78 0.55 Very Poor 317521 349273 Persit 0.24 0.24 0.80 0.49 Poor 88565 88565 9X 9X 100X Kavaje 0.41 0.17 0.56 0.45 Poor 173210 173210 Vlore 0.35 0.09 0.60 0.44 Poor 265863 265863 Korce/Devoll 0.30 0.09 0.52 0.38 Less Poor 412839 359170 351 311 871 Fier/Natlakaster 0.37 0.24 0.42 0.38 LesS Poor 511527 445029 KolonJe 0.00 0.12 0.81 0.37 Less Poor 51378 44699 Ssrande/DeLvins 0.35 0.06 0.45 0.36 Less Poor 179940 156548 ShkoAee/Nalesia O.S4 0.17 0.21 0.35 Less Poor 453581 394615 Gj1rokaster 0.30 0.07 0.46 0.35 Less Poor 115197 100222 Durres 0.30 0.09 0.40 0.32 Less Poor 190467 165706 Kruje/Lac 0.40 0.1S 0.26 0.31 Less Poor 194736 169421 Lushnje 0.24 0.16 0.28 0.25 Better-off 306723 221986 8X 5X 72X Lezhe 0.42 0.10 0.09 0.24 Better-off 146318 105896 60043.62651 Variable Wel8ht 0.45 0.10 0.45 6000000 6000000 100X 100X N/A a. Officfal unhIploynent rate as of August 1, 1992. b. Amount to be allocated (o)s 6000000.00 c. Index reflects per capita allocation aonS the rural population of arable land. d. The percentage of mottaineois and hilly land per distriet. - , ANUX S Page 1 of 6 RIM& POERTY lMAON FIIu P ALMNIAN RURAL DEVELOPMENT PROGRAM: CREDfT COMPNENT 1. Credit Demand The determining factors Ln Albania's agrlcultural sector are the shortage of land and the insecurity felt by peasants in the face of food shortages, high inflation, and a lack of agricultural input and output markets. In this situation many small farmers are revertlag to ubsiLstence strategLes. This strategy, however, is linmted by very small plot sizes that often do not allow sufficient wheat production to feed a family. Parmers are also quite cautious on credit; they have almost no experience with it and recognlze that it can involve an additional risk that can endanger thelr survival strategy lf the investment realized does not lead to the expected results. They primari1y use credit for lnputs (such as seeds, fertilizer, pestLcides, or tractor services) to increase production on their plots, or animals (poultry, sheep, goats, and cows for milk and meat production, and traction animals) to diversify beyond the llmlts of their agricultural plots. The rural market for services and processed products is not working at all, as low monetary incomes mean all cash is spent on basic needs, and there is little demand for credit for nonagricultural rural actlvltles. Total credit needs do not exceed $500 per famlly, and most loans fall between $20 and $300. While these amounts appear low, the income from a hectare of wheat does not exceed $100 and the amounts of the required loans correspond to one- half to five times average annual incomes, a ratio close to the practice of agricultural credit in other countries. While farmers also need larger loans for investments in irrigation, mechanization and off-farm activities, most of these loans should be met directly by the Albanian Bank for Agricultural Development (ABaD). Producers themselves say they would prefer to see available resources for the village funds concentrated on *small" individual credits. 2. Credt Supply Non-formal Vlage Level Systems Although traditional informal lending systems were common ln the villages before collectivization, they completely disappeared over the four decades during which the state monopolized productive investment. Loans among villagers are today almost exclusively social loans, without interest and generally intended for emergencies in situations of crisis, such as illness, or social obligation, such as weddings. Page 2 of 6 A rapid reappearance of a significant supply of money from traditional borrowers seems improbable, as land has been equally distributed and the social and economic differentiation that was the basis of informal lending has largely disappeared. Also, the commercial and extra-agricultural activities that serve as instruments of socioeconomic differentiation between families have not yet developed in most villages, and the general economic climate of high inflation tends to lead those with money toward direct investments. Peasants perceive high interest rates as a mechanism of exclusion, although discussions with farmers indicate that this is largely a problem of explanation; peasants - and even local AAD agents - have no experience with inflation, which has been unknown in Albania for more than a generation, and had no concept of the relationship between interest rates - which they considered arbitrary - and the depreciation of money. They quickly grasp, however, explanations of economic mechanisms and the need for banks to protect their capital against inflation. Peasants facing an unknown future inflation rate have suggested the fixed interest rates of the Agricultural Bank be replaced by indexing capital and interest repayments to the dollar: or the prices of agricultural products, which would allow them to evaluate and to better control the risks of credit. The Albanlan Bank for Agrictural Development (ABAD) In September 1992 The Bank for Agricultural Development was considering four types of credit to the private sector: • Loans of up to three months, at 25% interest, most of which would be channeled to rural tradesmen (food, inputs, clothing) and to private fertilizer traders under the USAID fertilizer program. Loans up to six months, at 32% interest, for use by peasants as credit for inputs. Loans of up to one year, at 39% interest, for inputs and processing industries such as bakeries and dairies. Medium-term credits of 3 to 5 years with an interest rate of 40% for cattle acquisition and rural enterprises (transportation). ABAD has allocated the bulk of its available funds (lek 350 million) to private-sector creditl. In July 1992 ABAD raised interest rates from 8-10% to 25-40% to partially compensate for inflation. As potential customers were not familiar with inflation, this has led to a decrease in demand for new loans. In Albania's poorer hilly and mountainous areas demand is almost nonexistent and is limited to the very small co˘mercial and non-agricultural sectors. ABAD's weakness in small-scale rural credit stems from its roots in the State Bank, which was not a bank in the sense of a modern institution of J/ As of June 19 BAD had tk 350 mititon fn cutstndinW loans to the private sector, and tek 2.8 billion outstanding to the publt sector. ANNEX S Page 3 of 6 financial intermediation, but rather a state agency responsible for paying salaries and balancing accounts between state enterprises. Most rural ABAD staff are former cooperative cashiers; they are good bookkeeper, but lack the training and experience to understand the mechanisme of inflation and its consequences on banking activities, analyze demand and conceive appropriate financial products, understand profitable financial intermediation, or build a rural banking service in a market economy. ABAD staff also lack equipment, such as calculators, and have largely adapted the old cooperative ledgers as their means of keeping accounts. Fund shortages often restricts new lending for weeks at a time, particularly as the district banks are only allowed to recycle part of repayments into new loans.2 ABAD's strengths lie in the motivation and comnmitment of a great number of employees, and its good bookkeeping capacities. ABAI's procedures also constrain small farmer access, as the documentation required for a loan can take several weeks with many trips to the district town, and the procedure for small loans is almost identical to that for larger ones. Village Funds ap an Alternative Source of Credit the concept of village credit funds was developed from surveys, discussions and work sessions in Elbasan district villages to define with the farmers themselves a financial mechanism that would meet their need for easy and real access to small loans while insuring the sustainability of the financial system by covering transaction costs and preserving invested capital against devaluation by inflation. Another consideration was the inclusion of a savings mobilization elent to allow withdrawal of external funding of the system over the medium term. Peasant requirements for a new financial mechanism include: e Procedures that make access to credit simple. * Loan duration, amount, and the modalities of reimbursement must be adapted to the economic activity supported by the loan, and specific conditions should be set up for each sort of investment activity. In general, credit will be individual, but group credit could be considered for some purposes, such as irrigation systems. * Credit should take into consideration the general situation of the village. In a village that is short of pastureland, for example, credit for cattle acquisition should be limited to poor families who do not have animals and not be used to increase overall herd size beyond carrying capacity. Credit also should not be appropriated by only one group in the community; the peasants feel credit should be an instrument for strengthening social cohesion and not the contrary. 21 GAD interest rates are also a political issu, and Parliatent excluded BAD the banking law so that it coutd tend at a subsidized rate. In tho absence of nrces"ry means for such a step, the SAD finds itself in an uncomfortable situation today betmeen the polftical constraints on one hand and the budgetary constraints on the other. MX 5 Page 4 of 6 * The system of loans to be Get up must have moderate transaction costs. Villages are ready to contribute to this by taking over large parts of credit processing. * Guarantees and collateral must be appropriate and modulated in according to the amount borrowed, the risk of the proposed activity, and the creditworthiness of the borrower. Rather than using mortgages for small loans, they suggested social or material guarantees (equipment, animals, crops, etc.). This will considerably reduce the cost of access to credit and delays in granting loans. Strong village structures can contribute to social control of repayment and allow appropriate conditionalities. Peasants think the village is the relevant unit for the organization of the loan system. Peasants agree that interest rates must cover the costs of the service provided and preserve the value of borrowed capital in an inflationary environment. They seek, however, to minimize their own inflation risks, and have suggested indexing interest to dollar values or agricultural product prices. Their preferred solution to their lack of accessible formal or informal credit is the creation of a fund reserved for the village, using ABAD's management capacity to handle bookkeeping and accounting. Thus, each village fund would have an account with ABAD, with individual loans expressed as subaccounts. Most peasants have never been granted a loan in the past. All the peasants are preparing for their second growing season in a private economy. Most farmers recognize they will need to invest - at a minimum in agricultural inputs - to raise production. While pointing out the necessity of a credit system, peasants simultaneously express a need for education and training to enable them to make good choices, and say they would like to involve specialists, such as agronomists or veterinarians in their investment decisions. They want the credit system to be under local control and have predictable repayments. Testing the Village Fund Concept The Pre-Pilot Phase of the Albanian Rural Development Program set up model village credit funds based on these criteria in seven mountain villages in the Elbazan district in September 1992. Village credit committees were established with one representative for each quarter of the village, with representatives of the working group set up as a predecessor to the planned Rural Development Fund and the Bank for Agricultural Development acting as advisors. The committees, based on the general regulations that govern village credit funds, make all decisions concerning fixing positive interest rates, loan recipients, guarantees to be provided by creditors, the fixing of reimbursement terms, and sanctions to be taken in case on arrearages or defaults. Any delay in repayments automatically blocks any new loans. Bookkeeping is provided by ABAD. amLI Page 5 of 6 The village committees fix for each type of loan a guarantee to be provided by borrower. It can be a material guarantee or a joint security. The requirement will depend on the loan amount, its duration, the risk entailed by the undertaken activity and the borrower's situation. The aim of this flexibility in guarantees is to make use of the committee's knowledge of potential borrowere. The system is also designed to improve MAD's capacity to manage funds so that it, in turn, can sustain the Rural Development Fund with its management skills. Thus, RDF opens for every village fund opens an account in the nearest ABAD branch, where its funds are deposited at the interest rate commonly applied for deposits. For each loan, the village credit committee requests from the Bank the opening of a subaccount and the paying out of the corresponding amount, and peasants repay directly to the ABAD branch. The village committees, thus, do not handle cash, and all accounting management is done by ABAD, which blocks payments to a village if there are delays in repayment. While MAD pays interest on deposits, it is paid service charges for its account-keeping and the expenses of its agent in the villages. The repayment rate fixed by the village committee covers intermediation fees, the costs of the working group, ABAD's fees, and inflation costs, which are pegged to the U.S. dollar. Transaction (and emergency fund) costs are set at 5S of the loan amount.3 The test village funds were set up on the basis of interviews and surveys in a number of villages in Ulbazan. An Albanian credit officer was recruited and trained, regulations and loan request forms drawn up, and village committees established in the seven villages. By mid-November 1992 84 loans totalling $24,000 had been approved, and another 40 loans for some $6,000 were in the final stages of processing. Loan sizes ranged from $47 to $209, and their duration was from I to 4 years, with most running 2 years. Most loans were used to purchase animals, which, given uncertainty about inflation and wheat prices, seemed to farmers the most secure form of investment. Some 40% of the loans were used to buy small ruminants, 36% for milk cows, and 19% for oxen. The remaining 5% was used for irrigation improvement. Establishing Village Credit Funds Under the Pilot Project The village funds will be established using deposits by the Rural Development Fund (using resources provided by external donors) to AAD accounts in favor of participating villages. The amount of each fund will J/ The 5X fee has been calculated on the basis of one project employee handling 30 villages at a cost of about St,500 a year for salary, office spao, and transport (motorcycle). SD bookkeeping and account management costs are calcuteted at $6,000. The work of the village comisttee is voluntary. Each village fund fs expected to handle some $10,000 worth of loans a year. and total eosts of $13,500 is 4.5X of the $300,000 handled by 30 vIl ages. A 0.5X fee has been added for an emergency fund. The fee structure will be ressess as more experfence fs sained. ANEX -S Page 6 of 6 determined by ROY according to available resources and the specific situation of each village. If we assume that the need that must be covered with this system of credit is about $100-300 for half the families in a village, this corresponds for a medium size village of 100 to 200 families to $l0,000-lS,000 per village. A starting fund of S0% of the final amount seems to be sufficient. Mechanisms for mobilizing rural credit from the villages - perhaps by adding a mandatory savings component of as much of 10% to loan repayments - will be tested during the pilot phase. The savings mechanisms would be deposited in individual interest-bearing savings accounts within the village fund, which would be managed in the manner of a savings and loan institution, which would be used to progressively replace RDF funds. This system includes an initial grant element, the planned mobilization of rural savings would provide a stable basis tc the future rural credit system. 3. Conclusion Farmers in Albania are going through a difficult period of transition from a state cooperative system to private agriculture. Credit can be a very important element in this transition. A system of village funds that combine local knowledge of creditworthiness with the management skills of the Dank for Agricultural Development can be an answer to this problem. This system should be able to handle the very small loans that account for the bulk of demand through a mechanism that is clear and understandable to the farmers. For the BAD, the Village Funds can provide a new approach to poor private farmers and their families, for whom an individual and direct approach would require overly transaction costs due to the low amount of their loans. The system, as it is proposed, fulfills all the durability conditions for rural financial systems, as it covers all transaction costs, has interest rates sufficiently high to preserve the capital value against inflation, and integrates a saving scheme that gives borrowers participation in the capital of the financial system. ANNX 6 Page 1 of 2 ALBANIA RURL POVE ALLOJN PILOT PROJEC ESTIMATED PROJECT COSTS ROF Vehicles Number Unit Cost Total (US S) Sedans 1 15,000 15,000 4-Wheel Drive 7 25,000 175,000 Minibus 1 40,000 40,000 Motorcycles 6 3,000 18,000 Total 15 --- 248,000 RDO Office Equipment computers 4 3,000 12,000 Printers 2 2,000 4,000 Copiers 2 3,000 6,000 Telex 1 5,300 5,300 Fax 1 950 950 Telephone 3 300 900 Misc. Furniture 1 12,000 12,000 Total -- -- 41,150 RDF Recurrent Costs Salaries Executive Director 1 15,840 15,840 Senior Staff 4 14,160 56,640 Infrastructure Staff 10 12,240 122,400 Credit Staff 5 12,240 61,200 Other Professional 3 12,240 36,720 Bookkeeper 1 10,920 10,920 Secretaries 2 10,200 20,400 Driver/Mechanics 9 9,720 87,480 Total ^taff 35 -- 411,600 Vehicle Operating Costs -- -- 73,100 Total Recurrent Costs -- -- 484,700 MLX 6 Page 2 of 2 Training Xquipment -- __ 7,300 Courses for Staff -- 45,520 Study Trips -- -- 38,000 Commune Staff Course -- 96,660 Businese Courses -- 32,220 Total -- -- 219,700 studies & Technology Village Profiles -- -- 5.000 Technical Support -- -- 22,600 Pilot Operations -- -- 40,000 Total -- 67,600 Technical Assistance Rural Works Advisor 1 197,540 197,540 Rural Credit Advisor 1 197,S40 197,540 Short-Term Consultancies (total) OS 197,540 98,770 Total 2.50 -- 493,850 12 months additional Recurrent Costs, Technical Assistance, Monitoring 870,000 Public Works 1,590,000 Rural Credit 750,000 Grand Total 4,765,000 ANNMX 7 Page 1 of 1 ESTIMATED DISBURSEMEN SCHEDULE (US$ =MUD) Bank Fiscal Year and Quarters During Quarter Cumlative 4th Quarter O.S0 0.50 1m 2nd Quarter 0.50 1.00 4th Quarter O.S0 1.S0 am 2nd Quarter 0.50 2.00 4th Quarter 0.40 2.40 aNNEX 8 Page 1 of 5 ALDAMS RUiRAL POVE,TY ALEAIN PILOlrTQ1T STUDIES, TECHNOLOGY, TECHNICAL ASSISTANCE, AND TRAINING 1. Studies While the far-reaching land reform achieved in less than a year shows the adjustment capacity the Albanian peasantry, the private farm in Albania is too new a phenomenon to be fully understood by policy makers. For farmers themselves, the only point of reference is the pre-war period that only old people can remember. Albania has a 3,000-year history but the last 50 or 60 years were largely erased by the communist regime. The identity of a community is its history. Everybody needs it to build up his self-confidence and project himself in the future. Thus, the first component of the rural studies will consist in interviews of with older village inhabitants about local traditions of labor organization, land ownership, off-farm activities, village organization, informal credit, etc. before collectivization. Short video films presenting these interviews would be used in project's training, and may also be shown in local schools. The second component of the studies will be an inventory of the village problems: access to markets, water and energy supply, land use, management of local resources such as irrigation, pasture, forest, which, for the moment still belong to the state. This study is essential to make policy makers fully aware of the constraints faced by farmers1 and to define the responsibilities of the village head and the village council created by the law of September 15, 1992. According to this law, inspired by the old *Kryeplaku" and "Kryepleqesia e fshatit" system2, the head of the village, elected by the representatives of the village quarterss (a) takes care of protecting public order in the village; (b) takes measures to meet needs such as burial services, maintenance of cultural and sports facilities, roads, sewage, telephone lines, electricity, etc.; (c) defines methods of using potable water resources, irrigation waters, and rules for exploiting pastures and forests; (d) reviews requests and claims of village inhabitants and tries to settle disputes; and (e) takes measures to improve and protect the village environment. al One of these constraints is, for instance, the lack of farm buildings and the lack of space in the village to build them. The cows are kept in the garden, the crops are stored in the kitchen and the manure is piled up on the village road, creating a public health and environment problem. 21 "The old head of the village" and "the old people council" grouping the heads of the quarters were the traditional local government of the village. The representatives elected in September 1992 are not necessarily old. I ANNX a Page 2 of 5 Prom the project's point of view, this part of the study, which would be carried out in all villages alongside rural works or credit components, is essential for prioritizing the infrastructure works and calculating proper maintenance and recurrent cost financing, which is a condition of RDF investment. A sample farm survey (about 20 farms in each village benefiting from the village credlt scheme) will focus on production factors (land, labor, equipment, inputs), choice of products (crops, cattle, ruminants, etc.), household budgets, and the attitudes and motivations of the farmers toward land ownership, employment, migration, services provided by the state and by the private sector. This sample survey will supplement the International Fertilizer Development Center country-wide study financed by USAID. It will complete the urban population household study financed by UNDP in Tirana and provide valuable information for poverty assessment. Beneficiary asseasment will be carried out at commune council, village council, and individual farm levels. All the studies will be conducted in the villages by ex-cooperative staff, who are now largely unemployed. This will allow for very low costs but, above all, it will help the technical staff to take another look at the farmers who were, one year ago members of the cooperative "brigade" under their control. The output of the study will be essential for monitoring the project, and exposing the former cooperative technicians to potential future clientele will be important for the organization of a future extension service. The studies component will be set up by RDF with the support of local research centers. It will help Albanian acadcsics retrain themselves in a new anthropological approach. Cost estimates are in Tk'le 1, below. 2. The technologies used in Albania's agricultural sector are large-scale and obsolete. The challenge is to introduce modern small-scale technologies, adapted to the new production and market pattern. The main sectors where these technologies are needed are: - Cereals processing (some small and very obsolete mills are already functioning under private ownership and bakeries will have to be modernized as rising farm incomes allow farm families to buy their bread rather than bake it themselves). - The dairy sub-sector, which will require small milk processing plants supplying the urban markets and cheese plants for goat and MM a Page 3 of 5 sheep milk which could be produced at very competitive prices for the export market.3 Fruit and vegtables processing could be developed not only in *.e present canneries, but also using drying techniques at the village level. Tobacco is already being prossed at the farm level, and techniques could be improved. Poultry, eggs and production could be developed in small production units for the local market. - Wool processing and carpet making could be rehabilitated at village level in relation with the development of tourism. - Local carpentry, blacksmith, mechanical shops could be modernized and put to work, as the former cooperative artisans are still in the village but generally jobless for lack of markets, raw materials, and equipment.4 - Rural tourism could be organized using methods applied in BC countries. Transfer of small-scale technologies could be organized by the RDF in cooperation with the EC-supported SME Support Unit, and by using technical assistance from specialized institutions in EC countries and promoting direct exchanges or joint ventures with the EC. Ten pilot operations are budgeted for the pilot phase. Table I shows the cost of studies and technology components for the four-year program. Table 1: Rural Developmnt Program Studies and Technology Costs It Year Lnd 3rd 4h TOTAL Village Profiles 5.000 13.000 25.500 40.000 83.500 Technical Support 22.600 22.600 22,600 22,600 90.400 Pilot Operations 40.000 72.000 115.200 158.500 385,700 TOTAL 67.600 107,600 163.300 221.100 559,600 3. Tehnkal Assistance The Project includes 56 person-months of technical assistance that would include two full time expatriate advisors to RDF for two years, one to assist l/ The present price of sheep choose is 60 leks/kg (6 cents) as compared to $16 on the SC markets. A/ The price of a village produced ax is now 1S leks. It does not cover even the price of the raw material. ANNX a Page 4 of 5 the rural public works component, the other to assist the small-scale rural credit component. The remaining funds would be used for shorter-term consultancies for such tasks as, inter alia, developing environmental c ..teria and training RDF staff in their application. The rural works advisor will assist the Infrastructure Department of RDF and help organize liaison with the communes and villages to identify and inventory priority small-scale works suitable for labor-intensive subprojects that can be implemented at the local level. The advisor will assist in assessing local management capacities, creating materials lists and technical norms, and ldentifying local partners to carry out subprojects. The rural credit advisor will assist the RDF Promotion of Economic Activities Department in surveying villages to determine the sizes and types of initiatives likely to be put forward for loans, determining local credit and collateral traditions and adapting them to village credit fund mechanisms, and building working relationships with local branches of the Bank for Agricultural Development and village credit committees. Both consultants will undertake training of RDF staff, and help the agency develop its budgeting, accounting, and other operating procedures. Table 2 shows estimated costs for technical assistance under the four- year Rural Development Program: Table 2: Estimated Technical Assistance Costs lot Year nd 3rd 4th TOTAL Rural Works 197,540 237,048 98,770 49,385 582,743 Advisor Rural Credit 197,540 237,048 98,770 49,385 582,743 Advisor Short-Term 98,770 48,872 65,846 49,385 262,873 Consultancies Total 493,850 522,968 263,386 148,155 1,428,359 4. Taining The first task of the RDF will be to recruit and train its own staff, organizing short training courses alternating with field work in the communes and the villages where actions have already started under Phase I and II of the program. Infrastructure projects with the communes and credit operations with the farmers are a perfect carrier for training in new market economy skills: project evaluation, financial management for the commune staff, business planning, management and marketing for the private farmers and rural micro- entrepreneurs. ANNEX a Page 5 of 5 The training courses organized by the RD? will have an immediate application both for its own staff involved in rural works or small credit operations and for the commune staff or the individual farmers, what is the only way to enhance the real value of the training investment. Table 3 shows training costs for the four-year program periods Tebte 3: Rural Dowtopment Proram Training Costs 1st Yar kg i} Equipment 7,300 - - - 7,300 Courses for Staff 45S.20 49,460 4,990 9.630 209,780 Study Trips 38,000 76,000 76,000 76.000 266.000 Compow Staff Courses 96,660 124,320 S9,280 174,160 554,420 Busirness Courses 32,220 71,040 79.640 87,080 269,980 TOTAL 219,700 321,000 369,910 396,870 1,307,480 Annex 9 Page 1 of 7 RURAL ItOV13TY ALLEVIAMIO PILOT R EC LESSONS LEARNED FROM THE BANK'S EXPERIENCE WITH SOCIAL FUNDS With the wave of structural adjustment programs and the increased focus on poverty alleviation since the mid-1980s, many countries have adopted special programs to deal wlth the impact of the reform programs on the poor. Lacking sufficient technical and administrative capacities to transfer resources rapidly to low income families, many governments have created autonomous Social Funds (SF) able to collaborate effectively with community groups, NGOs and local government institutions. The major areas of intervention of the SF ares labor intensive public works programs, support for micro enterprises basic social services, as well as training and placement services. The most important component tends to be public works, which often accounts for more than 50% of the fund's expenditures. Bolivia's Emergency Social Fund (ESF), initiated in late 1986, was the first major SF supported by the Bank that aimed to alleviate the impact of a adjustment program on the poor. Since then the Bank has supported many other social funds in Latin America (Honduras, Guatemala, Nicaragua), Africa (Guinea, Mauritania, Senegal, Benin, Niger, Burkina Fasso, Mali, Zambia, Somalia, etc) and Asia (Indonesia). The proposed rural development fund in Albania will be the first SF for a transition economy in Eastern Europe. Social funds are most effective when used in conjunction with a national strategy for poverty alleviation in the areas of health, education and basic sanitation. The attractiveness of SFs as an instrument of social policy reflects their ability to: * disburse large sums of money rapidly with low administrative costs that are generally below 10% and often less than 5%; * decentralize government functions by relying upon community organizations, local government institutions and NGOs; * provide a channel to funnel large quantities of foreign and central government funds to many small projects; * support the development of the private sector and in particular private contractors; * build basic social and economic infrastructure with a high rate of return; * provide low cost social services to the poor; * provide a model of efficient delivery of public services for line ministries and * finance visible accomplishments which shore-up the government's reform program and increase its sustainability. The principal drawbacks of a social fund are that rapid disbursements and flexible decision are often at the costs ofa a long-term development oriented social policy; high quality subprojects and; investments that do not Annex 9 Page 2 of 7 reach the poorest of the poor (often the most difficult to reach). Social funds cannot substitute for a national poverty alleviation strategy in the areas of health, education, and basic sanitation. KEY INGREDIENOM FOR SUCCESS Cleiay Deflned Objecties Social funds with a few clear objectives and a well-defined target population are easier to set-up and implement than funds that try to respond to all issues and groups (rural poor, urban chronic poor, unemployed, etc) affected by the adjustment program. An Autonomous Fleidble Organizatioi To promote efficiency and accountability, the social fund should be free from political interference and exempt from the civil service law to benefit from flexible funding, procurement, disbursement and hiring procedures. To attract high quality staff, the fund must be free to offer private sector salaries and to hire its staff and appraise projects on strictly technical grounds. Much of the success of the Bolivian Emergency Social Fund and the Bolivian and Honduran Social Investment Funds was attributed to the exceptionally capable, hard-working, and honest staff and leadership of the funds. The role of individual managers was also important, and their personality and competence played an important role in motivating the staff. Most governments have opted to create a separate institution under the office of the president or prime minister, reflecting their limited public sector institutional capacity and the desire to ensure the fund's full administrative, technical and financial autonomy (Bolivia, Guatemala, Honduras, Sao Tome and Principe). However, a new institution raises problems of competition for scarce management talent, rivalry with existing ministries, and concerns about how the work of the fund will fit into the overall planning, budgeting, and coordination process of the government. Some governments have established interministerial committees with broad oversight powers to assume responsibility for cross-cutting policy and strategy questions. In addition, granting the fund temporary status makes it easier to exempt it from standard civil service rules and limits problems of rivalry with other government institutions. On the other hand, a fund's temporary status can cause problems in assuring a smooth transfer of responsibility back to the relevant permanent public agencies. Some countries have preferred to integrate the fund under a line ministry, usually the ministry of planning (Guinea and Somalia). This option reinforces existing institutions and allows government personnel to benefit from the training programs and overall experience with the Fund. However, unless clearly specified this type of fund can be more constrained by government regulations, especially with respect to procurement and operating procedures. annex 9 Page 3 of 7 Unconventional procurement procedures facilitate rapid disbursement and are especially important to permit the fund support small projects in isolated rural areas and to use local contractors. A system of uniform unit prices and a schedule of standard rates for domeatic materials and labor costs are used and regularly updated by the SP. This permits the sub-projects to use local contractors who lack experience with procurement and contracting procedures. Development Local Government and Community Organizations Social funds work with both governmental and private sector institutions, exploiting their comparative advantages and fostering the development of both sectors. The social funds focus on sub-project appraisal and supervision leaving the detailed work of project formulation and implementation to the soliciting and supervising agencies that supply untold person years of labor. This reduces the staff requirements and increases the size of 8Fs' subproject portfolio. To compensate for the weak institutional capacity in many developing countries, particularly at the community level, SFs rely heavily on NGOOs to carry-out sub-project preparation, implementation (procurement, administration of funds, etc) and supervision activities. In particular, NOOs have been very involved in the administration of local solidarity based credit funds (see below). They tend to be grass roots organization and have a comparative advantage ir working closely with low-income groups; they often already have experience in the design, implementation and evaluation of small development projects at the community level. It is important to select serious W0Os who have a proven rack record in the type of subproject presented. A demand-driven institution is subject to the criticism that its spending patterns are subject to the whims of its potential beneficiary population and to the capacity of preparing and executing agencies. Many sFs offer a standard sub-project menu to provide the Government with some control over what they will finance, to link their investment program to the Government's social and economic public investment strategy and to facilitate project preparation and appraisal. sponsors choose from a menu of subprojects (e.g. road repair, rehabilitation of primary schools and health posts, etc) based on the standard construction norms and plans of the appropriate line ministry. The use of a menu, together with extensive pre-screening, encouraged high quality subprojects and contributed to a low subproject rejection rate of about 2 percent for the Honduran Social Investment Fund (FHIS). Poverty Focus Resource targeting and subproject promotion activities are two instruments used by many 81s to ensure that their resources reach poor communities and that their principal goal of poverty alleviation is advanced. The methodology used by SFs to target resources towards poor communities should be simple, relatively easy to implement and should be used as a guideline for resource allocation and not as a strict standard which must be fully implemented. Targeting systems have obvious advantages but can also Annex 9 Page 4 of 7 raise administrative costs and increase sub-project identification and preparation times lowering disbursement rates. The targeting scheme of the Honduran FHIS distributed resources between the districts and municipalities according to a poverty index based on sanitation, water supply and child malnutrition indicators to ensure that poor communities received a higher per capita allocation that less poor communities. The wage policy of SFs also helps to target their resources towards the poor. By offering market wages for manual labor SFs automatically attract workers who are predominantly poor, i' not the poorest of the poor. Empirical studies have proven that social funds employ participating households where average income is below the poverty line.1 The high content of wages in the sub-project costs, often required to be least 50%, also assures that the poor are the principal beneficiaries of SPe. The type of project financed by SFB also determines whether the poor will benefit from the infrastructure investment. Social funds also tend to focus on the provision of small-scale, technologically simple basic infrastructure (water and sewage systems, rehabilitation and expansion of basic social services, etc.) that is most lacking in poor neighborhoods. Basic infrastructure projects are also easier to prepare, implement and maintain thereby increasing the access of poor communities to the resources of SPs. Finally, the use of a project menu also simplifies project preparation and decreases preparation costs which facilitates the access of poor communities to sub-projects. The experience of the Bolivian ESP has shown that poorer communities have the least capacity to prepare subprojects. Despite the plethora of unmet demands, prospective projects from the poorest communities are either poorly conceived, inefficient in their use of funds or lacking in know-how. Special efforts should be made with poorer communities to: disseminate information on the objectives and procedures of SPs; provide technical assistance to local organizations to assist in project identification and preparation; and reimburse certain project preparation expenses. Promotion activities should be an integral part of the Sr's operations; the Honduran FHIS had a separate promotion unit for infrastructure, basic needs and informal credit sub- projects. In addition, UNDP supported a institutional development program in 40 of the poorest municipalities in Honduras to help train local officials in subproject evaluation and supervision. Sustainablity Many SFP structure subprojects to ensure the oustainability of the investment and its benefits. First, SPF tend to support subprojects with low recurrent costs and give priority to rehabilitation subprojects, and in some cases expansion, rather than new construction. When they do engage in construction, before the subproject contracts are signed, the fund requires confirmation from the aj_ - oriate line ministry or government institution that 1/ MartIn Ravallion, "Reaching the Rural Poor Through Pubtic Emptloment: Arguments, Evidence and Lessons from South Asfa," The eorld 8ank Research bseer- Vol. 6, no. 2 (JuLy 1991): 154-175. Annex 9 Page 5 of 7 the recurrent costs (new teachers or nurses, etc) are included in the budget. Social funds have also undertaken considerable efforts to ensure the sustainability of water and sewerage subprojects, which have major maintenance requirements. All subproject contracts in Honduras have a clause requiring the final owner of the project, the National Water and Sewerage Service, to provide for cost recovery and maintenance. In addition, before the contact is signed the community must create a local committee to raise fees to cover the operation and maintenance costs of the water and sanitation systems. The FHIS has contracted with a NOO to provide technical assistance to the poorer municipalities to setup and strengthen the water committees. The involvement of communities in the design and implementation of sub-projects also helps to ensure the sustainability of the sub-projects at the local level. counterpart financing or contributions in kind (labor or raw materials) should be required from beneficiaries as agreed upon when the subproject is appraised, to ensure that good quality subprojects are presented and that they will be sustainable beyond SF support. Accountability Accountability mechanisms help keep the S8e "honest without taking away operational flexibility. Many funds regularly report subproject lending commitments on an ex post basis to the President, the Congress and the press, which increases the transparency and accountability of the funds lending operations. An efficient management information system facilitates subproject administration and monitoring, helps sponsors and donors track the status of their subprojects, and ensures the transparency of the Funds' lending operations. In addition, an MIS helps social funds to easily monitor the implementation of their targeting program. Regular audits monitor the quality of sub-projects and also ensure the accountability of SFs. Despite the fact that IDA only requires annual audits, the Honduran PHIS is audited every six months by a private, independent external auditor. In addition, there are more in-dept quarterly audits that combine financial revisions with the physical inspection of works in the field. Other Characteristics A Pilot Demonstration is effective to fine tune project operations and to attract cofinancing. The Bolivian USP started operations with a commitment of only US$10 million, a fraction of its investment goal of US$180 million; as the ESF demonstrated that it could effectively absorb large quantities of resources, additional commitments from a number of donors, as well as a second World Bank credit became available. A monitoring comuonent is useful, especially during the pilot phase, to receive feedback to improve project performance and design and to allow for the diversification of or modifications in the SF's subproject menu. In Anneax 9 Page 6 of 7 addition, regular beneficiary assessments improve subproject quality and sustainability by ensuring that the subprojects are planned and implemented with a knowledge of people's values, are responsive to their needs and adapted to their behavior. Public Pelations. From the start the SP should have a public relations component which uses radio, newspapers and television to disseminate information on the SF, its goals and procedures, and to build confidence in its ability to deal fairly and promptly with the soliciting communities. This raises the demand for subprojects, improves the image of the fund, and highlights the government's efforts to alleviate the social costs of adjustment. Donor Management. Social funds should have a uniform set of procedures that donors must follow, the latter should not be allowed to design their own program and procedures. Donors, funds should be disbursed against SF6' overall portfolio, or to certain categories of projects therein. This will reduces staff time spent on managing donor funds. Technical assistance and trainina are required to increase the capacity of the social fund. Training courses should includes administration, pub:.ic relations, community development, project design, appraisal, supervision and evaluation. In addition, there should be resources for local and international seminars and study trips. An internationally recruited technical advisor and consultants with experience in project financing and social funds might also be hired to assist the project director. Local staff from social funds in other countries are often used as short-term consultants to provide training and to set up the fund's procedures and manuals during the early phases. Credit Funds Several SF have included credit support to micro-enterprises. The overall size of the credit programs is often very small and many of the programs are pilot operations. The credit component of the Honduran FHIS has been very successful in supplying credit to urban and rural micro- entrepreneurs who do not have access to commercial banks The project's mid- term review identified several key factors behind the success of the FHIS programs FHIS does not do the lending itself, but delegates this role to NGOS specialized in credit to the informal sector; market rates are charged to final beneficiaries, providing sufficient incentives to the NGo to undertake the subloan evaluation and ensure proper recovery and adequate capitalization of the revolving fund; * NOO assume the full credit risk vis-a-vis the PHIS which gives them incentives to collect subloans; * PHIS requires significant cost sharing (about 20%) from NGOs which incites them to present quality subprojects; * the NM0s must have recovery rates of at least 95 percent; and Annex 9 Page 7 of 7 solidarity group lending ensures loan recovery without requiring physical or fiduciary guarantees. Lessons Learned for the Albanian Rural Development Fund The Albanian Rural Development Fund (RDF) will be the first Bank sponsored social fund in a transitional economy and it will serve as an important test case for their use in Eastern Europe. Given the above review of social fund characteristics, the following general recommendations are proposed: * The target population of the RDF should be well defined. The project should focus on assisting former cooperative workers particularly in mountainous and hilly areas and fired state farm workers. * To ensure its transparency, effectiveness and the ability to disburse funds rapidly, the RDF should be autonomous and authorized to adopt flexible procurement practices and offer private sector salaries to its staff. * To ensure the Fund's accountability it should: report regularly on its activities to the President, Parliament and the press; carry- out regular audits of its financial statements and physical investments; and have a management information system that tracks the implementation each subproject. * The government should consider an interministerial review committee that would meet bi-annually to coordinate the work of the RDF between the different involved ministries and levels of government. 190 ~~~~~~~~~~~~2r21- < . ~~~~~~~~~~To S3reievo 42 1 ADRIATIC 4 -| SEAToCni 42li g 8 424 ALBANIA RURAL POVERTY ALLEVIATION N PILOT PROJECTLAh 10 POOREST DISTRICTS MAT [El10 POOREST DISTRITS 0 SELECTED TOWNS AND CMES ( A NAlONALCAPITAL Sheo 1, NI - MAIN ROADS RAILROADS it \8 AIRPORT 41. 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